Max out 401k now and pay early withdrawal penalties later? Or invest excess into a brokerage account?

Question

If I’m planning to retire early (45-50), is it better for me to max out my 401k now and pay the 10% penalty when I begin withdrawing early? Or is it better to invest the extra money in a taxable brokerage account that won’t charge penalties upon withdrawal?

Answer 1

If you get a company match, contribute enough to the 401k to take full advantage of the match. Think about it--if the company match is, say, 25%, and you later pay a 10% penalty, you still come out ahead.

Put the rest of your money (or all of it, if there's no match) into a taxable account. If tax-efficiency is an issue for you, you could look at some tax-managed mutual funds, such as those offered by Vanguard. You'd still defer most, if not all, of your taxes on gains (not principal) until you need to sell, and then you'll only pay long-term capital gains taxes, as opposed to paying taxes at your full income tax rate like you would with the 401k.

Another option (if you qualify) would be a Roth IRA. When you're ready to retire at 45-50, you could withdraw your PRINCIPAL with no penalties or taxes, and if you wait until age 59 1/2 to withdraw your gains, those will be tax-free too.

Perhaps a combination of the above would work for you. Good luck!

Answer 2

What you want is a gap filler. The gap is between the time you retire and the time you can can withdrawl the 401K without penalty. It's 59 1/2 when you can withdrawl that money without penalty. If you wait till 60 the gap is 10-15 years. Now figure how much money you will need to fill that gap and don't use any retirement account to get that money. Then work on the 401K or Roth IRA to use afterwards.

Answer 3

If you retire early, their are laws that allow you to pull your money out without the penalty. Ask your advisor about the 72(t) rule. The only drawback is that once you begin pulling money out, you are required to continue pulling out until you reach the age 59 1/2.

Tax diversification is important. Invest in your 401(k), a Roth IRA as well as a taxable account. If you have enough money max out your 401(k) & Roth.

Answer 4

I would talk with a financial planner. Because I don't know your age or your amount of money, or your tax bracket, I have no idea how it would effect you in the future. However, a descent financial planner/accountant should be able to answer all of those questions. Pay the $200 and get a professional to review it.

Answer 5

Put it in the taxable account. Why pay the 10% penalty?

Answer 6

Invest it elsewhere!!! The whole thing!! You would be penalized AND taxed if you are under 59 1/2.