> you can retire at 45
Kinda hard to do that when you've locked all your money up in a retirement vehicle that doesn't let you withdraw until age 59.5.
Kinda hard to do that when you've locked all your money up in a retirement vehicle that doesn't let you withdraw until age 59.5.
There’s a few methods here - and it’s going to depend on your mix of retirement accounts (ROTH vs Trad vs HSA vs non-tax advantaged). There’s lots of tools to help plan scenarios - I particularly like ProjectionLab. I would also recommend hiring a professional that can assist in the planning and especially taxes during early retirement.
For SEPP 72T you need to make similar withdrawals every year for at least 5 years or until you hit 59.5 of age. My plan is a mix of SEPP 72T + non-tax advantaged accounts for 5 years. During those 5 years I will also be making ROTH conversions from my Trad accounts. Once the 5 years are up - I will continue my ROTH conversions but can finally start withdrawing the money I converted 5 years ago (this is a ROTH conversion ladder).
I was a bit of a late bloomer and spent my 20s working my way into tech - so I won’t retire at 45 - but am on target for 50ish.
If your employer offers a match, you should absolutely contribute up to the maximum match (it's free money after all), but not a penny more IMO. There are much, much better vehicles for parking your money than retirement funds.
Historically, tax rates have gone down over time, not up. Especially in recent history.
You do pay a reduced tax in retirement because you're able to blend your income. You defer taxes on the 401k until requirement, but you pre-pay taxes on a mega backdoor/roth, so if you need 100k of income in retirement you pull 50k from 401k and 50k on the roth and only pay taxes on half of it, putting you in a lower bracket.
Having the pretax money to grow before paying taxes on it is greater than having post tax money and having less to compound.
The alternative to tax advantaged places to park your money for retirement is strictly worse than non-tax advantaged. In a 401k you pay taxes only in retirement, for roth's you pay taxes only with your paycheck. In a brokerage, you pay taxes at your paycheck and then you pay taxes on withdraw for your cost basis.
At the end of the day though, I'm sure it boils down to having both instead of trying to minmax it. Being able to liquidate a portion of your investments to, say, purchase a house is probably a good idea, which you can't do if you've been putting everything you have into a retirement account.
For example - if my wife and I max out our 401k’s - that’s about 50k we are deferring taxes on. If our pre-tax household income is 300k - then that 50k would have been taxed at 24% marginal rate.
In a year of retirement - let’s say we withdrawal that 50k but now it’s doubled (probably more than that since it only takes 9 years to double at 8% annual growth via compound interest). Now we pay 12% and end up with 88k. (Technically we’d have more than that because of the 24k standard deduction - but we’ll ignore that for the sake of simplicity)
Let’s take the non-tax advantaged comparison. We’d have paid 24% up front and invested 38k. It doubles to 76k. We’d pay 0% capital gains - but even then we end up with less investment income.
[1] https://www.investopedia.com/ask/answers/042415/what-average...
A few things to note:
* In the US at least - you invest your 401k in whatever funds you want. Mine are a mix of S&P500 and Total Market.
* 7-8% is the average inflation-adjusted return of the S&P500 over its history and is general figure you’ll see used in retirement planning discussions
There’s a huge wealth of resources out there on this topic. Look up Canadian specific “FIRE” guidance (Financially Independent Retired Early). I don’t know enough (or anything!) about Canada to really engage on this - but I’ve done pretty extensive planning both myself and with my financial advisor on my own early retirement objectives. For me - the math massively works out in favor of a 401k over non-tax advantaged accounts. I personally have a mix of Traditional (pre-tax), ROTH (post-tax), and non-tax advantaged accounts (because I save more than I am allowed to stuff into tax advantaged accounts per year).
I started doing this when I got a raise and realized pretty much half of my raise was going straight to taxes, whereas I could invest it all if I just upped my 401k contributions.
TFSA: you pay standard income tax up front, but no income tax on investment earnings. Annual contribution room is added. You can withdraw anytime and get the contribution room back.
FHSA: you do not pay income tax up front, you do not pay income tax on investment earnings. But you can only withdraw for a first home purchase (or convert into RRSP), and there's yearly and lifetime limits on contributions.
Non-registered investment account: you pay standard income tax up front. Investment earnings as capital gains are 50% of standard income tax. Withdraw anytime, no limits obviously.
With RRSPs: you do not pay income tax up front, but you pay standard income tax when you withdraw, and pay standard income tax on investment earnings (no capital gains rate). You cannot withdraw until retirement age.
Those are effectively your only four options here. When they're broken down that way.. does it make more sense?
If you're referring to US retirement accounts, that's not accurate. The early withdrawal penalty is 10% - the same as jumping from the 12% to 22% tax bracket when you're working.
If your company allows partial withdrawals starting in the year you turn 55, you can use the "rule of 55" to get your money out penalty-free January 1 the year you turn 55.
You can withdraw Roth contributions penalty-free at any age.
You can take SEPP withdrawals without a penalty.
You should have some cash and brokerage account money too. You could also own a rental house, sell your house and become a renter, etc. The 10% penalty is seldom going to stop someone from retiring.
Still cheaper than my current Long-term Capital Gains tax rate too.