Understanding Early Withdrawal Strategies: Rule of 55, SEPP, etc.

I try to make it as fun as I can . I wanna make sure that you guys are listening going . Yep , that's super helpful , but at the same time I'm not giving you information that does not apply to you . So today is an interesting episode .

I think it's a fun one because I don't want you guys to be worrying about a lot of stuff that does not apply to you and your coworker may have brought it up , or your neighbor , and I just want you to give .

Essentially , I'm giving you the job that I give my clients , which is for you to tell that coworker or that friend wow , that sounds really cool , but it doesn't apply to me .

And that's what I'll tell my clients , because a lot of them are really intelligent , smart people that are in these positions where they're constantly being told different ideas about their finances and they're like , hey , I don't know who to listen to , who not to listen to . So I tell them . Part of my job is to tell you stuff not to worry about .

And then there's going to be things that those coworkers or friends or neighbors never bring up and I'm going to tell you . I need you to strap in and listen to this piece . So today it's going to be fun .

I'm going to talk about the rule of 55 , the 72 T distribution , all these fancy techniques that can be really helpful , and situations when I tell clients never to use them or never even consider using them , and these are things that I hope , if at all , today you go , wow , that does not apply to me . I've thought about it a few times .

I'm glad I'm going to put that in my head trash corner , which a lot of you guys know that term . There's a lot of head trash that you have . Should I be doing that ? If markets take a downturn ? Can I still retire early ? And how soon before I retire , should I shift my portfolio ? And how do I not get killed by taxes ?

All big concepts that I talk about , but a really big one is wow , there's some different things . I hear about when I should tap into funds and how do I know what should be in my 401k , versus you talk about some brokerage account and you call it a superhero . I don't even know what you mean by that . How do we dive into all that ?

So today I want to simplify . More than anything , there's a lot of the early retirement fluff out there in my opinion . So here's my idea .

So we're going to go through this every week , I'll take a comment from YouTube or a review left on the podcast and I'll highlight that , and then what I'm going to now introduce and that's because of this comment here is a new segment where I'm not only going to highlight a recent review that was very kind , but I'm going to either bring up a comment that

wasn't so kind and respond to that , or I'm going to just highlight a funny comment that I saw each week , and here's why . So this first comment comes from let's Not Bicker and Argue that is their YouTube channel handle and it says thanks , ari , for addressing and explaining these trade-offs regarding Roth conversions and healthcare subsidies .

We're thinking of taking the best of both worlds option maybe ACA subsidies now at 60 , followed by Roth conversions between starting Medicare and RMDs , as you say . It will depend on our portfolio's performance and the degree to which tax rates change in 2026 .

We've been using new retirement , which indicates the future tax savings after Roth conversions are approximately equal to five years of subsidies . For me , your channel and podcast continue to provide the perfect education and entertainment as I plan for retirement , thank you .

So when I read that comment very kind comment , so thank you for that In my head I'm like , well , that's pretty cool . I want to definitely entertain .

That's why I'm doing what I'm doing , because if I just were to say , hey , here's what a Roth IRA is and keep it really dry , well , it just wouldn't be that fun and engaging and therefore you wouldn't essentially get as much value because you would stop listening to it . It's like as if someone's like you should have broccoli every single night .

It's like , hey , I know I probably should , but if I only eat that , get me wrong . But I want to make it entertaining . At the same time I want to make it educational . So I could say hate comment , but it's really not a hate comment , because all of you guys are very kind , even when you do constructive criticism , excuse me .

I want to make sure that all of you do know that you have the ability to tell me anything . I'm going to read it , I'm going to see it . I actually like reviewing this .

And so here I am , four minutes into the podcast and I'm yet to get to my rule of 55 and 72 T and the stuff I want to get to , but I'm trying to make this show what I hope is your go-to every Monday .

Yep , I'm going to learn something that's going to help me for my early retirement , or , at the very least , I'm going to learn some things that I used to worry about , that I'm no longer going to worry about , and , if not , that you're entertained learning about some financial strategy .

So this one comes from Dave Compton five one , five zero who says some constructive criticism . This is the first video of yours that I clicked . I've watched the first two minutes and you aren't even to the first item . Please get to the point . So I actually really liked that comment because it actually helps me go .

Hey , should I be getting to my points faster ? What can I do to help ? Because this is your podcast and this is your channel . So if a hundred of you go , yep , don't need any of those stories already about you talking about your clients doing this or that and spending . Nope , just tell me exactly how much to convert and then I'm going to go convert .

And the reason I don't do it it's not because I'm a mean guy , but it's because I just don't think it's as valuable If I just tell you , yeah , fill up to this bracket , you go do it and you go wait a second . But my spouse and I have an age gap and wait a second . You know I'm going to want to do part-time income .

So it's like I can give you an answer . It's just not that helpful of an answer . So I want to person said this in the comment , but that certainly does not kind of resonate with me . I like the story .

So if you guys want a podcast and a different description , or if you guys want me to go into more stories or go , hey , I'd love weekly episodes , or I'd love episodes twice a week where one's a story and one's more , just kind of going through the financial example of that , I try to blend it both and make them effective and put them into a tight 15 minute

, 20 minutes , sometimes 10 minutes , sometimes 30 minute podcast . So try to make this as helpful as I can for you guys . So those are the two comments . Now let's talk about what we want to talk about today . I'm gonna give you a few examples , but here's the first thing . So the rule of 55 , what is this ? When does this make sense ?

So let's assume you're turning 55 or older and you don't have any other accounts , just a 401k , and you're like , oh my God , ari , I'm going to freaking . I don't know what I'm going to do , but I'm so miserable at work . I don't want to get another job , maybe in the future , but I just I want out .

Okay , which I don't hear often , because most of my clients are reaching out going , hey , I just want to optimize . I kind of like what I do . I just want to make sure I'm doing it because I want to , not because I have to . And then what they find is they end up continuing to work anyways or they do something less stressful .

That's what I see most of the time . In this particular situation , the rule of 55 would make sense if someone had , for example , $500,000 in a 401k . They have no cash , no rental properties , no spouse with income , no future part-time income . They're just like , hey , I refuse to work ever again . I don't want to spend a lot of money .

That's where this rule of 55 makes sense . What I often see is people go wait a second , I'm going to retire early . Let's call it 57 . I don't know how much longer I've got my health and my energy . This early retirement concept sounds good to me . I also didn't save a ton of assets outside of my 401k or my Roth IRA or my HSA .

So , you know , I don't really know what to do and I don't want to simply , you know , be screwed just because I didn't save into a brokerage account . So there's a phrase I made up . I mean , you know I do this in a silly way , on purpose , so you guys remember it . And so my parents .

They are house rich , cash poor , and they let me talk about their story , where they have a home that's worth $6 million in Malibu and they're working in their seventies because they have a home that they love , they never want to sell , so it's really not an asset , it's not throwing off any income , but they love it .

So they're , and luckily , they love what they do , so they're going to continue doing it . But they are house rich , cash poor , working in their 70s , and they were burned by a few advisors , which is why I am an advisor Now that's house rich , cash poor . The phrase I'm talking about is qualified rich , cash poor . You're like huh .

What I mean by that is I don't want you to save so much that all of a sudden , you go . Wait a second , what if I don't love this job and I want to switch and I'm going to need income ?

Well , if you save so well to your 401k or your IRA , your 403b , and there's no pension that starts for a few years , there's no social security and there's no rental income , Well , all of a sudden , where's income going to come from ?

If you do want to switch your life around and to me that's the power of money is that you can go live the life you want to live . So the idea here and I illustrate it through this other example and I'm going to connect it all back , I promise A client came to me and they had about 6.2 , $6.3 million and they were 53 years old and they want .

They hated their life , they wanted to quit their job , but they had no other assets . So I said listen , what you can do based on your assets is you can take the funds out .

And once again , they didn't want to do this , but they had the option I said you could take the funds out and you can pay a 10% early withdrawal penalty in addition to taxes you have to pay .

But because you saved and invested well and you did a really good job , you can still do everything you want to do , but yeah , you're going to pay this penalty and switch jobs .

And they could not get it inside themselves to this concept of paying the penalty because they were just like , wait , that concept of me taking $100,000 out and paying this 10% penalty , I just can't get myself to do it . So we had a lot of planning session and eventually they did it .

But the point here is there was a lot of hesitation and it's because they saved so aggressively to these qualified accounts . These accounts you can't touch until you're 59 and a half . So then some of you are going to go wait a second . What about that rule of 55, ? Huh , you know this person . If they're 53 , what if they just waited two more years ?

Well , they didn't want to . But the point here is let's assume they were 55 . And let's use the real example . Let's assume this person was 55 . What they could do is they could retire January 2nd , january 1st in the year that they turn 55 , and they can skip the 10% penalty . People are like , whoa , this is pretty cool .

You're telling me I don't have to wait till 59 and a half . And I'm saying , yeah , and most plans allow this . It's called the rule of 55 , where you can take from your 401k at 55 , not 59 and a half . People are like , oh my gosh , why didn't you tell me this earlier ? Why don't I see it everywhere ?

Well , you can take it , but I often don't recommend it . I don't like when people do , and here's why , even though it's a cool strategy that is once again available to you , it doesn't mean you have to use it . So I'll tell clients yeah , you can absolutely pull from it , but it actually gets in the way of our tax plan .

People are when you take that money , yep , you avoid the 10% penalty , but it's as if you're just withdrawing more money from your IRA or 401k . It's as if you're just working . It's just ordinary income when you pay taxes on it . So what it does is it shoots up our income .

So let's assume they've got $6 million in a 401k and they're taking income let's just say , $100,000 out to live . Well , if they take $100 thousand dollars out , that doesn't leave us a lot of flexibility to do Roth conversions , which is going to reduce their future tax bill .

Because once again , if you've got 6 million bucks and that's growing and compounding well , maybe it's 10 , 15 , 20 million dollars once RMDs have begun and now you're just getting absolutely destroyed in taxes .

So what I'll tell a client is if you , for example , are 53 right now and you're going , hey , I've got two years until I can tap into that rule of 55 .

And what I would encourage you to do is , instead of adding more dollars to your 401k , maybe start to add new dollars on purpose , even if you're in a high tax bracket , avoiding a tax deduction , which I get . It sounds kind of scary at first because you're like why would I do that ?

But it's to bolster up this brokerage account , this superhero account that's what I call it because it allows you to retire earlier . There's no tax benefit you get , but you can take the funds out really as soon as you'd like and there's no special tax penalties . So someone's like , hey , I kind of get it .

But just give me like a simple example to just come home on this . I go okay , let's assume , like most of you , you've got a million dollars . So let's even say 2 million . So let's say $2 million . And let's say you're 52 years old . Okay , so you're 52 , you got 2 million .

You may have had a thought at some point hey , I don't know when I can tap into my accounts , but I saw this Fidelity article about the rule of 55 . So I'm going to tap into that . Okay , so you start to use that at 55 .

Well , if you were to do that and work three more years now at 55 , let's say you've got 2.2 million bucks I don't know , whatever it is Well , now you're withdrawing from it and you have no other way to withdraw income for the rest of your life .

So now here you are , from 55 , living until Social Security starts and let's assume you start that at 67 , and RMDs are at 75 . Well , now we've got you know a lot of time where this money is going to grow . You're living off of it . But what you're not allowed to do is what's called really .

You're allowed to do it , but it wouldn't be efficient Quality Roth conversions , where you move the money from your IRA to your Roth IRA . And the reason it's not effective is because you're taking money out of your 401k and that's creating income . It's filling up brackets as if you just make more money . So now let's say , okay , what's the pro tip here ?

Well , the pro tip is what if you're 52 and you've got $2 million and you say , hey , I don't want to retire . I don't know exactly when , but you know , I just want a job that's less stressful and maybe I'm going to scale back in a year or two ? Okay , well , what if you're making 250250,000 , $300,000 .

What I would like to see is that person try to save outside of the 401k , maybe $30,000 , $40,000 a year . So now , let's assume they're 55 now and let's just say they've got $75,000 . Well , if they , for example , live off that $75,000 in the first year at 55 , well , now they could live off of that .

And they're paying capital gains tax as opposed to paying what's called ordinary income tax , which is higher . So it's keeping your tax bill lower , which allows you to do a really cool tax playing technique like a Roth conversion . And then we take it to the next level . What about tax gain harvesting ? And some of you have heard of this concept .

Some of you go , hey , you have heard of it , but I just never understood it . And sometimes you got to be told these things multiple times in different ways before it really connects . And so tax gain harvesting is this idea that what if you bought Apple stock , let's assume , at 52 , let's assume , let's keep it simple 2 million bucks in a 401k at 52 .

And you've got a brokerage account and you haven't put any money into it . But you heard me talk about it and you looked up superhero online but you couldn't find it anywhere . That's a joke , because it's not actually a superhero , but my brokerage account . So now you're 52 and you're starting this for the first time and you put $10,000 into Apple stock .

Okay , well , if that $10,000 grows and now you're 55 and it's worth $50,000 , it went up by 40,000 . Awesome , you can take that money out and , assuming you have no other income , pay 0% in taxes . Okay . But like well , is that totally legal ? Is that like Ozark stuff on Netflix ? No , this is legal . You're allowed to do this .

It's called tax gain harvesting and I have separate video where I go over this in a whole lot more detail , where I literally just do that for 15 , 20 minutes . So if you want to fall asleep , check that one out . Just kidding , hopefully you're not falling asleep . Listen to this stuff .

So this is the next level of planning is how do I think about the rule of 55 ? When do I use it , when do I not ? Well , you want to use it If you're 55 , you're totally miserable , you have no other income sources and you are like I need out and I need income . Well , then it makes sense . It's a great option .

You can pull from it and you can go live . Before that I'll often look at okay , does it make sense to downsize ?

Are there , can you work at least part-time and maybe pull in some income that way , saved to a brokerage account , because it allows you to do all this really cool tax planning that adds hundreds of thousands of dollars over the course of your lifetime .

So the pro tip is to have some brokerage account that allows you to keep your income low , to qualify for capital gains tax preferential treatment instead of ordinary income . The rule of 55 is really cool , but to me it's almost one of those things that it's there as a backup .

It's hey , if God forbid something happens , I could pull from that and then you don't have to go back to this . You know very stressful job , but more often than not I'll say can we find a job you really enjoy and you do that for longer . Or maybe you're like , no , I want to travel and start enjoying my life and I've got no other way to pull income .

Well , great , maybe we use a portion of it , but maybe not all of it . And so sometimes I'll tell clients let's use a brokerage account for a few years and then if we need to use that rule of 55 at call it 57 or 58 , we can use it then . But at least we did some good tax planning the first two , three years .

So the overall message here is hey , you have a way to tap into income before 59 and a half . That's awesome . And if you only have a 401k and you just saved really well to that , great , you didn't do anything wrong and it's an option . But too many people simply hear it and go , whoa , I can tap in earlier . Let me do that .

And it's just because there's a cool tax strategy and a technique . It doesn't mean you need to use it . So that's the first one . I wanna go over the other one . Here I put a quick example on rule 72T . So what is this ?

Well , it lets people and it's a great idea , it lets you tap into your IRA , so not just your 401k , which we were talking about before . So not just your 401k , which we were talking about before , but it lets you tap into your IRA before 59 and a half . And so some people listen to this and go oh my gosh , once again .

Why was I never told this before ? This is awesome , yes , it's awesome , but once again , if we pull any money from an IRA or a 401k , it increases our income , which means we're filling up tax brackets and we're not able to be as effective with all the other aspects of our plan . A client came to me , said Ari , I'm 63 .

Here's how much I have in assets 1.2 million . I've got another 500 in the brokerage and I've got 200 in Roth . What do I do ? When do I take Social Security ? I said , hey , tell me about your parents when they collected Social Security . And they're like why are you asking me about that stuff ? Just tell me the answer and I go .

Here's how you determine Social Security , level one . Level one is what most people do is go eh , maybe I collect earlier . I know it's not as much of an amount that I could get if I waited , but you know I get it for more years . Nothing wrong with that . Level two yeah , I'm going to delay my benefit . I'm going to get a greater one if I wait .

And you know , ari , you might not know this , but you know if I were to wait , my partner's going to get the larger benefit . So if something happens to me , they're going to get that for the rest of their lives . That's pretty cool . I said that's level two , also once again a good thought .

Level three is ignoring all of that and saying wait a second , don't marry your strategy . But as we're looking at building the plan and when you're going to collect Social Security , understand , the earlier you turn on Social Security , the less effective tax planning is . People go huh and I go .

Well , if you turn on social security at 62 , what happens is let's assume it's $50,000 between two people .

Well , now it's $50,000 and there's probably another income source and there's probably rental income and there's probably a pension , and so what happens now is we can't do those Roth conversions effectively , and the Roth conversions could legitimately save hundreds of thousands , if not millions , of dollars .

So I don't want you to try to save $2,000 a year in taxes if I could save you $600,000 over the next five to 10 years . So the point here is your social security . Number one don't marry it , because we might build out this Roth conversion strategy and we might do all the conversions that we think are effective and that might be done at 64 .

And then all of a sudden it's okay , we did a really good job doing these conversions . We implemented the strategies we want now for the rest of your retirement . I'm totally cool . You turn on social security when you want , when you feel right , because there's no real answer . If there was a real answer , it'd be really easy .

But what happens more often than not is people go well , you know , my parents weren't in the best health and they turned it on . I've been paying into it for so long and , listen , I don't even know if it's going to be there when I'm older , so should I even rely on it ?

The big thing with social security is saying okay , when makes most sense based on my tax strategy , how effective was I with conversions ? Did I get that done efficiently ?

A lot of you are listening right now in your 30s , 40s , 50s , early 60s , going hey , I've got some time before I have to make a social security decision and all I ask is that you don't marry it Every single year you're identifying . Does it make sense ? Does it not ? I'd even argue more than a year .

But bringing this back to the rule 72T , what is this rule 72T ? Well , it allows you you don't have to pay the 10% penalty and you can tap into your funds before 59 and a half . So here's the example Number one . There's some really strict rules . So when , like , does this make sense ? How to think through this ?

Let's assume John is 55 and you saved 500,000 bucks in your IRA . Okay , now I don't know what it's growing at , but let's just say 5% .

Well , what you're able to do and I've put an example here is you're able to essentially take out a portion not as much as you want and once you decide you want to take it out , you have to take that portion out really every single year , and you could say it's a 10 year withdrawal period .

There's a lot of factors to determine here and there's three different ways of doing it . There's the RMD method , the amortization and the annuitization , so different methods to do it . But here's the main thing .

72t that's the rule for what this tactic is , which is called substantially equal , periodic payments , where you're intentionally taking a certain amount for a certain amount , a minimum . So what you can't do is just do 58 and go on at 59 and a half . No , now you have to do it for at least five years , whichever is longer . That's the answer .

So there are penalties if you stop , there's still taxes due . So all you're doing is saying OK , here I am , I'm 56 and I've got no other way to create income . I don't have a 401k and I've got no other way to create income and I don't have a 401k . I'm gonna , at a minimum , pull $50,000 a year from my IRA .

And you have to do that for at least five years . You couldn't just stop at 59 and a half , because if you started at 56 , well , that's only three and a half years , so you would have to continue doing it . And some people are like what's the problem with this ? Oh , my gosh .

You're telling me I could just turn this thing on and then I could get income , and I don't have to wait until 59 and a half and I'm going to need income anyways . So , like , why wouldn't I do this ? Well , it sounds good because you're turning on 50,000 every single year , or a hundred , whatever it is . But the problem is you turn it on once again .

Now that's locked in for five years and if something comes up and you determine , well , I want to do something else or you don't want to turn that income on for whatever reason , because you're not spending as much that year , whatever it is , well , now all of a sudden you've locked yourself into doing that and there's some heavy penalties and things you don't

want to deal with . Going in that realm , what I would rather you do is once again say wait a second , can I save to a brokerage account ? And that's the ultimate flexibility here . It's not going to make you go oh my gosh , am I going to be okay or not ? You're going to be okay . And if we needed to use the substantial , equal periodic payments ?

I've executed it once as an advisor and I've seen hundreds of people come through Root , go , hey , should I consider this ? And I get to say , no , it doesn't apply to you , you don't need to do it . You have this brokerage account . Your neighbor might talk about it . Your job is say that sounds cool , that does not apply to me .

So there's a lot of details to this If you want to really implement this . To me , it's one of those things that you optimize too well . Well , you've got your IRA . You've got your 401k . Part of my job , you know I love optimizing . My nickname is literally optimized at the firm . Like we know , ari's weekend wasn't fine . It was optimized .

But I want to make sure you're not optimizing so much that you don't leave yourself flexibility or the opportunity to determine part-time income . I don't want you to use these strategies that you hear because they sound cool Rule of 55 or 72T . These are all great options , but it doesn't mean you have to use them and , to be honest , I very rarely do so .

Your takeaway from today might be wow , I'm never gonna worry about those , ever again . They don't apply to me . It might be ooh , that could be interesting . Maybe a backup if something doesn't pan out the way I want . What if I don't love my job , or part-time income isn't a good fit for me ?

Whatever it is , these are good backup options , but I definitely don't think you should be relying on them . So these are my thoughts . Hopefully this episode resonate with you . If you're looking for holistic strategy on early retirement as a whole . That's what we do .

So I want to make this video because I get a lot of questions on these types of concepts and there's more than this , by the way , but I just want to start going through . What are some of these things ? How do you think through them ? Because there's certain rules around 457s and a lot of this stuff . Is people getting too lost in the weeds , I find so ?

Just my experience as an advisor . But , guys , hopefully this was helpful . Hopefully it answered some questions for you . If so , please do leave a comment , even if it's a funny one , an interesting one . Leave a review on the podcast . It helps more people find the show , that's . My only ask is if you're digesting this .

I love doing this , but I love hearing from all of you more than anything , so please do let me know and I'll see you guys next week . Thank you for listening to another episode of the early retirement show . If you have a question that you want answered in a future episode , you can always go to my website , early retirement podcast dot com .

That's early retirement podcast dot com , and you can go ahead and submit a question that I'll look to answer in a future episode . Thank you all for listening . Please do rate it , review it and share it with someone who you think would benefit from this information , if there's anyone out there that you know .

I certainly appreciate it and I will see you all each week . Hey guys , it's me again . Please be smart about this . Nothing in this podcast should be construed as financial , tax or legal advice . Consult with your tax preparer or financial advisor before taking any action . This podcast is for informational purposes only .