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Three Strategies For CRNAs To Retire Early
After spending decades working in a demanding career, many CRNAs dream of retiring early. And for some who have saved enough to do so, it’s important to have a retirement strategy in place that focuses on minimizing taxes and penalties.
The unfortunate reality is that retiring early can make your income plan tricky. Many retirement accounts are designed with a retirement age of 60 and up in mind. For those who seek to retire in their fifties, they’ll face an early withdrawal penalty if they want to withdraw from their retirement accounts, such as a traditional IRA or 401(k).
If you’re planning on retiring early, consider these three strategies for maximizing your retirement savings.
1. Rule 72(t) Distributions
When you withdraw from an IRA prior to age 59½, you’re slapped with a 10% tax penalty, plus your withdrawals will be subject to being included in your gross income. However, there are exceptions to this penalty. For instance, you can withdraw from your IRA and use the funds to pay your medical insurance premium if you lose your job.1
Another exception is to take “substantially equal periodic payments” under Rule 72(t).2 According to this IRS rule, the penalty does not apply if you take distributions as part of a series of periodic payments for the longer of five years or until you reach age 59½. However, once distributions begin, you’ll face the 10% penalty retroactively if you modify the series of payments in any way.
The withdrawals you make under this rule will be taxed at your income tax rate, but there is no flexibility, so this isn’t always ideal. However, this option at least allows you to avoid a 10% early withdrawal penalty, which for a CRNA who’s been saving for years could be a significant amount.
2. Roth Conversion
Rather than face years before you can dip into your retirement accounts penalty-free, one option is to convert your Traditional IRA to a Roth IRA. Not only are Roth IRAs funded with after-tax dollars, but once your account has been open five years, you can also withdraw contributions you make tax-free and penalty-free. One caveat is that you may have to pay penalties and taxes on the earnings made in your Roth before age 59½.
Unfortunately many CRNAs aren’t eligible to open a Roth IRA due to the income restrictions. As of 2017, married couples earning more than $196,000 can’t fund a Roth IRA. However, you can convert your traditional IRA to a Roth which allows high income earners, like CRNAs, a way around these restrictions.
Work with a tax professional when you consider doing this. The year you do this conversion, you’ll have to pay income taxes on the amount you convert to a Roth. This could potentially bump you up to another tax bracket, so you’ll want to strategize on the right time to make this move. A tax professional can work with you to determine the capacity for withdrawals or conversions.
3. Taxable Accounts
As explained, Roth IRAs aren’t the most appropriate route for all CRNAs, especially those who live in a high-tax state and intend on moving to a state with lower or no state income taxes during their retirement.
Another alternative is taxable accounts. Rather than pay the taxes and penalties associated with early withdrawals from retirement accounts, some people prefer to rely on the potential passive income stream of stock dividends, and CDs. With taxable accounts, there are no age-based penalties for distributions, so you can withdraw at any age. While you won’t pay a penalty, you will pay capital gains taxes.
The idea behind this strategy is to use funds from your taxable account during your early retirement years to allow your tax-deferred accounts to grow. Once you hit 59½, you won’t face a withdrawal penalty, and you may be in a lower tax bracket by that time, which is also beneficial tax-wise.
Next Steps
When it comes to your retirement savings, it’s important to work with a CERTIFIED FINANCIAL PLANNER™ practitioner who specializes in serving the unique needs and circumstances of CRNAs. Do you have questions about how we can help you?
1 https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans