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The idea of early retirement is exciting, but not if you're excessively paying penalties just to access your savings early. Find out how to make the most of your money.

As the FIRE movement continues to grow, more and more people have their sights set on retiring early. It’s not uncommon to hear stories of professionals walking away from their jobs in their 40s or even younger.

But while our culture’s definition of retirement age is quickly changing, the government’s definition, specifically when it comes to retirement accounts, has stayed the same. In order to avoid extra taxes and penalties, you’ll generally need to wait until age 59 ½  to begin taking withdrawals from IRAs and 401ks.

So what is an early retiree to do? What are the best places to save your money for early retirement? Let’s take a look.

7 Best Places to Save Your Money for Early Retirement

If you’re looking for the best places to save your money for early retirement, here are seven great choices.

1. Roth IRA

While you can’t withdraw your earnings from a Roth until age 59 ½, you can withdraw your contributions.

Let’s say that you contribute $6,000 to your Roth each year from age 20 to 45. Your total contributions would be $150,000. But if you earned an 8% annual return, your Roth would be worth nearly $440,000 when you hit early retirement.

That’s compound interest working in your favor. So in this example, you wouldn’t be allowed to touch the $280,000 of growth (without incurring a penalty) until you reach age 59 ½. But you could start withdrawing your $150,000 of contributions immediately.

That’s why a Roth IRA is one of the best places to save your money for early retirement. And it should probably be the first place you save if you can.

Roth income limits and how to get around them

I say “if you can,” because not everyone will be eligible to contribute to a Roth IRA. There are income restrictions. For single filers, you can’t contribute to a Roth if you earn more than $130,000 in annual income. If you’re married filing jointly, the max income is $203,000.

If you’re income is too high for a Roth IRA, you may want to consider contributing to a traditional IRA or 401k and setting up a backdoor Roth conversion. With this method, you can convert your pre-tax money to a Roth account no matter your income level. However, you will be required to pay tax on the converted amount.

Carefully think through the implications of a backdoor Roth conversion

A couple of things to keep in mind before setting up a backdoor Roth IRA. First, make sure that you don’t plan to spend the money in the next five years. If you do, you’ll owe a 10% tax penalty.

And you may owe the 10% tax if you use some of the converted IRA funds to cover the tax penalty. Plus, that money would immediately lose out on years of tax-free growth. So if you don’t have the cash on hand to pay for the Roth conversion tax bill, you may want to avoid it.

2. Taxable Brokerage Account

If you plan to retire five or more years before age 59 ½, your next best place to put retirement money away may be a taxable brokerage account.

Yes, you’ll have to pay taxes on your contributions and growth. But you’ll be able to use the money at any time without penalty. Plus, in most years, you’ll get a much better return for your money than in a savings account or CD.

If you do plan to open an account with a broker, you may want to consider one of the best robo-advisors , which will build portfolios to match your risk preference. And many offer tax-loss harvesting techniques to minimize your taxes.

Our Recommended Robo-Advisors

BrandBest For
Ally InvestPortfolio diversification
BettermentPassive investors
WealthfrontFirst time investors
Personal CapitalLarge investors

You could also consider investing in individual stocks. With individual stocks, you won’t owe any capital gains taxes until you sell. And even when you do, long-term capital gains (meaning you held the security at least a year before selling) are generally capped at 15%.

On the other hand, mutual funds can generate a steady stream of capital gains throughout the time that you own them.

3. Health Savings Account (HSA)

Saving money in an HSA account would be a great way to plan for your healthcare expenses in early retirement.

First, you’ll receive a tax deduction on your contributions. Then, once you reach a certain threshold, you’re allowed to invest your HSA contributions. And any earnings or interest on your HSA money is tax-free too.

And the best part about HSAs is that you can withdraw your contributions tax-free at any age as long as the money is used for health expenses.

And if you still have HSA money left over after you reach age 65, HSAs become like Traditional IRAs or 401ks in the eyes of the IRS. You can use the money on any expenses and it will simply be taxed like ordinary income.

In order to qualify for an HSA, you must be enrolled in a high-deductible healthcare plan. If you have a high-deductible plan, then you need to be taking advantage of an HSA.

Lively HSA is a great place to begin looking into an HSA. Lively allows you to save or invest with your HSA and there’s no cost to open an account or any monthly fees.

4. Traditional IRA or 401(k)

Ok, so here’s the bad news with Traditional IRAs and 401(k) accounts. With both of these accounts, you’ll pay a 10% penalty if you withdraw your money before you reach age 59 ½.

BUT if you know that your other accounts will be able to last you until that time, a Traditional IRA or 401k could still be a great choice.

For example, you could use your Roth, HSA, and taxable brokerage account money until age 59 ½. And then you could start taking distributions from your pre-tax retirement accounts.

How to Withdraw Money from an IRA or 401(k) Before Age 59 ½

There is one way to take money out of an IRA before age 59 ½ without having to pay the 10% early distribution tax. It’s called 72(t) payments. You can technically begin 72(t) payments at any age. But for it to work, you’ll need to stick with the same payment schedule for 5 years or until you reach age 59 ½.

There a few other times that you can make withdrawals from a pre-tax retirement account without penalty. One time is if qualify for a “safe harbor” hardship distribution and use the funds for things like medical expenses, tuition, or funeral expenses.

Another example would be if you leave or are fired from the company sponsoring your 401(k) account at age 55 or older. In that case, you can cash out your 401(k) without penalty. While retiring at age 55 isn’t a terribly early retirement, it’s still something to keep in mind.

An efficient way to do this is by putting your 401(k) on auto-pilot. You can do this with blooom, a robo-advisor that manages employer sponsored retirement plans. You can sign up for blooom to get a free analysis of your 401(k) and if you like what you see, you can use blooom to manage and regularly adjust your portfolio based on your goals.

Related: Blooom Review

5. Real Estate

There are a few reasons why real estate is one of the best places to save your money for early retirement.

First, investment properties can provide a steady stream of fairly passive income throughout your retirement years. Second, the current tax code allows landlords to deduct a large percentage of rental income.

And, lastly, if you sell a home that you lived in as your primary residence, you generally won’t need to pay capital gains tax on your profit.

Singles can exclude up to $250,000 of their home’s sale and married couples can exclude up to $500,000. In order to qualify for these exclusions, you’ll need to have owned and lived in the home for at least two of the previous five years.

You can invest in real estate along with other investors in order to bring diversity to your portfolio. Platforms like Fundrise and Realty Mogul are crowdfunding platforms for real estate investment. This means that you invest in real estate projects and properties along with potentially hundreds of other investors.

6. Municipal or U.S. Treasury Bonds

Both of these bonds give interest payments typically twice a year and then repay the full principal on the maturity date. What’s nice about government bonds like these is that they come with special tax perks.

With U.S. Treasury bonds, you’ll typically only need to pay federal income tax on the interest you receive. While with Municipal bonds, your income will often be completely tax-exempt.

You can buy Municipal or U.S. Treasury bonds from most banks, brokers, or bond-dealers. U.S. Treasury bonds can be purchased directly from the U.S. Treasury as well. Depending on where you live, you may be able to buy Municipal bonds directly from your municipality too.

7. CDs and High-Yield Savings Accounts

Finally, let’s talk about money that you plan to touch in five years or less. For money that you’re going to need that quickly, it’s better to have it saved in more stable investments.

Since government bonds often have maturity dates that are set several years out, they may not be a good fit for money that you need in the very near future. In that case, you should probably put your money away in the best CDs or high-yield savings accounts that you can find.

By shopping around, you can easily earn around 2% or more on your money. That’s not as much as you’ll earn from other investments. But that’s more than 20 times better than the average bank savings account interest rate!


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Bottom Line

The early retirement movement is exciting. However, not being able to access your money (without paying excessive penalties) can quickly take the wind out of your sails.

Related: 10 Expenses that Can Drain Your Money in Retirement

But by taking advantage of the best places to save your money for early retirement, you can avoid unexpected surprises and financial hiccups.

Author Bio

Total Articles: 25
Clint Proctor is a freelance writer and founder of WalletWiseGuy.com, where he writes about how students and millennials can win with money. When he's away from his keyboard, he enjoys drinking coffee, traveling, obsessing over the Green Bay Packers, and spending time with his wife and two boys.

Article comments

1 comment
Miguel Lizardo says:

Excellent review of the topic. No nonsense and to the point. Thank you.