#1: Don’t Take Early Withdrawals
If you take distributions from your traditional IRA or 401(k) account before you turn 59, not only will you have to pay taxes, you’ll also have to pay a 10% penalty, double ouch.
If you want to avoid penalties and taxes, you should do everything in your power not to take early withdrawals. Plus, the longer you keep your money in the account, the more your investment can grow giving the power of compounding that little bit longer to work.
#2: Don’t Touch Your Roth IRA EARNING
With Roth IRAs, the rules are a bit more complicated. Since Roth IRAs are funded with post-tax contributions, you can withdraw the money you have contributed at any time with zero penalties or taxes.
Withdrawing earnings is another story. If you are younger than 59.5 or have had your Roth account for less than five years, you’ll have to pay the 10% early withdrawal penalty AND pay taxes on the earnings… WOW that hurts!
So, while it’s perfectly acceptable to dip into your Roth IRA contributions to pay for an emergency, you should keep your hands off those earnings unless it’s absolutely necessary.
#3: Convert to a Roth IRA
If you have money in a traditional IRA or 401(k), the smart move is to convert your accounts to Roth IRAs.
With a traditional IRA, Uncle Sam will force you to start taking required minimum distributions (RMDs) once you turn 72, whether or not you need the money. Since traditional IRAs are funded with pre-tax money, you’ll have to pay taxes on your RMDs, even if you don’t want to take them.
How do you get out of taking RMDs? Convert your account to a Roth IRA. Unlike traditional IRAs, you are never required to take distributions from your Roth account, so you can let your investments grow as long as you want.
Weirdly enough, if you have a “designated” Roth 401(k) account, you’ll also be subject to RMDs. Luckily, you can roll your Roth 401(k) funds into a Roth IRA when you hit 72.
When you convert to a Roth IRA, you’ll have to pay taxes on the amount of money you convert, but it’s worth the cost. Investments in Roth IRAs grow tax-free, and you won’t be taxed if you decide to take distributions.
#4: Keep Your Distributions As Small As You Can
If you have your money in a traditional retirement account, you’ll have to pay taxes on any distributions you receive. While it might be tempting to take out more than you need, you need to be strategic about your withdrawals. If you take out too much money in one year, you can end up in a higher tax bracket, which will cost you even more in taxes.
Related: 5 Tips for Retirement Savings
#5: Generate Passive Income Through Rentals
One of the most underused retirement strategies is investing in rental properties. If you’re a BiggerPockets reader, you probably already knew this. What you may not know is that retirement savings tools like the solo/self-directed 401(k) and self-directed IRA (SDIRA) let you invest in real estate and grow your nest egg tax-free.
That means you can use your real estate investing know-how and strategic connections to find the best real estate opportunities. Once you’ve scored some great deals, you can rent those properties out to develop passive income streams that can flow into your retirement savings.