Taxes Matter When Cashing Out Early

Tax Planning

Taxes Matter When Cashing Out Early

Consider these tax rules if you want to access your nest egg sooner rather than later.

Early retirees can take advantage of penalty-free distributions from retirement accounts, but they must pay federal income taxes on those withdrawals at their top tax rate, which can be as high as 35%. State income taxes take another bite. But profits on investments held in taxable accounts for more than a year are taxed at a maximum 15% capital-gains rate.

If you're eligible, you can contribute up to $4,000 to a Roth IRA this year ($5,000 for those 50 and older). Although there is no up-front tax break, all the money can be withdrawn tax-free as long as you are at least 59 1/2 and the account has been open at least five years. To contribute to a Roth IRA in 2007, your income can't exceed $114,000 if you're single or $166,000 if you're married filing jointly.

There are no income-eligibility limits for Roth 401(k)s. You can contribute up to $15,500 this year ($20,500 for those 50 and older).