The one part that he failed to consider is what happens if he wanted to retire early. After some initial fact finding, I asked a simple question:
Do you plan on retiring early?
He quickly shot back and said
“Yes, my hope is that I can retire somewhere around the age of 57.”
That simple statement leads to ultimately the biggest mistake that many people make when changing jobs and retiring early. A little known IRS rule allows folks that retire early, starting at the age of 55, to take premature distributions from their employer sponsored plan while avoiding the 10% early withdrawal penalty.
How is this all a mistake? The mistake has everything to do with the technicality of the term “employer sponsored plan”. Employer sponsored plan would include your 401(k), 403(b), TSP, or 457. What that does notinclude is your IRA’s.
That’s right, your IRA, according to the IRS, is not an employer sponsored plan, so if you roll that over into an IRA, you lose the ability to take out your money and avoid the 10% early withdrawal penalty. And the last time I checked, no one likes to pay a 10% penalty just for the fun of it.