Strategies for Employing a Brokerage Account for Micro-Retirement, Excluding Your 401(k) Funds

Strategies for Employing a Brokerage Account for Micro-Retirement, Excluding Your 401(k) Funds

Ready to ditch the daily grind and take a well-deserved break? More young folks are jumping off the career treadmill for a taste of micro-retirement. Whether they call it a sabbatical, a gap year, or a one-year career vacation, the goal is the same: a short, purposeful break from full-time work without wrecking their long-term financial plans.

So, how do you pay for this pampered pause without dipping into your 401(k)? The secret sauce? A brokerage account. Here's the lowdown on using a brokerage account to fund your much-needed break.

Key Takeaways:

• A brokerage account offers easy access to your cash without penalties, making it the perfect budget vessel for a micro-retirement.
• Give yourself at least five to seven years to plan, and switch to safer investments as your break approaches.
• Set firm deadlines to start job-hunting and get back to work to avoid any unnecessary financial strains.

Why Choose a Brokerage Account?

Unlike a 401(k) or Roth IRA, a brokerage account allows you to withdraw funds whenever you like, no early withdrawal penalties required. That's why Eric Maldonado, the brains behind California-based Aquila Wealth Advisors, transferred his retirement profits into a brokerage account before embarking on his "one-year working sabbatical."

Escaping those pesky early withdrawal penalties is the major perk of using a brokerage, as per Maldonado. Most traditional retirement accounts (like traditional IRAs and 401(k)s) come with a 10% penalty on withdrawals before age 59½, plus income taxes. And while Roth IRAs offer more flexibility, Maldonado warns, they're "most effective" when you let them grow over decades. "Don't kill the compounding effect by withdrawing early if at all possible," he advises.

Plan Early and Invest Wisely

"If you're all in on the micro-retirement dream, a brokerage account is a good place to redirect all new retirement savings," says Maldonado. "The sooner, the better—ideally, five to seven years ahead." He suggests saving even more than you think you'll need and accounting for contingencies.

At first, you can invest aggressively. But as your trip date nears, shift your savings into safer assets. "You'd want to have your full year's expenses set aside and allocated into stable funds by the time you take a leave of absence," says Maldonado, citing options like money market funds, T-bills, or high-yield savings accounts.

Mind the Taxes and Timeline

Before you sell any stocks or other assets in your brokerage account, take note of the tax implications.

"If you have big capital gains in your stock positions, you could be hit with 15% to 20% long-term capital gains taxes," Maldonado points out. Consider spreading sales across two tax years to reduce the pain.

Maldonado also advises thinking through income taxes on interest from bonds or money market funds. And remember, proper planning is crucial. "The biggest risk is unintentionally slipping into a prolonged micro-retirement," he warns, recommending deadlines for job-hunting or self-employment.

Wrap Up

A brokerage account offers the flexibility you need to hit pause on your career without sacrificing your 401(k). But, remember, that flexibility only works if you take charge. To fully enjoy your micro-retirement, start planning well in advance, invest smartly, understand the tax implications, and most importantly, stick to your return-to-work timeline to keep your finances healthy.

"We often underestimate how costly life can be without an income and overestimate how much we can save in a year or two," says Maldonado, "but don't underestimate the power of staying focused on your goals."

Bonus Reads:

1. Fundrise Income Fund: A popular investment option for generating passive income.
2. Diversified Portfolio: Understanding different asset classes and how they can support your investment goals.
3. Fundrise.com/Income: Learn more about Fundrise and how it helps investors build a diversified portfolio.

• By transferring retirement profits into a brokerage account, Eric Maldonado was able to avoid early withdrawal penalties during his one-year working sabbatical.
• A brokerage account allows for easy access to funds without penalties, making it an ideal choice for those planning a micro-retirement.
• Giving yourself at least five to seven years to plan and saving more than you think you'll need are key strategies when using a brokerage account for micro-retirement.
• Before selling any stocks or other assets in a brokerage account, it's essential to consider the tax implications to minimize long-term capital gains taxes and properly plan for income taxes on interest.

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