Retiring before 60 and worried about big capital gains – should I restructure my mix of ETFs and mutual funds right now?

There’s a reason workers are commonly advised to save for retirement in an IRA or 401(k) plan. These accounts offer a world of tax benefits, like tax-free contributions and tax-deferred investment gains.

The problem with IRAs and 401(k)s, though, is that you risk an early withdrawal penalty if you remove funds before turning 59 and 1/2.

There can be exceptions for 401(k) savers, who can sometimes access their most recent employer plan at age 55. But for the most part, if you’re retiring before reaching age 59 and 1/2, you need investments in a taxable brokerage account to live on, or some other income stream.

In this Reddit post, we have someone who’s assembled a mix of investments in a regular brokerage account for this very purpose. They want to retire at 55 and don’t want to take an early withdrawal penalty in their IRA or 401(k).

They have enough money in their brokerage account to cover their costs for the next five years, so they’re not worried about a shortfall. But what they’re worried about are capital gains.

Their primary investments in that account now are ETFs and mutual funds. And they’re wondering if they should make changes. The answer? Maybe – but not necessarily for the reason they think.

Taxes are only part of the equation

It’s hard to make money off of investments while avoiding taxes completely.

The good news is that long-term capital gains are taxed more favorably than short-term gains. So if the poster is in the long-term gains category, they may only be looking at a modest tax bill in the coming years. Even if they’re a high earner, long-term capital gains taxes max out at 20%.

But what the poster should really be asking is whether they’re taking on the appropriate amount of risk in their portfolio. They’re not so heavily invested in international funds, but they may want to move out of some ETFs and into bonds funds for more stability.

Given the volatile nature of the stock market, it’s important to have assets outside of it when you’re at a point where you’re tapping your portfolio for income on a regular basis. So rather than stress about taxes, the poster should look at their asset mix and perhaps consider a few changes.

It pays to get help

Retiring at 55 isn’t necessarily a risky thing if you have enough money. But it’s important to do what you can to ensure that your portfolio keeps growing while mitigating any associated tax hit.

That’s why I would suggest that this poster talk to a financial advisor. If they’re financially stable enough to end their career at 55, it means they’ve clearly done a good job of saving and investing their money. But there’s a difference between investing for growth and investing for income.

When you’re doing the latter, it can be tricky to strike the right balance. So the poster might really benefit from the input of a professional who can also address their tax concerns and help them find the most efficient investments.