Many dream of retiring before their 60s, but making it work takes more than aggressive savings. The gap between when you leave your career and when you can tap traditional retirement accounts without penalties can stretch years, even a decade or more. That window of time poses a unique challenge.
How do you fund your life without triggering unnecessary taxes or dipping too soon into long-term assets?
One option for funding retirement for early retirees is a bridge account. Rather than pulling from your 401(k) too soon or relying on part-time work, you can draw from a personal account designed to keep you afloat until you hit full retirement age or other significant milestones. With the right approach, you can bridge the gap confidently, without derailing your long-term strategy.
What Is a Bridge Account?
The term “bridge account” refers to the account(s) you can use to fund your expenses after leaving work but before tapping traditional retirement assets. Depending on your goals and income needs, your bridge account might include a mix of cash savings, CDs, or investments held in a taxable brokerage account.
So what makes one type of account more useful than another?
If your retirement timeline is just a few years away, you might rely more heavily on high-yield savings accounts or certificates of deposit (CDs). These options offer stability and low risk, making them helpful for near-term expenses. Some retirees even set up CD ladders—spreading deposits across multiple maturity dates to lock in higher yields while maintaining access over time.
On the other hand, if you’re planning for a longer bridge—say, five to ten years—you may want to lean more on invested assets. This is where a taxable brokerage account can shine. It gives you flexibility over your investment choices and withdrawal timing, making it a popular option for more extended bridge periods.
Pros of a Bridge Account for an Early Retirement
Having a bridge account gives you control over when you retire, how you withdraw your money, and how much tax you pay along the way. It’s an option that can add stability to your plan, especially if you want to leave the workforce before 60.
Here are a few reasons many early retirees consider this strategy a smart part of their overall income plan:
Withdraw Any Time: One of the biggest advantages is freedom. There are no penalties or age thresholds. You can access your money when you want, on your schedule.
Creates a Buffer Against Early Retirement Surprises: Life doesn’t always follow your financial projections—and a bridge account gives you a margin for error. Whether healthcare costs spike, markets dip, or you need to replace a car, having a flexible, penalty-free source of cash can help you absorb the unexpected without locking yourself into fixed withdrawal rules.
Helps Preserve Retirement Accounts: The longer your traditional accounts stay untouched, the more they can grow. Tapping your bridge account first allows your IRA, 401(k), and other accounts to keep compounding, possibly supporting a longer retirement.
Flexible Investment Choices: You’re not stuck with the limited fund options inside an employer plan. A bridge account lets you build a portfolio around your goals, risk tolerance, and income needs, giving you more control over strategy and execution.
Cons of a Bridge Account
While a bridge account offers flexibility, it doesn’t come without drawbacks. These downsides are worth considering as you weigh how a bridge account fits into your overall retirement approach:
No Tax Deferral: Unlike 401(k)s and traditional IRAs, a bridge account doesn’t offer tax-deferred growth. That means you could owe yearly taxes on interest, dividends, and capital gains. Over time, this could reduce your after-tax returns compared to accounts that allow earnings to grow untouched.
No Employer Match: There’s no extra help from your company when you save in a bridge account. That’s a notable contrast to a workplace plan where your employer often matches part of your contributions, giving you free money toward your future.
No Built-In Retirement Incentives: Bridge accounts lack retirement-specific features that encourage consistent saving, like automatic payroll deductions, catch-up contributions, or age-based tax advantages. Without these structures, staying on track can take more planning and discipline over time.
Risk of Overspending: Bridge accounts offer easy access, which can sometimes work against you. Without clear rules or withdrawal penalties, it can be much more tempting to use funds for unplanned wants instead of early retirement needs.
How to Build and Fund a Bridge Account
A bridge account is something you build gradually over time based on your income, spending needs, and retirement timeline. The key is to treat it like its own category in your financial plan, separate from long-term savings or short-term spending. These strategies can help you get started and stay on track:
Maximize Savings Rate During Working Years: One of the most effective ways to grow your bridge account is to set aside money consistently. Automating transfers into a dedicated account—even small ones—can help build momentum without relying on year-end catch-up.
Use Bonuses and Windfalls Strategically: Putting extra income to work can give your bridge account a big lift. Think about directing work bonuses, RSU sales, or tax refunds toward early retirement savings instead of lifestyle upgrades. It’s a relatively painless way to make progress faster.
Balance Contributions Across Accounts: It’s a common question: Should you pause contributions to your 401(k) or IRA in order to fund a bridge account? Not necessarily. The goal is to build retirement savings for both the near and long term. You might continue contributing enough to get your employer match while also saving separately in a taxable account for flexibility. The right mix depends on your income, timeline, and tax picture.
Invest for Growth and Liquidity: If you’re using a taxable brokerage account, you’ll want investments that can grow over time but still be accessible when needed. Be mindful not to tie up too much in illiquid assets, especially if you’ll need to draw from the account early on.
Track Progress With Retirement Modeling Tools: Free online calculators can help you model different timelines, expenses, and withdrawal rates. You can also partner with a financial advisor to build customized forecasts that reflect your entire financial situation.
How to Invest Within a Bridge Account
Choosing the right investments for your bridge account involves balancing growth with availability. These strategies can help align your bridge account with your short-term income needs and longer-term goals:
Ideal Asset Allocation Strategies for a 5–15 Year Horizon: You’re not planning for 30 years of growth here—you’re planning for a glide path between work and traditional retirement. During this stage, retirees often shift their investment mix, gradually reducing risk by adjusting the balance between stocks and bonds as they approach their withdrawal timeline. A 60/40 or 70/30 stock-to-bond allocation can be an excellent approach for medium-term use.
Balance Equity Growth With Downside Protection: Stocks can help your money grow, but you don’t want to be forced to sell during a market dip. Keeping a portion of your bridge account in bonds, cash equivalents, or stable value funds can provide a buffer during downturns.
Reduce Sequence of Returns Risk in Early Retirement: If your bridge account takes a hit in the early years of retirement and you’re also withdrawing from it, the damage can compound. That’s called sequence of returns risk. Some retirees keep one to three years of planned withdrawals in safer holdings within the bridge account, like cash or short-term bonds, to reduce that risk.
Use Tax-Efficient Investment Vehicles: Tax efficiency matters when investing through investment accounts like taxable brokerage accounts. Index ETFs, municipal bonds, and tax-managed funds can help reduce your annual tax bill without compromising your strategy.
Rebalance Over Time to Manage Volatility: Markets shift—and so should your allocations. As you get closer to drawing down your bridge account, it’s wise to rebalance gradually into more stable holdings. This helps reduce volatility while keeping your risk aligned with your timeline.
Please Note: Sequence of returns risk doesn’t end with your bridge account. It also applies to your 401(k)s, IRAs, and other retirement accounts. The order in which returns occur—especially during early withdrawal years—can significantly affect your retirement nest egg. Planning for stable cash flows and building a buffer of safe assets within all your retirement accounts can help protect against this risk.
Tax Planning With Bridge Accounts
Bridge accounts are flexible, but that flexibility comes with a tax trade-off. You’ll need to account for annual taxes on interest, dividends, and realized gains. Still, with smart planning, a bridge account can help reduce your overall tax burden by spreading income more intentionally across your early retirement years. These strategies can help you get the most out of your bridge account without handing too much over to the IRS:
Understanding Capital Gains and Dividend Taxes: Earnings in a bridge account aren’t sheltered. If you sell assets for more than you paid, you may owe capital gains tax, and dividends or interest income may also be taxable in the year you receive them. The timing and size of those gains can make a big difference in your total tax bill.
Tax-Loss Harvesting Opportunities: When certain investments lose value, you might sell them to lock in the loss, which can help counterbalance gains from other holdings in your portfolio. This approach, known as tax-loss harvesting, may reduce your taxable income for the year. Be careful—reacquiring similar assets too soon can trigger wash-sale restrictions.
Utilizing the 0% Capital Gains Bracket: If your taxable income is relatively low—something that’s common in early retirement—you may qualify for the 0% long-term capital gains rate. That means you could sell appreciated assets without paying any federal tax, so long as you stay under the annual IRS income threshold.
Strategic Asset Location: Some assets are better suited for taxable accounts than others. Placing more tax-efficient investments in your bridge account—while holding higher-growth or tax-heavy assets in your tax-advantaged retirement accounts—can help reduce the drag of annual taxes and improve your portfolio’s overall efficiency.
How a Bridge Account Fits Into an Overall Early Retirement Plan
Bridge accounts don’t replace your retirement accounts—they work alongside them. The goal is to give you more options and flexibility during a time when your other assets may still be off-limits. When included in a broader retirement plan, your bridge account can support a smoother, more tax-aware transition from full-time work to long-term retirement income. Here’s how it fits into the bigger picture:
The Order of Withdrawals: A typical early retiree might start by pulling from their bridge account, and later tap into IRAs, 401(k)s, or annuities. This sequence can help delay taxable distributions from retirement accounts and may lead to better long-term outcomes—especially in favorable markets.
Coordinate Contributions Across Account Types: You can often continue contributing to other tax-advantaged accounts while building a bridge account. If you still have earned income, Roth IRA contributions may be available (subject to income limits) while HSA contributions are allowed regardless of income as long as you’re enrolled in a qualifying health plan. These accounts work in tandem to support different phases of your retirement, from covering medical costs to generating long-term, tax-advantaged income.
Complements Other Early Retirement Tactics: Bridge accounts can support strategies like Roth conversion ladders or 72(t) withdrawals. By using your bridge account to fund living expenses, you give yourself room to implement these more technical tactics without stressing your cash flow.
Prepares You for a Smoother Transition Into Traditional Retirement Once you reach your 60s and beyond, income from Social Security, annuities, or Required Minimum Distributions (RMDs) often takes center stage. A bridge account helps you stretch your timeline and arrive at those years on stronger financial footing.
Please Note: A 72(t) withdrawal allows you to take early distributions from an IRA or other qualified retirement account before age 59½ without paying the 10% early withdrawal penalty. This strategy requires you to follow a substantially equal periodic payment (SEPP) plan, which means taking out the same amount each year based on IRS-approved formulas. You have to keep making these withdrawals for at least five years or until age 59½—whichever is longer.1
Additionally, if you’re leaving your job after age 55 (or 50 for certain public safety workers), the IRS allows penalty-free withdrawals from your 401(k) via the Rule of 55— but only from the 401(k) associated with your most recent employer. This is an important planning window. If you’re close to 55, it might be worth timing your early retirement to take advantage of this provision, or rolling assets into the correct 401(k) to access funds penalty-free.
Bridge Account for Early Retirement FAQs
1. What’s the best way to start a bridge account?
Most people use a taxable brokerage account as their bridge account because it allows for flexibility in both investment choices and withdrawal timing. To get started, you can open an account through a trusted brokerage platform and begin contributing funds separately from your retirement accounts. Think of it as a “freedom fund” you built for the years before 59½.
2. Can I retire early without a bridge account?
It’s possible, but it often takes more complicated strategies. You might need to rely on 72(t) withdrawals, Roth conversion ladders, or other less flexible methods. A bridge account simplifies the process by giving accessible funds without age restrictions or rigid IRS conditions.
3. Is a bridge account the same as a taxable brokerage account?
Not exactly, but close. A taxable brokerage account is the most common type of account used for this purpose, but what makes it a “bridge account” is how you use it. If you’re earmarking the funds to support yourself between early retirement and traditional retirement age, that’s when it becomes a bridge account. These accounts might also include things like a high-yield savings account or certificates of deposit.
4. What are the tax implications of using a bridge account?
Using a taxable brokerage account, you’ll pay taxes each year on realized gains, interest, and dividends. That’s the trade-off for flexibility. However, with smart planning—like using tax-efficient investments or harvesting losses—you may be able to manage your tax liability more effectively than you think.
5. How much should I save in a bridge account for early retirement?
A good starting point is to estimate your annual spending between retirement and age 59½, then multiply by the number of years you’ll need to fund. For example, if you retire at 52 and spend $60,000 a year, you’d want at least $420,000 saved to cover seven years. Remember to factor in a buffer for market fluctuations, inflation, or unexpected expenses.
6. Should I prioritize my 401(k) or my bridge account?
You don’t have to choose one over the other. Many people continue contributing to their 401(k) up to the employer match while also setting aside money in a separate bridge account. Understanding your income level and contribution limits can help you split your savings in a way that supports your goals in the near and far term.
7. Can I withdraw from my bridge account at any age?
Yes. There are no age-based rules like those that govern IRAs or 401(k)s. You can access funds at any time, which is why these accounts are so helpful for early retirees.
8. How do I manage cash flow in early retirement using a bridge account?
Some retirees withdraw monthly, while others prefer to take out lump sums once or twice a year. It often depends on your spending habits and how your investments are structured. Keeping 1–2 years of expenses in cash or bonds within your bridge account can help provide a buffer during market downturns.
Is a Bridge Account Right for Your Early Retirement Plan?
If you’re serious about retiring early, a bridge account can help make that dream financially sustainable. It gives you access to money when other accounts are off-limits, allowing you to cover your living costs and stay on track with your long-term goals. Whether leaving work at 55 or stepping away even sooner, this strategy can help you gain more freedom and flexibility in how you live those early retirement years.
Used alongside Roth IRAs, HSAs, and your 401(k), a bridge account can add an extra layer of control over your withdrawal strategy. This isn’t intended to replace existing financial tools but rather to offer an additional strategy for lowering taxes, managing cash flow effectively, and safeguarding long-term investments. For those considering more advanced techniques like Roth conversion ladders, a robust bridge account can provide the necessary flexibility to execute them properly.
Working with a financial advisor can also bring clarity and direction to your early retirement plan. Our advisors can help you model different timelines, make smart allocation decisions, and decide exactly how much to set aside. If you’re ready to get a head start on your golden years, we invite you to schedule an introductory call with our team today.
Resources:
- https://institutional.fidelity.com/advisors/investment-solutions/fidelity-advisor-ira/fidelity-advisor-traditional-ira/understanding-72t-and-sepp
- https://www.nerdwallet.com/article/investing/roth-conversion-ladder
Sheena is a highly regarded financial professional known for her clear explanations and practical advice on complex financial matters. She earned her CERTIFIED FINANCIAL PLANNER™️ designation in 2010 and holds a Bachelor of Science degree in Finance from the University of Wisconsin LaCrosse.
