ROTH IRA Conversion Ladder

[@Aerie499]

That was great. Please do shorter videos like this!

[@wildfoodietours]

A VERY important point to remember is that after the 5 year waiting period ONLY the initial contribution amount is available tax AND penalty free. Any gains are penalty free but NOT tax free until you reach 59.5. For example, with a $40k conversion to a Roth IRA that grows to $60k after 5 years, on the sixth year you can withdraw your original $40k contribution tax and penalty free. The remaining $20k in gains is penalty free but you still have to pay taxes on it until you reach 59.5.

[@AKim-uu4hg]

That was a nice snippet of an important subject! Thank you!

[@jacob-t-s]

The article on the ChooseFI website about this is by far the most comprehensive and easy to understand guide on the ROTH conversion ladder. I was finally able to understand it after reading it over there. Definitely echoing others here in saying more short videos and more guides like that would be awesome. Especially on the more "advanced" FI concepts and strategies

[@holdencawffle626]

Link?

[@amafid]

Love these bite sized snippets. More please.

[@SD-co9xe]

Your explanation is excellent.

[@mattcramer9187]

Great topic and love the shorter video

[@jonv.6792]

Thank you for sharing this info in short, concise and direct to the point. Can you also explain the backdoor IRA as well in this manner.

[@ArthurChoe]

Thank you Thank you thank you!!

[@lindersok]

Love this shorter snippet! Any thoughts about the conversion for ppl considering a work gap year?

[@emikami1]

For early retiree, they need to be concerned about how to pay for health insurance. Many people are stuck with either 18 months of COBRA (pricey) or buying from Obamacare exchange (income and household size based--kind of like a hidden additional tax). If the later is the case, this Roth conversion strategy often doesn't work as well as you would like. It isn't too uncommon to have the income tax + Obamacare credit cost being greater than 22%. In other words, your cost bracket in early retirement can often be higher than during the working years.

[@Yyrdfhjlplnvxsserujbg7]

Great topic. Could you review Curtis Ray MPI retirement?

[@Jeff321]

Is it possible to withdraw Roth IRA contributions while simultaneously doing the conversion ladder from a Traditional IRA into the Roth IRA? I'm assuming so?

[@ZacheryGlass]

Yes. You do the conversion 5 years in a row. Then on year 6, you still do the conversion from Traditional to Roth, but you can now withdraw the money that you converted from year 1. So every year after the first 5, you convert $40k from Traditional to Roth and you withdraw $40k from the Roth.

[@Marl-hj8hh]

Infographic would also be helpful

[@SIM19999]

What about moving money from Roth 401(k) to Roth IRA? Is that also subject to a five year waiting period?

[@jskweres2]

Does this also apply to roth 401k? (I convert traditional 401k to roth)..

[@EtherealPanda218]

I had quick questions how about the 10% early withdrawal penalty does that apply when doing for example a 403b into ROTH IRA conversion?

[@addd21323]

I like this idea and I'm planning on using it, but I'm still not entirely convinced it's better than just throwing money in a individual taxable account and pulling out long term cap gains tax free (assuming your income remains below a certain amount). There's the opportunity cost of losing 5 years of gains on that money you have on the sidelines that you're using to pay for that first 5 year period where you can't touch the contributions). Not to mention to even save up 5 years of income you're either slowly adding to a savings account (so opportunity cost of not having it invested), or you're investing it in the stock market and then cashing it out prior to the 5 years you'll need it (which means you paid taxes on it, which you wouldn't have had to do if it was all just individual taxable account). Also, even though you can touch the contributions in 5 years, you still can't touch the gains until retirement, so that means you've basically lost out on those gains for another 20-40 years (depending on how early you retire) unless you wanna pay that fee. Whereas, with an individual taxable, I can keep my money invested up until I need to use it and I can pull all of it out tax free as long as I remain in the lowest long term cap gains tax bracket. Obvious downside is with individual taxable you're paying taxes up front and if you have a 401k match at work you'd be missing out on that. So that's why I still max my 401k (plus the fact that rules around accounts change a lot, so I like to have a diversity of account types. Also retirement accounts tend to be harder for people to take money from if you get sued or if you have a medical emergency that lands you heavily in debt), but I just wish there were better calculators out there that let you take all of this into account so I could really do a side-by-side comparison.

[@amafid]

Madfientist baby!!

[@ceeIoc]

When should you withdraw the first 40K from the 401K? Does it have to be after you quit your job and in a new year? For example you were making lots of money in the year and you quit at the end of the year and then withdraw on the first day of the next year. So that year will be a low tax because you had no income except the 40k.

[@stevemlejnek7073]

It seems to me that one should open a separate Roth Ira account for these conversions so they are not comingled with Roth contributiions. This is due to trying to manage the various 5 year rules and money withdrawl rules would be messy and potentially restrictive if all Roth investments are all together in one account.

[@f1explained542]

Stupid question: What do you live off of when you initially retire early? This strategy requires taking your income to zero to be at the lower tax rate to even *start* the ladder. I can't really do this in my last years of working otherwise I'd be taxed in higher brackets.

[@HydroDanno]

5 years of cash saved up or your existing Roth IRA contributions from 5+ years ago

[@TheRea10GG]

Once we convert that money into a Roth IRA , say $50k, that that money in the Roth IRA be invested - say vtsax or does it have to stay in cash ?

[@HydroDanno]

You should keep it cash since you're using it in 5 years. The time horizon is too short for stock investments

[@thedebaterness]

I assume this is also true of the 403b?

[@amafid]

😀

[@nitricdx]

Is there a way to withdraw from a roth ira before the age limit?

[@scottmoser5891]

You can always withdrawl Roth IRA contributions without penalty at any time, just not earnings.

[@dlipp23]

I'm 58, in a year and a half I will be 59.5. Do I still need to wait 5 years to access that money or will it be available once I'm 59.5??

[@donaldfafard]

GREAT question, did you ever find the answer?

[@dlipp23]

Unfortunately I have not gotten a clear answer.

[@donaldfafard]

@@dlipp23 Found it. No 10% penalty after 59.5. i.e: you can ROTH convert @ 60 and withdraw at 61 with no penalty. @15:15 kzbin.info/www/bejne/d6DGZqiAa8ummbc

[@picacupa]

Is there a 10% penalty to do this before 59.5?

[@nebf4253]

Yes I thought this was an example of retiring early...there's still a penalty before 59.5 right? I'm confused

[@scottmoser5891]

No, there is never a penalty when you withdraw Roth IRA contributions regardless of your age.This is because you already paid tax on that money. The penalty is if you withdraw earnings in a Roth. With conversions however, there is a 5 year waiting period until you can take out contributions.

[@nebf4253]

Right but the scenario was that Brad said you have retired early, and pull money out of your 401k. Isn't there still a penalty for withdrawing funds prior to age 59.5 even if your doing a conversion? (A penalty above the taxes) Or no?

[@scottmoser5891]

The avenue would be rolling over a traditional 401k to a traditional IRA. There is NO penalty for this. Then convert the traditional to a roth IRA. There is no penalty for this either. There are only tax consequences which Brad covers. Penalties come with early withdrawls only. Rollovers and conversions are not the same as a withdrawls.

[@debratomek662]

I think it's important for people to understand that there is a 5 year waiting period before you can take the contributions that are converted.