In this video I go over my plan to access retirement accounts early in FIRE. The plan to access these accounts tax free and also pay no penalty. The trick is to have a low ordinary income (earned) income. If you’re single, you want to keep your ordinary income below $12,400. Ideally you would want to allow for as much conversion as you can without going over the standard deduction. If you’re married, then it’s double that at $24,800. You convert this amount and pop it into a brokerage retirement account at Vanguard, Schwab, Fidelity.
Invest the capital in the account in your favorite investment and let it sit there for 5 years. Do this each year building up a chunk converted. Each chunk converted will need to meet the 5 year holding period before it can be pulled out tax free, penalty free before 59 1/2. In most cases, you would want to draw down the traditional retirement accounts to ZERO if you can before the RMD (Required minimum distributions) kick in. The IRS will force you to take cash out at a certain age and that could require you to pay tax on it if it’s coming out of a traditional retirement account. So, keep that in mind.
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Why are you only converting $6000 to start? I would assume you would go ahead and convert up to your entire federal deduction to pay $0 tax?
Interesting video. I'm sure there are plenty of people (me included) who had no idea this was a thing.
Thanks a lot for sharing, Roth IRAs are something a lot of people don't fully understand. Retiring early is what a lot of people don't realise is actually possible. Nice video, keep informing the people ❤️
Hello enjoyed watching your video so much I hit all your buttons will definitely be back for see u soon
Such a great video Dave, with all these types or retirements accounts out there. It can definitely be discouraging on which route to go, You did a great job on breaking this down!
very interesting my friend. im sure many will appreciate this..
I might have to watch this a couple times to get a better understanding over it, along with having some cheat sheets on the side, lol! I've always wanted to retire early, but it probably won't happen as fast as I want it if I don't get into it as you are. Great vid Dave!
Really interesting man! I never knew about a Roth ladder. Really helpful to know this information for anyone looking to get on to the FIRE movement! When is the B-day!? Another great video and info Dave! Also really appreciate you hanging in the stream tonight! I'm liking the INTC pick!
Great information, thank you for the video. 🙂
whoa I completely forgot about the 5 year holding period. what a nice little fine print detail. crazy how much trouble we go through to not pay taxes on our hard earned money. makes me wonder if a personal financial guy/gal would be helpful. I'm assuming if the cost of their services is less than what they save us, then definitely. of course, Hidden Freedom Investing is free too 🙂
Backdoor…lol…Holy shit there are so many different investment tools, definitely looking forward to more of these videos, I might need to re watch this to fully digest what you are saying lol.
May have not been the backdoor I was thinking of but it was most likely the backdoor YOU were thinking of!
I can feel the anxiousness of going from such high income to a much smaller fixed income. Keto diet might keep you living longer. Never knew about this in regards to 401k.
LOL your Hiyas. I have been thinking about living in a cheaper place with dividends and stuff as well. Got your message just been busy and taking a break sorry if I missed a few videos…
lol I think you were reading my mind when you said mega backdoor…
Great video, Dave! A Roth conversion ladder should definitely be part of the plan for all the high earners out there.
Something else to consider along the same theme is capital gains harvesting. Basically taking the delta between your FIRE income and the max of the tax-free tax bracket + standard deduction and selling that amount of stock. Then you just buy the stock right back, realizing the long term gains. The long-term gains are taxed at 0% since you're still in the lowest tax bracket, and your cost basis goes way up after re-buying the shares, essentially washing away a substantial portion of your tax burden. Pretty sweet, totally legal tax hack!
Lots of opportunities out there to take advantage of the tax code if you're living off a low income in retirement. Even more opportunity if you're married!
Great information, thanks! I like the early retire planning videos your doing. Close 2nd compared to your options videos:)
with so many retirement plans out there, things can get confusing.
thanks for going over this subject dave!
Fantastic information! The earlier we can become free or retire the better!