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A Roth IRA Conversion Ladder is a strategy that allows individuals to access funds from their traditional IRA accounts penalty-free before the age of 59.5. This method involves converting funds from a traditional IRA to a Roth IRA, and then accessing those funds after a waiting period.
The primary benefit of a Roth IRA Conversion Ladder is the ability to tap into retirement savings without being subject to the 10% early withdrawal penalty that typically applies to traditional IRAs. This can be particularly useful for individuals who are looking to retire early or who want to supplement their income before reaching traditional retirement age.
Here’s how the Roth IRA Conversion Ladder works:
1. Start by converting funds from a traditional IRA to a Roth IRA. This can be done at any age, but it’s important to note that you will need to pay taxes on the amount that you convert.
2. After the conversion, you must wait five years before accessing the funds. This waiting period is necessary to avoid the 10% early withdrawal penalty.
3. Once the waiting period is over, you can withdraw the converted funds from the Roth IRA without penalty. Keep in mind that any earnings on the converted funds may still be subject to taxes and penalties if withdrawn before the age of 59.5.
It’s important to carefully plan and strategize when implementing a Roth IRA Conversion Ladder. Consider factors such as your tax bracket, anticipated retirement date, and overall financial goals. Consulting with a financial advisor can help ensure that you are making the most of this strategy and avoiding potential pitfalls.
In conclusion, a Roth IRA Conversion Ladder can be a valuable tool for individuals looking to access their retirement savings early without incurring penalties. By understanding the rules and limitations of this strategy, you can make informed decisions about your financial future and achieve your retirement goals.
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.
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.
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.
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??
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 ?
Thank you Thank you thank you!!
I had quick questions how about the 10% early withdrawal penalty does that apply when doing for example a 403b into ROTH IRA conversion?
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.
Is there a way to withdraw from a roth ira before the age limit?
Your explanation is excellent.
Great topic and love the shorter video
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
Is there a 10% penalty to do this before 59.5?
I assume this is also true of the 403b?
Madfientist baby!!
Love these bite sized snippets.
More please.