The Truth About The Roth IRA Conversion Ladder In Retirement
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- Опубликовано: 28 сен 2024
- The Roth IRA conversion ladder is possibly the greatest discovery for early retirement and financial independence. The Roth IRA conversion ladder is a tax-efficient strategy for taking withdrawals from your retirement accounts before age 59.5 WITHOUT paying the dreaded 10% early withdrawal penalty. It sounds perfect in theory, but how does it actually work in real life? This is what this video will explore and show you.
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That conversion sound effect at 2:57 is one of the coolest sound effects I’ve seen on RUclips. Well done!
Haha
I'm missing something. From what I gather here, this strategy only works, if you've ONLY saved up post-tax savings (meaning money in a bank account), to cover your annual expenses, during the years that you do the conversions. That's the only way to stay in a low enough bracket to minimize taxes on the conversions. It sounds like you'd have to be super affluent to achieve this ladder.
You would have to find a way to provide income during the 5 years until you can withdrawal your first conversion tax and penalty free after the 5th year. Here are some suggestions on how to do that:
ruclips.net/video/s31O6LbXu7Q/видео.html
I will be performing this strategy the year after retirement. Great video - subscribed!👏 👏
Thank you!
Enjoying your videos. Thx for your work!
Thank you so much! I'm glad that I can help!
Great info. Thank you!!!
You're welcome! Thank you for watching!
The Roth IRA conversion ladder sounds awesome and like something everyone should do. I currently have my taxable account located at M1 and the rest at Scwaab. I also like Schwab and have other friends that I helped and run their investments on swap because I know how to use it but think that by the time I get closer to retirement I will transfer it all to m1 for ease of use.
The Roth IRA Ladder is secretly a huge game changer. It is a multi-year strategy, so I don't think that it is widely known as much as it should be. It can be done even in regular retirement if you expect to have lower income/lower taxes in regular retirement vs working career.
I hear good things about Schwab, especially that their cash account has great features for travelling abroad (atm reimbursement + no foreign fees?). I don't have any accounts with them right now, but a little while back I opened a self-employed 401k there, I didn't make enough to put money into it quite yet, so they closed it on me haha.
The cash card with no fees is my strategy for handling cash without bogus exchange rates when we do our Europe trip in 2025.
Credit cards with no foreign transaction fees will give you these best rates in any country! Better than any bank/atm withdrawal ;)@@nikiclaypool8800
Sounds great.
If you have no income for the year, what do you think about converting $22,000 per year over 5 years - use the standardized deduction and put yourself in the 10% bracket? (22,000-12,975 puts you at 9,025 for the year and under the 10k to keep you in the lowest tax bracket)
$902 tax on $22,000 income is 4.1% effective tax rate. Pretty low so it sounds good to me!
With interest rates being what they are, I can roll off around 30k of interest earnings each year into my Roth without touching the principle. This keeps me in the 22% bracket by a skosh. I want to eventually get an amount equivalent into my Roth so I can live off it and SS and pay no taxes thus never having to draw down the principle.😁
Nice!
What do you mean? Can you provide more details on your strategy?
@@ceeIoc Whether or not they tax your SS is determined by a formula called provisional income. If your provisional income is below a threshold, no SS tax. Basically the formula for provisional income is 1/2 SS amount + taxable income. Now ROTH income is NOT considered taxable, so if you get $20 or $20 million it does not count.
Now as a single(dual is a different threshold) , the threshold is $25k provisional. That means if your SS amount is under $50k annually (single) or $4166 a month, and your only other income is from a ROTH IRA, no taxes at the federal level. Some states tax SS regardless but I live in a no income tax state.
The idea is to accumulate a large principal in a ROTH IRA so you can live off the interest or earnings. Imagine you have $1 million in a ROTH IRA, at today's rates it will earn almost 5%. That is $50,000 a year of untaxed income when you reach 59 1/2 without touching the principal. Add in your (single filer) SS of $49,950 and you have $99,950 per year income tax free. And it is still under the medicare $103k limit so no IRMAA. Note that this is for a single filer like myself. The limits are higher for filers as a couple.
If most of your investment is in a pretax, you can convert to a ROTH but you pay taxes like regular income. So folks do this between 59 1/2 and 72 to avoid RMDs. If you keep your income low during that time, you can stay within a desired tax bracket and thus convert more to ROTH and not lose it to income taxes.
Do yourself a favor, open a ROTH IRA immediately. There is a five year window before you can touch ROTH earnings so you should start the clock NOW!
Good luck.
I like this idea. Question though. Assume you have a Roth 401k. And you want to retire early. How do you get access to that money? Do you have to wait and i cant even imagine trying to figure out the cost basis as its mixed with traditional 401k.
Once you seperate from the employer, you should be able to roll over the Roth portion into a Roth IRA and the Traditional portion into a Traditional IRA. Then you can start a Roth IRA ladder using the Traditional IRA and slowly convert. Your 401k documents should have a record of the two different allocations between T/R?
@@OnCashFlow Why does he need to wait until he separates? I have roth 401k and just did a rollover of employee contributions to my Roth IRA directly.
I think that most plans requre that you separate from the employer. Yours must not require it, which is good "In-service rollover" it's called.@@MrCPPG
@@OnCashFlow I thought that was the case as well until I called the Fidelity team supporting my plan. I would reccomend he call the equivalent broker team for and ask.
That's true, you never know until you confirm with your 401k sponsor!@@MrCPPG
Just started vid.....have high expectations
Well...How did it go? lol
Why don't all brokerages just rip off M1s vastly superior workflow? TIAA and Fidelity are not nearly this simple :D
I still use Fidelity for the Cash Management Account and for an HSA, and there are simple things that should be easy to do, but are not!
I really like the Fidelity and Schwab "trade" interface of using a form that is totally self service. I would not want someone reading and interpreting a support ticket, too much chance of an error.
It's all computer automated by now, unless a trade get's flagged probably?@@jerrylabat550
Could you pull out your previous Roth IRA contributions (or old conversions) during the first 5 years and start the conversation ladder at the same time? If you had enough in contributions, you basically wouldn’t have to wait the first 5 years and could still access your funds at the lower tax rate & without penalty.
Correct! Contributions come out first in the ordering rules!
If you retire and start to collect SS, say at age 63, isn’t the conversion strategy limited by how much income you can make before being penalized?
I think you may be referring to the income limit to where Social Security benefits become taxable? I'm not an expert on Social Security, but if you make over a certain amount of income (including taxable income from Roth conversion) then you would be taxed on Social Security income.
"You must pay taxes on up to 85% of your Social Security benefits if you file a:
-Federal tax return as an “individual” and your “combined income” exceeds $25,000.
-Joint return, and you and your spouse have “combined income” of more than $32,000."
One thing that pumps me way up about FIRE is withdrawing our 401K funds under the standard deduction amount and paying 0% taxes on that earned income going in, growing and coming out!
By age 55 those funds will all be rolled into a solo 401K so they can be accessed penalty free 5 years earlier as well! 🙌🏻
Bonus points if we can pull out even more tax free to max out an HSA between 55 and 65 when Medicare starts. ✅
If we end up with more than we fan conver under the standard deduction + HSA limits, Roth conversions will definitely be next.
There are a lot of strategies for paying very little federal income tax, you just have to know the rules!
@@OnCashFlow so true! 💯