Author Topic: How to withdraw funds from your IRA and 401k without penalty before age 59.5  (Read 54456 times)

forummm

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Did you know that you can withdraw funds from your Roth IRA, traditional IRA, 401k, Roth 401k, TSP, Roth TSP, 403b, or 457b* before age 59.5 and without a penalty? It's true!

The secret is using the Roth IRA Conversion Pipeline ("Roth Pipeline") and/or Substantially Equal Periodic Payments (SEPP--also called 72t).

For the Roth Pipeline, the simple steps are
1) Open a Roth IRA
2) Figure out how much you want to withdraw from your 401k/tIRA 5 years from now
3) Move that amount from your 401k/tIRA to your Roth IRA (called a "conversion"), paying any normal income tax due on that amount. No penalty will be due.
4) The next year, and each year thereafter, repeat steps 2 and 3
5) After your converted funds have been sitting in the Roth IRA for 5 tax years (i.e. becoming "seasoned") they can be withdrawn without paying any further tax or penalty. The 5 year rule starts counting the beginning of the tax year you convert it, so it doesn't actually have to "season" for 5 years. For example if you convert some money from your traditional IRA to your ROTH IRA on December 31, 2015 you can take that contribution out penalty free on January 1, 2020 which is only 4 years and 1 day.

For SEPP:
The rules are somewhat complicated and I won't go into too much detail here. It's much less flexible than the Roth Pipeline. You choose 1 of 3 different IRS-approved methods to define payments that are "substantially equal".  Then you are locked into using that same method to withdraw substantially equal amounts from your account(s) each year until the year you turn 59.5. If you deviate from that plan then you are retroactively assessed a 10% penalty on all payments previously withdrawn using the SEPP method. Whether you pay the penalty or not, SEPP distributions are taxable as income--even distributions from a Roth IRA.

Here are some links that explain these in more detail:
https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/
http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

You can also withdraw any Roth IRA contributions (but not earnings) at any time. The same applies for Roth 401k contributions once you have separated from the employer sponsoring your Roth 401k plan.

Please feel free to comment on this thread, ask questions, or add additional clarifying information. I will keep editing this original post to improve it over time.

*Note that for 457b plans you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method. https://www.bogleheads.org/wiki/457(b)
« Last Edit: April 05, 2016, 11:00:52 AM by forummm »

kpd905

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Roth Conversion Ladder

This method is probably the most recommended, because it allows you to completely control your tax rate.  You roll your 401k to a traditional IRA, and then convert chunks of it each year to a Roth IRA.  The amount you convert to a Roth IRA is taxed as ordinary income for the year you convert it.

Five years after converting a chunk of money, you can withdraw it from your Roth IRA at any age without penalty.  This means   you need five years of expenses to fund your life for those first five years.  You can use funds in a taxable account, a 457b account, or Roth IRA contributions.  These can all be used at any age without penalty. 

So you quit your job, roll your 401k to a traditional IRA, then estimate how much you need to convert to cover your expenses in five years.  If your expenses now are $40,000, and you assume a 3% annual inflation rate, you need to convert $46,370 to cover your expenses in five years.

  • Year 1: Convert $46,370
  • Year 2: Convert $47,762
  • Year 3: Convert $49,194
  • Year 4: Convert $50,670
  • Year 5: Convert $52,190
  • Year 6: Withdraw $46,370 (Year 1 conversion), Convert $53,756

Good Resource on Roth Conversions: http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/
« Last Edit: June 21, 2015, 05:31:45 PM by kpd905 »
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seattlecyclone

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This method is probably the most recommended, because it allows you to completely control your tax rate.  You roll your 401k to a traditional IRA, and then convert chunks of it each year to a Roth IRA.  The amount you convert to a Roth IRA is taxed as ordinary income for the year you convert it.

The bolded part isn't actually required by law. If your 401(k) has bad funds, definitely roll it into a traditional IRA first. If it actually has better funds than you can get in an IRA (like Vanguard institutional class funds), you can leave your money to grow in the 401(k) until you're ready to move it to your Roth IRA. This is also subject to plan limits. The federal TSP, for example, doesn't allow you to do this.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

frugalnacho

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The 5 year rule starts counting the beginning of the tax year you convert it, so it doesn't actually have to "season" for 5 years.

For example if you convert some money from your traditional IRA to your ROTH IRA on December 31, 2015 you can take that contribution out penalty free on January 1, 2020 which is only 4 years and 1 day.

offroad

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But you still pay the taxes at your higher rate for that tax year. Assuming your tax rate at retirement would be much less.

Say you make $100k per year. So you pay at the highest tax rate. But at retirement you downsize to $50k per year. You tax rate is cut down much less.

Just noting this.


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So If I have a TSP, I have to move it to a traditional IRA, then the roth IRA? Or are there more rules?

forummm

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So If I have a TSP, I have to move it to a traditional IRA, then the roth IRA? Or are there more rules?

For traditional pre-tax TSP contributions, you probably want to move the whole thing to a traditional IRA because I think you can only make one partial distribution from your TSP (the 2nd one has to clean it out, IIRC). Then you convert however much money from the IRA to the Roth each year (paying normal income tax on it). Once it's sat in the Roth long enough you can pull it out without penalty.

TomTX

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So If I have a TSP, I have to move it to a traditional IRA, then the roth IRA? Or are there more rules?

For traditional pre-tax TSP contributions, you probably want to move the whole thing to a traditional IRA because I think you can only make one partial distribution from your TSP (the 2nd one has to clean it out, IIRC). Then you convert however much money from the IRA to the Roth each year (paying normal income tax on it). Once it's sat in the Roth long enough you can pull it out without penalty.

Whenever the TSP folks are done getting "guidance" from the IRS (they're 2.5 years in limbo so far) - you should be able to do a Roth conversion internal to the TSP.

http://federalretirement.net/tsproth.htm#CONVERTING_YOUR_TSP_TO_A_ROTH_IRA
« Last Edit: June 21, 2015, 08:07:44 PM by TomTX »

stlbrah

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What about money that started out as roth IRA (not put in with the "pipeline").

Can you withdraw that after 5 years as well?

Jeremy E.

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Here is another link as well
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Also, stlbrah, you can withdraw contributions that were put directly into the Roth IRA without waiting 5 years(only the initial contribution, none of the returns), you only have to wait 5 years after converting from IRA or 401k to Roth

Lastly, the 10% penalty is not the worst thing that can happen, sometimes it makes sense to take the penalty. Lots of people have unique situations and they need to come up with the plan that suits them best.

It's possible a combination might fit someone best, if someone doesn't have enough money to make it all 5 years with taxable accounts, they could use the SEPP method while also starting to convert money for the Roth IRA Escape Hatch Loophole(or whatever you wanna call it). For instance, if someone was 35 years old today, with 500k in a retirement account as well as 50k in a taxable account, they could take 72t distributions to get up to 20k/year, I would choose the RMD method, which would instead start at closer to 10k/year probably, while also converting 10k/year to Roth, and using 10k from a taxable account. If your RMD's start to fluctuate, fluxuate the amount you convert to Roth appropriately. If you end up not having enough some year, and can't get the money any other way, then take money out and just incur the 10% penalty. This combination method isn't the best for everyone, but it's a way to help if you don't have enough in taxable accounts for the first 5 years.

sirdoug007

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Here is a good calculator to see what you can access using Substantially Equal Periodic Payments.  Just be sure to note that the methods (other than the RMD method) require you to take a distribution of the exact same amount (to the penny!) for the life of the SEPP which is until you reach 59.5!  No adjustments for inflation or because the stock market has moved upward/downward.  This feature makes these methods very restrictive.

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

Be sure to check the latest 120% of the Federal Annual Midterm Rate at this website: http://apps.irs.gov/app/picklist/list/federalRates.html

Cressida

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What about money that started out as roth IRA (not put in with the "pipeline").

Can you withdraw that after 5 years as well?

If you contributed money directly to your Roth, you can withdraw it at any time (always with the caveat that you can withdraw your contributions only, not the market gains on those contributions). The 5-year rule applies to conversions.

I'm pretty sure this is correct, but there might be exceptions. Seems like there always are.

forummm

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What about money that started out as roth IRA (not put in with the "pipeline").

Can you withdraw that after 5 years as well?

As others have said, the contributions can be removed at anytime (even later the same day you contribute them). But to withdraw the earnings you can either use SEPP, wait until 59.5, or pay the penalty.

Mr. McGibblets

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I have a question regarding income limits. One cannot contribute to a traditional IRA if their income reaches a certain limit, correct? So would this conversion strategy of rolling over 401(k) to traditional IRA violate that?

forummm

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I have a question regarding income limits. One cannot contribute to a traditional IRA if their income reaches a certain limit, correct? So would this conversion strategy of rolling over 401(k) to traditional IRA violate that?

Rolling over a 401k to a traditional IRA is not restricted by income, and is a non-taxable event. You already made the contribution legally to the 401k. You're just moving it to another tax-advantaged account.

seattlecyclone

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I have a question regarding income limits. One cannot contribute to a traditional IRA if their income reaches a certain limit, correct? So would this conversion strategy of rolling over 401(k) to traditional IRA violate that?

In addition to what forummm already said (that there are no income limits restricting transfers between different retirement accounts), there is also no income limit for contributing to a traditional IRA. There is an income limit for deducting traditional IRA contributions from your taxable income, but the contributions themselves can be made regardless of income. These non-deductible contributions are commonly made as part of the backdoor Roth IRA tactic.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

CmFtns

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I'm glad this got pinned. Easy to find for other confused souls like myself.
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Mr. McGibblets

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Pardon my ignorance on the topic - I am generally well-versed in personal finance but can't seem to wrap my head around this concept. I am going to selfishly use my use case as an example. If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?

forummm

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Pardon my ignorance on the topic - I am generally well-versed in personal finance but can't seem to wrap my head around this concept. I am going to selfishly use my use case as an example. If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?

Yes, if you make very little income now, and pay little or no tax now, contributing to a Roth IRA can be a very good idea. All the gains will be untaxed! I did this myself when my income was lower. I still contribute to a Roth now though because I make too much to get a traditional IRA deduction. I would prefer to get the deduction if they raised the income limit.

MDM

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If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?
Especially if you start with Roths and already have enough in them to get you to age 59.5, your age and/or time to retirement is irrelevant when choosing traditional vs. Roth.  What is relevant is your current marginal bracket vs. your projected marginal bracket in retirement.

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THANK YOU for pinning this!
It is good to have an end to journey toward; but it is the journey that matters, in the end. -Ernest Hemingway

Mr. McGibblets

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Pardon my ignorance on the topic - I am generally well-versed in personal finance but can't seem to wrap my head around this concept. I am going to selfishly use my use case as an example. If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?

Yes, if you make very little income now, and pay little or no tax now, contributing to a Roth IRA can be a very good idea. All the gains will be untaxed! I did this myself when my income was lower. I still contribute to a Roth now though because I make too much to get a traditional IRA deduction. I would prefer to get the deduction if they raised the income limit.

How about if you're young and your income is relatively high (~100k)?

forummm

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Pardon my ignorance on the topic - I am generally well-versed in personal finance but can't seem to wrap my head around this concept. I am going to selfishly use my use case as an example. If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?

Yes, if you make very little income now, and pay little or no tax now, contributing to a Roth IRA can be a very good idea. All the gains will be untaxed! I did this myself when my income was lower. I still contribute to a Roth now though because I make too much to get a traditional IRA deduction. I would prefer to get the deduction if they raised the income limit.

How about if you're young and your income is relatively high (~100k)?

Depends. Your income may be too high to qualify for a traditional IRA deduction. If so, then it's better just to contribute to a Roth.

If you can take the traditional IRA deduction, then you have to judge whether your tax rate during retirement will be lower than it is now. If it will be lower (which it will for most high earners), then you'd probably benefit from contributing to a traditional IRA.

johnny847

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Finally a sticky on the topic. This question comes up way to often on the forum


turketron

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Possibly a dumb question about Roth IRA ladders, but I've researched them a bit and haven't seen it discussed anywhere before... Are you required to make a conversion every year in order to keep withdrawing yearly after 5 years?  E.g. instead of converting, say, $10k each year and then withdrawing that $10k each year after 5 years, is there a reason why you can't convert $100k, wait 5 years, and then withdraw $10k yearly over the next 10 years?

MDM

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Possibly a dumb question about Roth IRA ladders, but I've researched them a bit and haven't seen it discussed anywhere before... Are you required to make a conversion every year in order to keep withdrawing yearly after 5 years?  E.g. instead of converting, say, $10k each year and then withdrawing that $10k each year after 5 years, is there a reason why you can't convert $100k, wait 5 years, and then withdraw $10k yearly over the next 10 years?

You certainly could do that.

Due, however, to the progressive tax structure you would likely pay more tax on a single $100K conversion than on $10K for each of 10 years.

turketron

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You certainly could do that.

Due, however, to the progressive tax structure you would likely pay more tax on a single $100K conversion than on $10K for each of 10 years.

Oh, right, because you're taxed at the time of conversion, duh. Like I said, I'm sure I was missing something obvious. Thanks for the quick reply!

forummm

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fattest_foot

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I'm curious if anyone has done the math to figure out when it makes sense to do Roth versus Traditional to get through the early stages of FIRE?

My wife and I are at the point now where regardless of which one we choose, we'll be in the 25% tax bracket for that income (~$87k after 401k reduction). We had started Roth's when I was in the military because I had so much tax free income due to deployments and so I became somewhat partial to them. After my cursory research on the FI blogs/forums, it sounded like the Roth Conversion Ladder was an amazing tool to use -- after the first 5 years of FIRE.

But what about those first 5 years of FIRE? My original intention was to contribute the max ($11k) per year to Roth's, and then in around 10 years when we're ready to FIRE we'd have somewhere around $150k in Roth basis. We could then pull this money out without worry. Unfortunately, $150k wouldn't quite be enough to get us through the first ladder conversion.

So now the question becomes; do I lower my AGI by $11k now (and still hit the 25% bracket) by contributing to the traditional, use Roth's for the bulk of our first few years of FIRE and then pay penalties, or save cash in the last 2-3 years before FIRE (which will likely also be in the 25% bracket)?

MoonShadow

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I'm curious if anyone has done the math to figure out when it makes sense to do Roth versus Traditional to get through the early stages of FIRE?


Too many variables to guess.

Quote

My wife and I are at the point now where regardless of which one we choose, we'll be in the 25% tax bracket for that income (~$87k after 401k reduction). We had started Roth's when I was in the military because I had so much tax free income due to deployments and so I became somewhat partial to them. After my cursory research on the FI blogs/forums, it sounded like the Roth Conversion Ladder was an amazing tool to use -- after the first 5 years of FIRE.


The AGI tax bracket isn't the only consideration, but generally, it's a better idea to sock it all away into a 401k and take the deduction if you are deep into the 25% bracket.  If you retire after 55 from the company that manages the 401k, you can take distributions from it without the 10% penalty.  In which case you may, or may not, benefit from the Roth conversion ladder between 55 & 60.  But another consideration is required minimum distributions, it's usually advantageous to depend upon the 401k and leave the roth for over 70.


But what about those first 5 years of FIRE? My original intention was to contribute the max ($11k) per year to Roth's, and then in around 10 years when we're ready to FIRE we'd have somewhere around $150k in Roth basis. We could then pull this money out without worry. Unfortunately, $150k wouldn't quite be enough to get us through the first ladder conversion.

So now the question becomes; do I lower my AGI by $11k now (and still hit the 25% bracket) by contributing to the traditional, use Roth's for the bulk of our first few years of FIRE and then pay penalties, or save cash in the last 2-3 years before FIRE (which will likely also be in the 25% bracket)?
[/quote]

Still likely better off taking the deduction now, but you aren't doing anything 'wrong' if you choose otherwise.  You can also split the contribution limit between a regular IRA & roth.  But if you have a 401k, or better, an HSA; put as much as they will let you into that and whatever extra you might have into a roth and you will have both taxable & non-taxable options available that will allow you to shoot or that elusive 0% effective tax bracket after FIRE.

fattest_foot

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Still likely better off taking the deduction now, but you aren't doing anything 'wrong' if you choose otherwise.  You can also split the contribution limit between a regular IRA & roth.  But if you have a 401k, or better, an HSA; put as much as they will let you into that and whatever extra you might have into a roth and you will have both taxable & non-taxable options available that will allow you to shoot or that elusive 0% effective tax bracket after FIRE.

I think maybe my question wasn't quite clear enough with my own personal story.

Are your only choices to start your Roth conversion ladder while still employed (thus paying at whatever tax rate you are while employed), use taxable accounts, or draw on Roth basis?

For my own situation, I was asking post-401k maxing. We will still be in the 25% bracket after that, and worse (well, worse in context of making too much), still in the 25% bracket even after $11k in traditional IRA lowering AGI. In our case, I was considering a Roth to draw the basis (however, contributions would be at 25%), taxable accounts or cash prior to FIRE (also at 25%), or eating the 10% early withdrawal penalty plus whatever taxes would be (potentially lower than 25%?). After 5 years, we'd be able to use the laddered money.

It sounds like you're saying the difference between traditional and Roth is pretty miniscule and won't matter?

MoonShadow

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Still likely better off taking the deduction now, but you aren't doing anything 'wrong' if you choose otherwise.  You can also split the contribution limit between a regular IRA & roth.  But if you have a 401k, or better, an HSA; put as much as they will let you into that and whatever extra you might have into a roth and you will have both taxable & non-taxable options available that will allow you to shoot or that elusive 0% effective tax bracket after FIRE.

I think maybe my question wasn't quite clear enough with my own personal story.

Are your only choices to start your Roth conversion ladder while still employed (thus paying at whatever tax rate you are while employed), use taxable accounts, or draw on Roth basis?


No, there are other useful tricks, but they depend upon doing things right.

Quote

For my own situation, I was asking post-401k maxing. We will still be in the 25% bracket after that, and worse (well, worse in context of making too much), still in the 25% bracket even after $11k in traditional IRA lowering AGI. In our case, I was considering a Roth to draw the basis (however, contributions would be at 25%), taxable accounts or cash prior to FIRE (also at 25%), or eating the 10% early withdrawal penalty plus whatever taxes would be (potentially lower than 25%?). After 5 years, we'd be able to use the laddered money.

It sounds like you're saying the difference between traditional and Roth is pretty miniscule and won't matter?

No, that is not what I'm saying.  I'm saying that the tax brackets are set up so that your 'last' income is taxed highest, and in the 25% tax bracket, you are almost certainly better off with the current deduction.  Also, while you may believe that you will still be in the 25% tax bracket after retirement, this will almost certainly not be the case after a few years.  So if the math looks like an even case between a traditional or Roth IRA, it's probably still favored to the traditional in practice.  But the 25% tax bracket is about where things are questionable anyway.

Still, there are too many factors to consider.  Myself, as an example, made $129K gross last year, with an AGI of $50K, and have been exempt at federal level for the past 3 years.  You really can set up your life to pay zero legally.

MDM

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I'm curious if anyone has done the math to figure out when it makes sense to do Roth versus Traditional to get through the early stages of FIRE?

My wife and I are at the point now where regardless of which one we choose, we'll be in the 25% tax bracket for that income (~$87k after 401k reduction).
...
So now the question becomes; do I lower my AGI by $11k now (and still hit the 25% bracket) by contributing to the traditional, use Roth's for the bulk of our first few years of FIRE and then pay penalties, or save cash in the last 2-3 years before FIRE (which will likely also be in the 25% bracket)?

Missing one big puzzle piece: what will your marginal bracket be in the 5 year window?  E.g., if it will be 10% then an extra 10% only gets to 20%, and that is less than your current 25%.

MDM

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Seems the Mega Backdoor Roth deserves a mention here as well.

See the link (and links therein) for more details and qualifiers, but if you have access to a 401k plan that allows
  - after-tax contributions above and beyond the normal employee contribution limit, and
  - non-hardship in-service withdrawals of after-tax contributions, then
this could be a great way to fund a large Roth IRA account from which to withdraw funds without penalty before age 59.5.

Cheddar Stacker

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Are your only choices to start your Roth conversion ladder while still employed (thus paying at whatever tax rate you are while employed), use taxable accounts, or draw on Roth basis?

Or use cash you've stashed away, or earn some income, or have rental properties, or be lucky enough to have a pension, or spend just a little bit less, or sell your house, or...

Lots of options. I wouldn't stop maxing out the 401ks until you are sure you need more cash, like maybe for the last few months of work.
Indecision may or may not be my problem.

seattlecyclone

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Lots of options. I wouldn't stop maxing out the 401ks until you are sure you need more cash, like maybe for the last few months of work.

Even then, if your marginal tax rate during your last year of work is at least 10% higher than your expected marginal rate during early retirement, contributing to the 401(k) and paying an early withdrawal penalty on that money the next year will be better than skipping the 401(k) and holding money in a taxable account.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

MoonShadow

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Lots of options. I wouldn't stop maxing out the 401ks until you are sure you need more cash, like maybe for the last few months of work.

Even then, if your marginal tax rate during your last year of work is at least 10% higher than your expected marginal rate during early retirement, contributing to the 401(k) and paying an early withdrawal penalty on that money the next year will be better than skipping the 401(k) and holding money in a taxable account.

Well, that's a perspective I've never considered. 

daveydinner

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I save a lot to my HSA. Can that money be converted to a IRA then Roth pipeline?

seattlecyclone

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I save a lot to my HSA. Can that money be converted to a IRA then Roth pipeline?

No, there's no provision for moving money from an HSA to an IRA. However if you accumulated a large HSA balance because you paid your medical bills out of taxable funds, you may withdraw some money tax-free from your HSA in a future year up to the total of your medical bills.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

MoonShadow

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I save a lot to my HSA. Can that money be converted to a IRA then Roth pipeline?

No, there's no provision for moving money from an HSA to an IRA. However if you accumulated a large HSA balance because you paid your medical bills out of taxable funds, you may withdraw some money tax-free from your HSA in a future year up to the total of your medical bills.

Also, if your medical bills (after medical insurance benefits, if any) exceed 10% of your AGI, you can withdraw the amount above 10%from an IRA without the 10% penalty.

Travis

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #41 on: September 05, 2015, 03:05:40 PM »
Are the rules for converting a TSP account still waiting on further government rules?  I have a TSP, a Roth IRA, and a taxable account and I'm trying to figure out how to access my TSP funds as part of FIRE.  I'm 35 now and I expect to fire at 45 (assuming I qualify for pension).  Is there a particular order in which I should be pulling these funds?

forummm

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #42 on: September 05, 2015, 07:01:31 PM »
Are the rules for converting a TSP account still waiting on further government rules?  I have a TSP, a Roth IRA, and a taxable account and I'm trying to figure out how to access my TSP funds as part of FIRE.  I'm 35 now and I expect to fire at 45 (assuming I qualify for pension).  Is there a particular order in which I should be pulling these funds?
You can only take 1 or 2 distributions from your TSP. The 2nd one has to be a full distribution. So what you should do is roll it over into an IRA. Pre-tax TSP funds get rolled over into a traditional IRA and post-tax (i.e. Roth) TSP funds get rolled over into a Roth IRA. Then you can follow the instructions here to access your funds in the IRA. Another possible option for the TSP holdings is to purchase an annuity, but most people here would just handle their own investing.

Travis

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #43 on: September 10, 2015, 07:04:38 PM »
I posted this same question to Nords today.  Apparently he and his wife are in the middle of doing precisely this and he wrote a blog post with lots of details. It's starting to make more sense.

http://the-military-guide.com/2015/08/06/how-and-why-to-transfer-your-tsp-to-an-ira/

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?

MoonShadow

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #44 on: September 10, 2015, 07:18:01 PM »

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?

It doesn't matter.  The IRS considers all of the Roth IRA accounts in your name (SSN?) to be one collective mass of funds for tax consideration.  So it doesn't matter how many you have, or which one you actually draw from when the time comes; the funds will be considered in the following order upon withdrawal...

First, all of the normal after-tax contributions.

Then any rolled over funds from other types of accounts; first in first out. 

Finally, any gains that have accumulated.

So you can deposit a rollover into one Roth IRA, and so long as it's aged at least five years from that particular deposit, withdraw that rollover amount from a different Roth IRA.  The IRS keeps track of it via your SSN and the required reporting under KYC laws, but they expect YOU to keep track of how much you have withdrawn, and be able to justify any withdrawals.  So while you can do what I said above, you may have to show your work and explain to a government agent that your withdrawal from account A is qualified because you rolled over into account B 5+ years ago.

Eric

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #45 on: September 11, 2015, 12:09:58 PM »

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?

It doesn't matter.  The IRS considers all of the Roth IRA accounts in your name (SSN?) to be one collective mass of funds for tax consideration.  So it doesn't matter how many you have, or which one you actually draw from when the time comes; the funds will be considered in the following order upon withdrawal...

First, all of the normal after-tax contributions.

Then any rolled over funds from other types of accounts; first in first out. 

Finally, any gains that have accumulated.

So you can deposit a rollover into one Roth IRA, and so long as it's aged at least five years from that particular deposit, withdraw that rollover amount from a different Roth IRA.  The IRS keeps track of it via your SSN and the required reporting under KYC laws, but they expect YOU to keep track of how much you have withdrawn, and be able to justify any withdrawals.  So while you can do what I said above, you may have to show your work and explain to a government agent that your withdrawal from account A is qualified because you rolled over into account B 5+ years ago.

And to add to this, the way you and the IRS keep track of this is by using form 8606 which you'll file with your taxes every year.

http://www.irs.gov/pub/irs-prior/f8606--2014.pdf

(specifically Part III for withdrawals from the Roth)
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forummm

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #46 on: September 11, 2015, 01:31:16 PM »
I posted this same question to Nords today.  Apparently he and his wife are in the middle of doing precisely this and he wrote a blog post with lots of details. It's starting to make more sense.

http://the-military-guide.com/2015/08/06/how-and-why-to-transfer-your-tsp-to-an-ira/

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?

Quote
A Fidelity e-mail alerted my spouse on 9 June when her TSP check was deposited in her rollover IRA. The next day we logged in and purchased shares in the iShares S&P Small Cap 600 Value ETF (ticker IJS). Thats roughly equivalent to the TSPs S fund, but it carries a 0.25% expense ratio instead of the S funds 0.029% expense ratio.

Hopefully Nords is aware that this isn't really that equivalent to the S fund. The S fund is nearly identical to VEXAX though, which has a 0.1% ER.

Nords

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #47 on: September 12, 2015, 01:14:13 PM »
Hopefully Nords is aware that this isn't really that equivalent to the S fund. The S fund is nearly identical to VEXAX though, which has a 0.1% ER.
That's why I used the phrase "roughly equivalent".  They're both small-cap funds, and we have more IJS shares in our taxable accounts.  That makes it easier to rebalance once in a while.
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forummm

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #48 on: September 12, 2015, 01:16:57 PM »
Hopefully Nords is aware that this isn't really that equivalent to the S fund. The S fund is nearly identical to VEXAX though, which has a 0.1% ER.
That's why I used the phrase "roughly equivalent".  They're both small-cap funds, and we have more IJS shares in our taxable accounts.  That makes it easier to rebalance once in a while.
S is actually a mid-cap fund too (and slightly more large/mid than small). It's essentially VTSAX minus the S&P500--i.e. VEXAX.
« Last Edit: September 12, 2015, 01:19:40 PM by forummm »

googily

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #49 on: September 16, 2015, 03:28:43 PM »
We are trying to get the answer directly from Megacorp, but they are being slippery, so I thought I'd ask here.

If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?