Author Topic: Roth Conversion Ladder Questions  (Read 2158 times)

carozy

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Roth Conversion Ladder Questions
« on: November 19, 2015, 03:28:44 PM »
I am going to contribute to my first ira next year.  After fully funding my 401k and funding the ira, I don't think I'll have much left to invest in taxable accounts.  So my question is what happens down the road when I want to do the Roth conversion ladder and have to wait the 5 years....how would this play out?

Would I convert part of the ira 5 years before I plan to retire early?  Can I work (part time or something) during the 5 years and how would that affect things?

I'm not even sure what my exact questions are, I just have some general confusion about this.  It seems to be a fine plan for early retirees who make enough to also sock away money in taxable accounts.  But I'm not sure what happens in the case when you don't have much extra money to invest aside from a fully funded 401k and an ira (and you live cheaply).

Any thoughts or advice would be appreciated.

Thanks.

Gone Fishing

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Re: Roth Conversion Ladder Questions
« Reply #1 on: November 19, 2015, 03:41:48 PM »
Sounds like you are just getting started.  If you are in a good paying field have a reasonable expectation of your income increasing, you'll probably amass plenty of taxable savings to fund your first 5 years of retirement while you get your ladder started.

What tax bracket are you in now?

carozy

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Re: Roth Conversion Ladder Questions
« Reply #2 on: November 19, 2015, 04:12:39 PM »
I am in the 25% tax bracket.

I don't know that my field is all that high paying.  I'm 37 and work as an Office Manager.  Thank you for your response.

Gone Fishing

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Re: Roth Conversion Ladder Questions
« Reply #3 on: November 20, 2015, 01:56:57 PM »
Have you done a case study?  Most folks in the 25% bracket have some extra cash to invest.  Although, in SF I bet housing is probably killing you...

And part time could work. The whole idea is to get the funds rolled over in a bracket lower than your current bracket.  Another possible solution is if your 401(k) contributions are enough to get you into the 15% bracket, you could fund a ROTH instead of the traditional, then use your contributions (but not earnings) to fund the first five years of retirement.  This method could also be coupled with PT work.
« Last Edit: November 20, 2015, 01:59:56 PM by So Close »

carozy

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Re: Roth Conversion Ladder Questions
« Reply #4 on: November 20, 2015, 02:30:28 PM »
Thank you So Close, your answer is very helpful.

So my 401k contributions should push me down to the 15% tax bracket.  I'm set up to start maxing out the 401k, but since I set it up in the middle of the year, I don't know that it'll max this year.

I'll look into doing a case study.  I'm sure that would be helpful too.

EDIT: Yes, rents in SF are crazy.  Right now I'm saving $ staying with my parents but plan to move out end of winter / early spring.  I'm determined to find something affordable!



« Last Edit: November 20, 2015, 02:32:56 PM by carozy »

seattlecyclone

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Re: Roth Conversion Ladder Questions
« Reply #5 on: November 21, 2015, 09:48:53 AM »
Don't forget about the option of simply paying the 10% penalty for the first few years of retirement while you build up your Roth pipeline. If you're paying tax at a 25% rate now and your income will put you in the 15% bracket later, there's really no difference between making Roth contributions now and making traditional contributions now while paying the 10% early withdrawal penalty later. If your traditional contributions are enough to push yourself down into the 15% bracket, then switching part of those contributions to Roth to get your income back near the top of the 15% bracket is likely a good choice.

carozy

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Re: Roth Conversion Ladder Questions
« Reply #6 on: November 22, 2015, 06:29:24 AM »
Don't forget about the option of simply paying the 10% penalty for the first few years of retirement while you build up your Roth pipeline. If you're paying tax at a 25% rate now and your income will put you in the 15% bracket later, there's really no difference between making Roth contributions now and making traditional contributions now while paying the 10% early withdrawal penalty later. If your traditional contributions are enough to push yourself down into the 15% bracket, then switching part of those contributions to Roth to get your income back near the top of the 15% bracket is likely a good choice.

Thank you for the advice.  My 401k contributions should bring me down to the 15% tax bracket, so I'm thinking just going with the Roth would be fine in my case.  I want to do a case study in the future when I move out and know what my rent will be.