Author Topic: How to withdraw funds from your IRA and 401k without penalty before age 59.5  (Read 117826 times)

LiseE

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #150 on: November 07, 2017, 10:30:21 AM »
Does this look right?  I've been reading and learning about the Conversion Ladder strategy and it seems the timing may be right in the near future.  Here are the details:

Hubby not currently working - 2018 Income = zero
March 2018 I will be taking a package from my company and getting 40 weeks of pay -  Income for 2018 = 130K
Inheritance of 200K received in 2018
1.1M in 401K (need to get this money out!)

So with the inheritance and the severance package we will have enough to live on for over 5 years and hope to get the conversion pipeline well established.  Am I on the right track here?

With Hubby and I both not generating income in 2019, THIS is the year to start our conversions as our tax bracket will be lower.  I don't know the numbers off hand but with charitable giving and standard deduction for married filing jointly lets say our total deductions for 2018 about 20K. ( we might be investing in real estate in this time frame which will offer more tax incentives so our taxable income could be even lower)

So if we convert 50K from 401K --> TraditionalIRA --> RothIRA we will have to pay the taxes on the 50K but we'll hopefully be in the 15 or 25% tax bracket.  So we need to really look at our deductions to decide how much to convert to see if getting our income down to < 13K to get the 15% bracket.

Am I understanding the timing and the tax implications correctly?
« Last Edit: February 20, 2018, 02:35:43 PM by FrugalToque »

Cheddar Stacker

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #151 on: November 07, 2017, 01:09:30 PM »
Does this look right?  I've been reading and learning about the Conversion Ladder strategy and it seems the timing may be right in the near future.  Here are the details:

Hubby not currently working - 2018 Income = zero
March 2018 I will be taking a package from my company and getting 40 weeks of pay -  Income for 2018 = 130K
Inheritance of 200K received in 2018
1.1M in 401K (need to get this money out!)

So with the inheritance and the severance package we will have enough to live on for over 5 years and hope to get the conversion pipeline well established.  Am I on the right track here?

With Hubby and I both not generating income in 2019, THIS is the year to start our conversions as our tax bracket will be lower. 

Everything until here sounds great, then you sort of lost track.

If you convert $50k it will be income on your return. Assuming you have no other income and you have $20k in deductions, you would have $30k taxable income. In 2018 (not considering tax law changes) the 10% bracket goes up to $19k, and the 15% bracket goes up to $77k. So you really could convert up to $97k and still be in the 15% bracket.

Radioherd88

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #152 on: February 12, 2018, 04:02:43 PM »
Ok so this thread is super - as my employer sponsored advisor just told me that you can't withdraw from our 403b prior to 59.5 without penalty....

My employer offers a 403b and a 457 - is it better to max out one over the other? Given that the 457 allows you to withdraw prior to 59.5 without needing to do the conversion?

My wife has her 401k maxed out and we also have our IRA's maxed out, so this is one of our last big tax free options....

Cheddar Stacker

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #153 on: February 12, 2018, 05:34:31 PM »
Ok so this thread is super - as my employer sponsored advisor just told me that you can't withdraw from our 403b prior to 59.5 without penalty....

My employer offers a 403b and a 457 - is it better to max out one over the other? Given that the 457 allows you to withdraw prior to 59.5 without needing to do the conversion?

My wife has her 401k maxed out and we also have our IRA's maxed out, so this is one of our last big tax free options....

457 is usually better because of the rules for easier withdrawals, but you can do both. $18,500 in 403b, and $18,500 in 457.

dandarc

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #154 on: February 13, 2018, 08:01:42 AM »
Ok so this thread is super - as my employer sponsored advisor just told me that you can't withdraw from our 403b prior to 59.5 without penalty....

My employer offers a 403b and a 457 - is it better to max out one over the other? Given that the 457 allows you to withdraw prior to 59.5 without needing to do the conversion?

My wife has her 401k maxed out and we also have our IRA's maxed out, so this is one of our last big tax free options....

457 is usually better because of the rules for easier withdrawals, but you can do both. $18,500 in 403b, and $18,500 in 457.
This.  Max Both.  If all things are equal regarding investment choices and you can't max both, favor the 457.  Quite often, things are not equal, so do your homework.

Radioherd88

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #155 on: February 13, 2018, 03:50:07 PM »
Ok so this thread is super - as my employer sponsored advisor just told me that you can't withdraw from our 403b prior to 59.5 without penalty....

My employer offers a 403b and a 457 - is it better to max out one over the other? Given that the 457 allows you to withdraw prior to 59.5 without needing to do the conversion?

My wife has her 401k maxed out and we also have our IRA's maxed out, so this is one of our last big tax free options....

457 is usually better because of the rules for easier withdrawals, but you can do both. $18,500 in 403b, and $18,500 in 457.

Ok thanks - i met with my Voya rep again to show her the IRA conversion ladder and she was thoroughly confused by it - she also couldn't really explain ANY difference between the 403b and 457 other than the 457 you can withdraw earlier IF you quit the job it's associated with. If you don't quit, you can't access it till 70. I did find this article useful:

https://www.investopedia.com/articles/personal-finance/111615/457-plans-and-403b-plans-comparison.asp

So, I think 457 it is then...

Is there a good thread on here already that compares VTSMX versus the Vanguard Retirement 2035/2045/2055 type funds that are a mixture of index funds then switch to bonds once you get closer to that date - are they just a bit more conservative than VTSMX because of the switch to bonds so in theory will perform slightly lower than VTSMX all being equal?

« Last Edit: February 13, 2018, 03:55:55 PM by Radioherd88 »

boarder42

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #156 on: February 20, 2018, 02:21:19 PM »
@MDM

add this link to your OP please its probably the best analysis that also includes taking the penalty

https://www.madfientist.com/how-to-access-retirement-funds-early/

MDM

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #157 on: February 20, 2018, 02:33:19 PM »
@MDM

add this link to your OP please its probably the best analysis that also includes taking the penalty

https://www.madfientist.com/how-to-access-retirement-funds-early/
I'd be happy to, except I'm not the OP for this thread.  I have reported your post to the moderators, who are able to do so.

swampwiz

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #158 on: February 21, 2018, 01:22:07 AM »
I have been working with some friends to help educate military on their benefits when it comes to investing while serving in a tax free zone.  The military is not great at educating their Sailors and Soldiers on some huge benefits they can reap while serving in a hostile area (Tax Free).  One of these benefits is the Roth Conversion:  So I may disseminate the concept correctly, I have a question for the crowd.

During the Roth Conversion Ladder, it is mentioned that you would convert a certain amount each year once in retirement, so you can have access to that amount five years later.  You wait until retirement because your income will be significantly reduced.

However, since I am currently serving in a tax free zone, my income this year will be drastically reduced next to nothing.  In this scenario, shouldn't I go ahead and convert my entire Traditional IRA into Roth?  Or should I at least convert up to a certain amount?  If so what is that target.  I want to have the right information so I can share it with our military brothers and sisters.  Thank you in advance.
First off, I'd like to thank you for serving our country, and I think that this seemingly small - but potentially huge - benefit of getting a super low tax rate while in a combat zone is a wonderful benefit, and I have no problem with this adding to the deficit.  We unmotivated civilians will just have to pay your taxes!

As for taking advantage of a lower tax rate, just like the price of "free" cannot be beat, so can you (almost) never go wrong with taking advantage of doing a Roth conversion at a 0%.  That said, there is one possible drawback in that the only amount that can be accessed penalty-free is the 5-year Roth conversion basis (of course, the contribution basis can also be accessed like this as well), so it could turn out that doing a big Roth conversion now instead of later - when the assets presumably will have gained in value - generates less of that conversion basis than what would have been generated had the assets been at a higher value at the time of the conversion.  I myself have had a big position in the super-volatile BRZU, which has gone to Hell and back, allowing me to convert (up to my 0% tax rate) some at the super-depressed prices, but in so doing, I might run out of TIRA to do a Roth conversion that would hit the 5-year seasoning date before hitting age 59.5 (as it turns out, it appears that I might only miss out on a 5-year seasoned Roth conversion basis tranche for a only a few months in the year that I hit 59.5, which is not all that bad considering that I will be 100% Roth!)

Mother Fussbudget

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #159 on: February 22, 2018, 04:07:49 PM »
Hi Radioherd88.  I wanted to clarify 2 things regarding withdrawing funds penalty free after age 55 from a 403(b) - yes, even one hosted at Voya. 
1) You can only withdraw funds penalty free if you 'separate from service' with the 401K or 403(b) sponsoring company - i.e. you quit, get fired, retire, etc.
2) Voya DOES support penalty free withdrawals for 403(b) accounts for those over 55 - it says so right in their Distribution form:

Quote
"2.  Early (premature) Distribution, exception applies - This reason applies to separation from service after age 55 (including retirement) or an IRS Levy. If separated from service or retired and you are requesting a direct rollover to an IRA, 403(b) or qualified plan, check this box"
Link:  https://investments.voya.com/idc/groups/public/documents/forms_and_applications/fundspace_403b2010.pdf

I'm not surprised their representative wasn't aware of the Rule of 55.  Since I wrote the original post here 2 years ago, I've been contacted by several readers who were initially told their plans didn't support this rule... only to find later with further research that they (like 'The Dude') do 'abide' by the rules.

Example companies where reps were schooled by Mustachians:  TIAA, Voya, Employee Fiduciary, and Trans-America (the latter by me in 2/2018). 

So while I agree a 457 is probably an easier all around plan to use as a retirement savings vehicle, I did not want the earlier statement to stand unchallenged that (my rephrasing) "Voya 403(b)'s do not allow penalty free withdrawal upon separation of service."

Keep saving, and All The Best!
MFB

blackjack

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"You can also withdraw any Roth IRA contributions (but not earnings) at any time"
Does this still apply if you only opened and contributed to a ROTH IRA less than 4 years and of course under 59 1/2?


Also you can only withdrawl a roth 401k or convert to a roth ira after you separated from the company?

thank you
« Last Edit: March 04, 2018, 07:21:33 AM by blackjack »

Nords

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"You can also withdraw any Roth IRA contributions (but not earnings) at any time"
Does this still apply if you only opened and contributed to a ROTH IRA less than 4 years and of course under 59 1/2?
Yes, at any time, because you've already reported the money which you contributed as earned income and paid your taxes on it. 

It's on page 30 of IRS Pub 590-B:
https://www.irs.gov/pub/irs-pdf/p590b.pdf
"You don't include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)."

This is why some investors use Roth IRA contributions as emergency funds (while hoping there's no emergency need to tap the fund).  Of course you ideally won't touch your contributions because once you withdraw contribution funds, they can't compound for you any more.

Also you can only withdrawl a roth 401k or convert to a roth ira after you separated from the company?
Yep.  It's a totally different type of account from a Roth IRA (a "designated Roth account") and subject to a different set of federal laws & IRS rules.

blackjack

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Thank you i made my first contribution into my roth ira in dec. 2013. I will withdrawl only contribution which is 14k and i made around 5k in earnings. so i'll leave the 5k.
(need the money for a business start up)

Nords

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(need the money for a business start up)
I hear that a lot, and I'd counter that "need" might not cover all aspects of the situation.  You're cannibalizing tomorrow's absolutely certain retirement in exchange for an uncertain chance to create revenue from a business.  You will retire one day (whether you want to or not) and you will want retirement funds.  Whether your business can get you there is a whole 'nother debate about risk, uncertainty, and opportunity luck.

I've been an angel investor for over a decade and I've heard literally hundreds of pitches for startups.  Here's what I'd advise a founder.

If your business is truly a great idea then other people will lend or invest money to help you start it up and to prove the fit of its product/service with the market.  If your business plan is good then your customers (or lenders or investors) will pay you up front to bootstrap from your revenue without having to pillage your retirement accounts.  If nobody will lend or invest or put down an advance payment then... that's how your business is likely to work out with your prospective customers, too.

Before you burn up your retirement funds for a startup, try the "other people's money" approaches first.  If you're not sure how to do that then search for accelerators, incubators, startup "boot camps", or SCORE/SBA offices in your area.

blackjack

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The money isn't necessarily for the business it self.. its going to be more of salary to myself until i make enough money from the business.

Having said that i will hold off withdrawing. thank you
« Last Edit: March 04, 2018, 11:35:58 AM by blackjack »

bigote2032

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Hello, thinking about keeping taxable income bracket of 25% or below for the ladder to make any sense, but having some trouble, let me elaborate a bit below:

When I FIRE and I am ready to start doing the ladder every year, say I use my index funds to support myself until I am 59.5 and can take my first ladder paycheck after 5 years.  My taxable income will be too high since it's not only the tIRA to ROTH IRA conversion that gets taxes, also my index funds dividends and/or capital gains I get every year.

For example, say I am getting 50K a year from index funds in total, and doing annual 50K conversions, I will be at $100K taxable income.  If I cannot keep my income below 25% bracket, is there really any value of doing the ladder? And that's not accounting for an spouse that might be working and significantly increasing income if we file taxes jointly, so probably will have to file single.

Thank you!

seattlecyclone

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Firstly, there's no 25% bracket anymore. In 2018 the brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Secondly, withdrawing $50k from your taxable account does not necessarily imply that you will be realizing $50k of income from that account. The principal part of the shares you sell does not count as income, only the gains do. The dividends that you receive count as income whether you withdraw from the account or not.

Thirdly, there's a difference between gross income and taxable income. A $100k gross income will have a standard (or itemized) deduction subtracted from it to result in a smaller taxable income. This post-deduction taxable income is the number you use to figure your tax bracket. Supposing you had a gross income of $100k as a single person and you take the $12k standard deduction, that will result in a taxable income of $88k, which is only a little bit into the 24% bracket. Same situation as a married couple and you would barely scratch the surface of the 22% bracket.

Fourthly, capital gains and qualified dividends are taxed at a lower rate. Only the $50k of Roth conversions in your example would be taxed at the regular bracket, and only after subtracting your deductions. You'll likely be in the 12% bracket from this alone. Capital gains go on top of this. The top rate you would pay for capital gains in your example would be 15%, though much of it would be taxed at 0% if you're married.

Fifthly, you would only be having this "double income" situation for five years. After that, your pipeline will be well primed and you will have no need to realize more than one year's worth of spending as income in a year.

If not the Roth ladder, what alternative strategy are you considering, and how do you expect it to save you money in taxes?

boarder42

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Hello, thinking about keeping taxable income bracket of 25% or below for the ladder to make any sense, but having some trouble, let me elaborate a bit below:

When I FIRE and I am ready to start doing the ladder every year, say I use my index funds to support myself until I am 59.5 and can take my first ladder paycheck after 5 years.  My taxable income will be too high since it's not only the tIRA to ROTH IRA conversion that gets taxes, also my index funds dividends and/or capital gains I get every year.

For example, say I am getting 50K a year from index funds in total, and doing annual 50K conversions, I will be at $100K taxable income.  If I cannot keep my income below 25% bracket, is there really any value of doing the ladder? And that's not accounting for an spouse that might be working and significantly increasing income if we file taxes jointly, so probably will have to file single.

Thank you!

you're not getting 50k in earnings from you index funds if you cash out 50k maybe only 20-30% of that is actually LTCGs and dividends.  plus the standard deduction mentioned below. 

bigote2032

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Hi boarder, can you point me to some examples of this? I am sure folks that are FIREd are doing this put would love to see some numbers. Thank you!

MDM

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...can you point me to some examples of this?
Examples of...what?  Selling fund shares for $50K that one purchased years back for $20K, thus paying only long term capital gain taxes on only $30K?

seattlecyclone

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Hi boarder, can you point me to some examples of this? I am sure folks that are FIREd are doing this put would love to see some numbers. Thank you!

Here's an example of how this might look.

Suppose you retire this year, planning to spend $50k annually. If you're following the 4% rule that implies your portfolio is $1.25 million. Suppose $1 million of this is in traditional IRAs, while the last $250k is in VTSAX in a taxable account.

You roll over $50k from your traditional IRA to Roth to get your Roth ladder going. This counts as regular income.

Your $250k of VTSAX pays out a bit less than 2% in dividends, let's call it $5k. You need to sell some shares for the other $45k.

You have some choice about which shares to sell. The oldest ones generally will have lower cost basis, meaning higher taxes when you sell. Let's say you choose to sell some shares you bought in 2014 when the price was about $50 per share. It's a bit under $70 now, meaning you need to sell about 650 shares to get your $45k. With a $20 gain per share, that's a $13,000 capital gain that you need to report on your tax return.

Add it all up and you have $50k of regular income, plus $18k of capital gains/dividend income.

If you're single and claiming the standard deduction of $12,000, that means you're only taxed on $38k of regular income and $18k of capital gains/dividend income.

That $38k number puts you just below the top of the 12% bracket for your regular income. For the Roth conversion you would be paying 10% on the first $9,525 and 12% of the rest, or $4,369.50 in total.

For capital gains, you pay 0% up to the top of the 12% bracket (the first $700 of capital gains income in this example), and 15% after that. So you would pay an additional $2,595 in tax (($18,000 - $700) * 15%) based on your taxable capital gains and dividends.

Your total tax burden on $68k of gross income would then be $4,369.50 + $2,595 = $6,964.50, an effective tax rate a hair over 10%.

With the same income numbers but married filing jointly, you instead have a $24,000 standard deduction, meaning you're only taxed on $26k of the Roth conversion, amounting to $2,739 of tax. Your capital gains and dividends would all be taxed at 0%.

This is of course just an example. You might start retirement with some existing Roth basis that you can withdraw tax-free, reducing the amount you need to take from your taxable account. You might start with a bigger taxable account, allowing you to supplement your Roth withdrawals in years 6+ with some taxable withdrawals, thus reducing the amount you need to convert each year. There are a number of possible variables. It all depends on your particular situation.

bigote2032

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Is ROTH IRA money I withdraw really considered taxable income (only capital after 5 years of conversion, not the earnings)? I have found few sites that say it's not taxable income, so should not be a problem, as opposed to traditional IRA, you already paid taxes on ROTH, if it is considered taxable income you would be double-taxed: taxed on conversion from traditional to ROTH and taxed on income tax after withdrawing the money.  Correct me if I am wrong, but this makes sense to me, double-taxing ROTH IRA would defeat the purpose and nobody would be doing it.

From: http://fairmark.com/retirement/roth-accounts/roth-distributions/taxable-distributions-from-roth-iras/

"You donít pay tax on your Roth IRA distributions until you withdraw earnings, and you arenít considered to be withdrawing earnings from your Roth IRA until the total amount youíve withdrawn from all your Roth IRAs is greater than the total amount you contributed to all your Roth IRAs, including rollover contributions. If you meet certain requirements, you wonít pay tax when you withdraw earnings. But if you donít meet those requirements, youíll have to pay tax on the earnings you withdraw, and you may have to pay a penalty, too."
« Last Edit: March 14, 2018, 11:13:40 AM by bigote2032 »

bigote2032

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Hey seattlecyclone, that example helps a lot! Thank you.

Any opinion on that article about ROTH IRA withdrawals not considered taxable income? Sorry, I posted few minutes after you!



boarder42

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you dont pay tax on your withdrawals or the earnings* in a Roth.  *as long as your of the correct age to withdraw or you meet other requirements. 

my bridge money will likely be 50% roth contribution 50% Taxable contributions and follow a plan similar to what SC laid out above.  Staying under the 12% bracket is key for us.  but there is a large gap of free money there when you account for standard deductions. 

50k for a single person is really high btw.

MDM

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Hey seattlecyclone, that example helps a lot! Thank you.

Any opinion on that article about ROTH IRA withdrawals not considered taxable income? Sorry, I posted few minutes after you!
Most Roth IRA withdrawals will not be taxable.  Some will.  The quote from the Fairmark article seems an accurate synopsis of when they will and won't.

seattlecyclone

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Yep, pre-59Ĺ withdrawals of Roth IRA earnings will generally count as income. Withdrawals of your contributions and conversions never count as income, nor do withdrawals of earnings when you're old enough to take a qualified distribution.

bigote2032

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Got it, thanks seattlecyclone, MDM and boarder42 for your helpful advise!! :)

DreamFIRE

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Check your brokerage account funds to see what your capital gains will be.  I just checked mine, and the total of my funds shows a cost basis of about 40% of the total equity, and I've always done dividend reinvestment.

As a single person, I'm allowing for a WR of $54,000/yr and adjust for inflation.  I'm in a LCOL area, but it doesn't seem that high considering I want a nice fun/travel fund.

Cognitive Miser

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Does anyone have a fancy VETTED spreadsheet they can share, which implements a Roth ladder including taxes?  I'm looking for something with several columns which show 401k/TSP balances, Roth balances (contributions, conversions, and earnings), Taxable accounts, Income needed in retirement, and breaks out what taxes are owed on conversions and withdrawals?  Also which incorporates inflation and expected returns.  I made one, but it has errors, and I'm so frustrated with it I'm about to scrap it.  It goes from right now (while I'm still working and building up my taxable and 401k balances) to age 80, so it covers my initial conversion period (from 401K to Roth) when I'm drawing down taxable, the period where I'm withdrawing conversions from my Roth, the period where I switch to withdrawals from my federal TSP account after age 59.5, and then back to Roth (earnings) for late retirement.  It's pretty darn complex. Just wondering if someone else has something equally complex, but CORRECT.

boarder42

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Does anyone have a fancy VETTED spreadsheet they can share, which implements a Roth ladder including taxes?  I'm looking for something with several columns which show 401k/TSP balances, Roth balances (contributions, conversions, and earnings), Taxable accounts, Income needed in retirement, and breaks out what taxes are owed on conversions and withdrawals?  Also which incorporates inflation and expected returns.  I made one, but it has errors, and I'm so frustrated with it I'm about to scrap it.  It goes from right now (while I'm still working and building up my taxable and 401k balances) to age 80, so it covers my initial conversion period (from 401K to Roth) when I'm drawing down taxable, the period where I'm withdrawing conversions from my Roth, the period where I switch to withdrawals from my federal TSP account after age 59.5, and then back to Roth (earnings) for late retirement.  It's pretty darn complex. Just wondering if someone else has something equally complex, but CORRECT.

https://i-orp.com/paper/index.html

go play with this.

Leisured

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Thank you NorCal for the article. I must remember the name Morgan Housel.

Two good quotes:

When most people say they want to be a millionaire, what they really mean is ďI want to spend a million dollars,Ē which is literally the opposite of being a millionaire. This is especially true for young people.

It helps, Iíve found, when making money decisions to constantly remind yourself that the purpose of investing is to maximize returns, not minimize boredom. Boring is perfectly fine. Boring is good. If you want to frame this as a strategy, remind yourself: opportunity lives where others arenít, and others tend to stay away from whatís boring.




OurTown

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It looks like I will need to bridge from 2024 (when I turn 55) to 2029 (when I turn 59.5).  We have a 457(b) through Wife's work, which we will be able to access as soon as she retires regardless of age.  I can also access my 401(k) at the firm if I can keep working through 2024 (age 55).  The only disadvantage is I don't control the investments in the 401(k), and I can't roll it over and still take it early without penalty.  In fact, not only do I not control the investments, I don't even know what the investments are!  It could be invested in Dutch tulip bulbs for all I know.  I also don't have any access to a current balance.  We get a paper report once a year that shows last year's balance.  Since I'm flying blind, I've been investing only up to the match in the 401(k), and I am maxing out the rest of my space in a 403(b) in my side gig.  I have to make a decision starting in 2019 (my age 50) as to whether I should add in the extra $6,000 catch up contribution to the 401(k).  Probably the answer is yes, even though it's a bit of a black hole.

     

boarder42

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It looks like I will need to bridge from 2024 (when I turn 55) to 2029 (when I turn 59.5).  We have a 457(b) through Wife's work, which we will be able to access as soon as she retires regardless of age.  I can also access my 401(k) at the firm if I can keep working through 2024 (age 55).  The only disadvantage is I don't control the investments in the 401(k), and I can't roll it over and still take it early without penalty.  In fact, not only do I not control the investments, I don't even know what the investments are!  It could be invested in Dutch tulip bulbs for all I know.  I also don't have any access to a current balance.  We get a paper report once a year that shows last year's balance.  Since I'm flying blind, I've been investing only up to the match in the 401(k), and I am maxing out the rest of my space in a 403(b) in my side gig.  I have to make a decision starting in 2019 (my age 50) as to whether I should add in the extra $6,000 catch up contribution to the 401(k).  Probably the answer is yes, even though it's a bit of a black hole.

   

if i were that old when i retired i'd just use SEP. 

OurTown

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I am, indeed, quite old.

boarder42

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I am, indeed, quite old.

that wasnt the point of my comment - just that it would be much simpler and with how many years you have much less risk with the shortcomings of it for someone retiring in their 30s or 40s.

Travis

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The scenario SeattleCyclone laid out may end up being very similar in form to my retirement.  I'm pretty sure I'm going to receive a pension which I can predict today plus or minus $10k/year.  I know how much I'll need in dividends and LTCG to pad the rest, but how much of my income will be unqualified dividends is another variable.  I know how much I received last year, but I'm not FIREing for a few more years.  Is there a more or less known rate of growth for taxable VTSAX dividends?  Do they grow at the same rate as the overall gains?  Whatever that amount is will determine how much room I'll have to do conversions each year.

bob22

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I've attached a paper entitled "Substantiation of the use of a Roth Conversion or Rollover to a Roth to Avoid Additional Tax on Early Distributions from IRAs and Certain Other Retirement Plans." I'm including the beginning few paragraphs which include its justification and feedback I'm looking for, because I believe that it will be useful to others.

Justification for this paper: There are quite a few sources on the Internet that espouse the "Roth Conversion Ladder" as a method to obtain access to assets in tax-advantaged accounts to fund early retirement, without paying additional tax on early distributions. A number of these sources go into a lot of detail on how the Roth Conversion Ladder is implemented, but what I've found that these sources provide limited traceability back to and explanation of IRS rules that permit (or at least do not inhibit) this tax "loophole." Sometimes there is traceability to the IRS publications, but often there is none. In a few cases there is in-depth but narrowly focused analysis of specific IRS rules. Rules that I've found are ambiguous and very subject to interpretation. It's for this reason that I have included inline traceability. I'm writing this paper because I want to understand as much as I can about the logical basis for the "gray areas" so that I can make an informed decision on whether or not to use this method--it's not enough for me to assume that it's valid to do something just because others have. I want to understand what is explicitly stated, what is inferred, and why so that I'm prepared to discuss this with an accountant, the brokerage that holds my IRAs, or anyone that can potentially throw up road blocks that delay my ability to use this method. Because not everyone agrees on what is and isn't allowed.
 
Feedback: I'm looking for input on this paper that will help to make it more correct, complete, and unambiguous. I understand that this level of detail doesn't work for everyone, and there are some that won't see the need for this--that's not the type of feedback I'm looking for.

dandarc

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bob22 - I'd personally add something about the ordering rules on Roth IRA distributions. These can be found here:
https://www.irs.gov/publications/p590b#en_US_2017_publink1000231071

Otherwise, how do you know if "distribution is of conversion or certain rollover contributions"?

Unique User

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bob22 - I'd personally add something about the ordering rules on Roth IRA distributions. These can be found here:
https://www.irs.gov/publications/p590b#en_US_2017_publink1000231071

Otherwise, how do you know if "distribution is of conversion or certain rollover contributions"?

Thanks for the link, I was just wondering on the conversions. 

"Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first)."

I converted our Traditional IRAs to Roth in 2008, values had tanked and we had zero income that year.  So if I start a ladder from our traditional IRAs in our first year of retirement, does this mean we can take out (1) contributions then (2) conversions from 2008 and then start on the laddered amounts?

dandarc

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Yes exactly. You already paid tax on the 2008 conversion, and the conversion was more than 5 years ago, so no penalty would be due were you to withdraw all of your regular contributions and start dipping into the 2008 conversion amount. 

You'd have to withdraw the amount of your regular contributions, plus the amount of that 2008 contribution before there is even a possibility of a penalty.

Unique User

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Thanks Dandarc!  That helps with my planning.  We're (hopefully) only 20-23 months away. 

dustinst22

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Sorry for the newb question -- has anyone done this conversion with a SEP?  Is the process the same?

MDM

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thesis

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Dear holy hell, this took a long time to find.

I've been bothered lately about the comments (also appearing in the original post) that Roth IRA contributions can be withdrawn any time, tax free. This is true, but I finally found the IRS link that proves this:

https://www.irs.gov/publications/p590b#en_US_2017_publink1000231057

Quote
Are Distributions Taxable?

You don't include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also don't include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering Rules for Distributions , later.
(emphasis mine)

The big links on the side of the IRS site have an unfortunate bug where they simply roll up or roll down their contents, and do not lead to their corresponding anchor in the page, such that only the final sub-links lead to actual paragraphs. I had to URL-hack to get the link that goes directly to that specific paragraph :)

Turns out that "Designated Roth Account" is IRS speak for Roth 401(k), Roth 403(b), or some such accounts, and THOSE are subject to pro rata taxation for non-qualified distributions:

https://www.irs.gov/retirement-plans/designated-roth-accounts-distributions

(the more formal information was somewhere else, too).

Posted here for future reference :)