Author Topic: How to withdraw funds from your IRA and 401k without penalty before age 59.5  (Read 197096 times)

dandarc

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #200 on: December 12, 2018, 10:06:23 AM »
Generally, converted assets in the Roth IRA must remain there for at least 5 years....
Another exception to "Generally" is the amount of non-deductible traditional contributions converted to Roth.  See Backdoor Roth IRA.  Those amounts (subject to withdrawal ordering rules - these are #3 in http://retirementlc.com/wp-content/uploads/2017/07/2017-07-06-Roth-IRA-Distribution-Ordering-Rules.pdf) may be withdrawn at any time without tax or penalty.
Huh. I thought those were subject to the 5 year wait as well. TIL.
The ordering rules when making a non-qualified withdrawal from your Roth IRA are thus:

1. Regular contributions
2. Conversions on a first-in, first-out basis
    a. Taxable portion (the amount required to be included in gross income because of the conversion or rollover)
    b. Non-taxable portion
3. Earnings

In a Roth IRA, the penalty only would apply to taxable items - it is a 10% additional tax on the taxable portion. If you've done your backdoor Roth IRA well, item 2.a will be minimal - typically you're aiming to convert more or less immediately after the deposit is made so that there are no earnings when you convert, so if you've done it perfectly, 100% of the backdoor Roth conversion is the "non-taxable" portion.

That being said, if it has been 5 years or more since the conversion, the "taxable portion" essentially shifts into the "non-taxable portion".

frugalnacho

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #201 on: December 19, 2018, 08:35:34 PM »
Is it really 5 years? It was my understanding that it's the 5th year after the conversion is made and only the tax year counts.  So if you convert on December 31, 2018 you would satisfy the 5 year "seasoning" on January 1, 2023 which is really only 4 years and 1 day later.

Is that correct?

Nords

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #202 on: December 19, 2018, 10:35:56 PM »
Is it really 5 years? It was my understanding that it's the 5th year after the conversion is made and only the tax year counts.  So if you convert on December 31, 2018 you would satisfy the 5 year "seasoning" on January 1, 2023 which is really only 4 years and 1 day later.

Is that correct?
That's correct-- five tax years, not five calendar years.

https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

GUNDERSON

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Is there anything that changes about this process if one is using a solo 401k?
Thanks!

secondcor521

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #204 on: December 12, 2019, 04:28:44 PM »
^ Your research is wrong.

First, anyone can withdraw Roth contributions at any point without penalty or taxes.  There is no need to wait 5 years or to attain any particular age.

Second, the age is 59.5, not 59.

Third, while your statement about taxes on earnings before 59.5 is accurate, it is incomplete.  In addition to paying taxes, generally a 10% early withdrawal penalty will apply (unless the withdrawal qualifies for one of the exceptions).

Fourth, plug your blog elsewhere.

rush20

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I'm new to the website and am interested in learning more about investing and retirement planning. Why are people converting to ROTH IRA for retirement instead of leaving it in the tIRA? Why would your tax bracket be higher when you retire at age 59.5? If you're income when you retire are your withdrawals from LTCG and dividends, how would that be higher than your current salary? Shouldn't a tIRA be more beneficial?

MDM

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I'm new to the website and am interested in learning more about investing and retirement planning. Why are people converting to ROTH IRA for retirement instead of leaving it in the tIRA?
Some (incorrectly) think that tax free earnings in a Roth make it inherently superior to traditional.  Some (who may or may not be correct) think their marginal tax rate on withdrawal now will favorable in comparison with that rate later.

Quote
Why would your tax bracket be higher when you retire at age 59.5?
Many possible reasons, including
- having "too much" in traditional (perhaps including an inherited IRA)
- having a very good pension
- expecting a higher marginal rate in just a few years, including IRMAA tiers and/or Soc. Sec. benefits.
- etc.

Quote
If you're income when you retire are your withdrawals from LTCG and dividends, how would that be higher than your current salary? Shouldn't a tIRA be more beneficial?
If LTCG and dividends are your only income later, then a tIRA is likely more beneficial now.

See Investment Order and Traditional versus Roth - Bogleheads for more.

rmorris50

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Anyone just pay the penalty, especially when filing married and jointly and your other spouse isn't subject to the tax penalty. My calculations show it's only a 5% effective penalty in my case. My spouse has no interest in retiring and I am screaming to leave the corporate world. Our effective tax rate would be 24% instead of 19%, including state (NC at 5.25%). Any penalty sucks, but given the fact both our incomes right now put us in the top marginal tax bracket, this is still a decrease for us (yes, I am the breadwinner but have been socking most of it away)! I've looked into Roth conversions, SEPPs, and all that sort, but the penalty isn't that bad and leaves me plenty of flexibility still. And with my deferred comp, pension and SS I am not so scared to spend down my pre-tax IRA first in my early retirement years, at least low enough to a level where it doesn't grow out of control and I have massive force outs at 70.

Cheddar Stacker

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Anyone just pay the penalty, especially when filing married and jointly and your other spouse isn't subject to the tax penalty. My calculations show it's only a 5% effective penalty in my case. My spouse has no interest in retiring and I am screaming to leave the corporate world. Our effective tax rate would be 24% instead of 19%, including state (NC at 5.25%). Any penalty sucks, but given the fact both our incomes right now put us in the top marginal tax bracket, this is still a decrease for us (yes, I am the breadwinner but have been socking most of it away)! I've looked into Roth conversions, SEPPs, and all that sort, but the penalty isn't that bad and leaves me plenty of flexibility still. And with my deferred comp, pension and SS I am not so scared to spend down my pre-tax IRA first in my early retirement years, at least low enough to a level where it doesn't grow out of control and I have massive force outs at 70.

Why would you want to pay the penalty when you can just do a SEPP instead? How long until you are 60?

Why is your spouse not subject to the penalty? If spouse is over 60, or disabled or something and can avoid a penalty, draw down spouses assets first to avoid the penalty.

A 10% penalty is not the end of the world, but if you can avoid it, why elect to pay it?

rmorris50

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Anyone just pay the penalty, especially when filing married and jointly and your other spouse isn't subject to the tax penalty. My calculations show it's only a 5% effective penalty in my case. My spouse has no interest in retiring and I am screaming to leave the corporate world. Our effective tax rate would be 24% instead of 19%, including state (NC at 5.25%). Any penalty sucks, but given the fact both our incomes right now put us in the top marginal tax bracket, this is still a decrease for us (yes, I am the breadwinner but have been socking most of it away)! I've looked into Roth conversions, SEPPs, and all that sort, but the penalty isn't that bad and leaves me plenty of flexibility still. And with my deferred comp, pension and SS I am not so scared to spend down my pre-tax IRA first in my early retirement years, at least low enough to a level where it doesn't grow out of control and I have massive force outs at 70.

Why would you want to pay the penalty when you can just do a SEPP instead? How long until you are 60?

Why is your spouse not subject to the penalty? If spouse is over 60, or disabled or something and can avoid a penalty, draw down spouses assets first to avoid the penalty.

A 10% penalty is not the end of the world, but if you can avoid it, why elect to pay it?

I turn 46 this summer and my spouse turns 51. He plans to keep working and won't draw on retirement accounts until 60 at the earliest, so his income is subject to just normal tax is what I meant. I would love to retire now,  but by 50 at the latest (save a little more, let investments recover, etc). My spouse makes ok money, but he has never been the breadwinner and our lifestyle would be drastically reduced and he may divorce me (half joke, half serious). And SEPP doesn't provide enough for me to contribute to the household and keep us in a middle-class lifestyle. Starting at 55, I also have deferred comp from ages 55-70, and then if I defer pension and SS until 70 that is more than enough for me to live off of. So I don't need to make sure my IRA supports me to very old age. And if I keep working and just let the IRA grow I will just have massive forceouts from the IRA starting at 70. Just seems to make more sense to retire very soon and use my IRA to bridge the gap to age 55. Thus the reason i am willing to pay the penalty.

rmorris50

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I should also add my IRA is currently $1 million and we have no children and won't. I don't plan on making any extended family rich off my hard work either :-)