Author Topic: Is the ROTH conversion ladder worth it if you don't FIRE until your 50's?  (Read 1250 times)

drparrish09

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I apologize if this is an obvious answer.

I am almost debt free now and will begin investing more heavily soon.  I hear a lot about the tax benefits of the ROTH Conversion Ladder for people who FIRE in their 30s and 40s and I get it.  But if you are not going to FIRE until your 50's would it make more sense to invest in the ROTH now since you can take it all out penalty free soon after FIRE anyways? 

I read a lot about the tax optimizations of people who FIRE when they are 35 but rarely hear about how to optimize if you don't plan to FIRE until 50 or 55 and am just curious.

Thanks!

seattlecyclone

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If you plan to retire after 55, the laddering part makes no sense because the whole point of the ladder is to avoid early withdrawal taxes five years after your initial conversion. If you'll be 59 within five years of your retirement, you don't need the ladder to avoid those taxes in that year.

Whether your new contributions should be pre-tax or Roth is a more complex question than this, but it mostly boils down to comparing your expected marginal tax rate now to your expected marginal tax rate in retirement (taking into account any early withdrawal taxes that you might pay upon withdrawal). I think most Mustachians should err on the side of pre-tax contributions unless they can articulate some reason why they expect their taxable income during retirement to be higher than it is now.

not_a_trex

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I think most Mustachians should err on the side of pre-tax contributions unless they can articulate some reason why they expect their taxable income during retirement to be higher than it is now.

Given the length of employment spanning into their 50s would it not be uncommon for there to be a sweet spot between retirement and the RMDs of pensions and social security where taxes would be lower? I don't know the numbers here, but it seems like the Roth ladder would make the most sense in this sort of situation.

seattlecyclone

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You generally minimize your taxes by keeping your income as consistent as possible from year to year. Roth conversions after retirement can definitely help you in that area, whether they're part of a "ladder" meant to avoid early withdrawal taxes or not.

VoteCthulu

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If you plan to retire after 55, the laddering part makes no sense because the whole point of the ladder is to avoid early withdrawal taxes five years after your initial conversion. If you'll be 59 within five years of your retirement, you don't need the ladder to avoid those taxes in that year.
It can still make sense to do Roth conversions at 55-59 (although I wouldn't call it a ladder anymore).

If someone retires at 55 with enough taxable savings to last 5 years, it can still be a good idea to do conversions in order to take full advantage of the 0 and 12% tax brackets for 4 years until they can start taking normal distributions.
« Last Edit: May 25, 2018, 08:36:56 AM by VoteCthulu »

seattlecyclone

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Exactly.

swampwiz

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It all depends on your expected tax rate when you spend down vs. your current tax rate when you build up.  If the tax rate is the same now as it would be then, then it would be a wash.    Now, when I say "tax rate", I mean the complete tax rate, including any implicit tax rate for the reduction is means-tested benefits like the ACA Premium Tax Credit.