Author Topic: Any harm to starting Roth conversions early?  (Read 732 times)

startingsmall

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Any harm to starting Roth conversions early?
« on: May 29, 2018, 07:17:40 PM »
I know that, traditionally, people talk about setting up a Roth IRA conversion ladder 5 years before retirement. Is there any reason for waiting until that to get those funds in place? If the money needs to sit in the Roth for at least 5 years before withdrawal, is there any harm in starting that 5-year clock sooner rather than later?

I recently changed jobs and have about $7k in my previous employer's 401k. (I was there less than a year!) I'll be moving that money over to Vanguard, where I keep the rest of my investments, for simplicity's sake. I've rolled previous 401k funds into a Vanguard Rollover IRA... is there any reason NOT to roll this $7k into my Roth IRA, instead of a Rollover IRA? And, while we're at it, is there any reason not to also start converting small amounts of my Rollover IRA funds to Roth, to spread out the taxes instead of waiting for that 5-year-pre-FIRE mark?

I suspect there might be a reason that people wait until 5 years out, but I can't find anything that explains why. 

maizeman

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Re: Any harm to starting Roth conversions early?
« Reply #1 on: May 29, 2018, 07:23:02 PM »
Are people saying you start your Roth conversion ladder five years before you retire? That doesn't seem like good advice at all.

What you need is 5 years worth of living expenses in taxable accounts and/or previous Roth contributions, because the whole point of the Roth conversion ladder is that you're going to pay extremely low average and marginal taxes in FIRE.

If you start your Roth conversion ladder 5 years early you'll be paying higher marginal taxes than if you just stop saving in tax deferred accounts five years early (either taxable or Roth accounts), and use that as your cushion to cover living expenses for the five years until your Roth conversion ladder (started when you first retire) starts throwing out income.

startingsmall

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Re: Any harm to starting Roth conversions early?
« Reply #2 on: May 29, 2018, 07:25:26 PM »
Are people saying you start your Roth conversion ladder five years before you retire? That doesn't seem like good advice at all.

What you need is 5 years worth of living expenses in taxable accounts and/or previous Roth contributions, because the whole point of the Roth conversion ladder is that you're going to pay extremely low average and marginal taxes in FIRE.

If you start your Roth conversion ladder 5 years early you'll be paying higher marginal taxes than if you just stop saving in tax deferred accounts five years early (either taxable or Roth accounts), and use that as your cushion to cover living expenses for the five years until your Roth conversion ladder (started when you first retire) starts throwing out income.

Okay, NOW I get it! So you don't start the Roth ladder until after you've already QUIT working (using taxable investments).... that's why the tax rate on the conversions is so low! I knew it must be something super-obvious like that... it just wasn't clicking for me.

Thank you!!
« Last Edit: May 29, 2018, 07:27:14 PM by startingsmall »

maizeman

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Re: Any harm to starting Roth conversions early?
« Reply #3 on: May 29, 2018, 07:27:51 PM »
Happy I could help!

Acastus

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Re: Any harm to starting Roth conversions early?
« Reply #4 on: May 30, 2018, 11:12:40 AM »
Roth conversions make sense when you are in a low tax bracket, so any time you have a break in employment, you can move a chunk. Also, if you don't make a giant salary. My household makes a nominal 6 figures, but after 401k and HSA, we are routinely in the 15% tax bracket.