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Loaning yourself larger sums from Roth?
mistymoney:
So - a couple of questions imbedded here:
Preliminarily - is there any risk to the roth conversion strategy? I would think not given current administration, but wondered if roth conversion could be taken away in the next few years - or at some point? 4 years from now admin could be very different - or not, we never know!
Second but main question:
Background: been contemplating downsizing or more likely fixing up current home for the long haul (I am 58 and planning to retire this year). So i either need a tidy sum to fix up, or to put on a new place. (Logistics with pets would not allow me to be a renter, and I don't think I could manage to sell and move out and then contemplate next spot).
At any rate - My money is currently 86% pretax, 10% roth, and 4% taxable. My vision for money use after retirement was to leave roth in place and just use for extra or lumpy expenses when those would carry too high a tax rate coming out of pretax, use taxable for fixups/new place, and take all regular spending out of pretax, staying in the 22% bracket, and possibly filling out the 24% bracket for roth conversions to head off higher tax brackets when RMDs come along.
In thinking of doing a big fix up on the house, I was hoping to be able pay with taxable, and then maybe get some short term financing (3-5 years, depending on what the total is) so I could instead of roth converting in the 24% tax bracket - pay off the loan with the 24% tax bracket money.
BUT! Then I thought - could I '"loan" myself the money out of roth? I'll be 59 later this year, and early next year 59.5. So I could do what I can with taxable now, and put off a few projects until 59.5, take the money out of roth for the fixup and then convert up through the 24% to replace the money I borrowed, and continue on until it looks like the pretax won't exceed the 24% bracket down the RMD line.
Does this make sense? (the description of plan?)
And if I have communicated that sufficiently - is it a good idea?
My largest worry is to use up the precious roth money and then laws are changed and no more roth conversions! Maybe not even roth contributions!
Perhaps a far fetched scenario, but any way - is this a solid plan?
I've been thinking for any financing options - need to do that while still on W-2 status. But if I do the roth loan to self, if I make sure I have enough for everything, it won't affect my discharge date planning.
The wildcard is of course roth is mostly stocks, going into the 60 of the 60/40. So I would either need to preemptively cash out to guard against a huge bear market before I execute on the plans, risk the bear and change plans if it happens, and then the flip side is a huge bull that increase the values of equities in the pretax, and converting to roth is not an even deal!
maybe I have talked myself out of this.
Other things to consider?
NotJen:
--- Quote from: mistymoney on January 18, 2025, 11:25:20 AM ---BUT! Then I thought - could I '"loan" myself the money out of roth? I'll be 59 later this year, and early next year 59.5. So I could do what I can with taxable now, and put off a few projects until 59.5, take the money out of roth for the fixup and then convert up through the 24% to replace the money I borrowed, and continue on until it looks like the pretax won't exceed the 24% bracket down the RMD line.
--- End quote ---
If you are over 59.5, with access to all your retirement accounts without penalty, I'm missing the point of the Roth conversion. Just use the money from your pretax and leave Roth untouched. Withdrawal from pretax should be the same taxes as Roth conversion, no?
mistymoney:
--- Quote from: NotJen on January 18, 2025, 11:53:04 AM ---
--- Quote from: mistymoney on January 18, 2025, 11:25:20 AM ---BUT! Then I thought - could I '"loan" myself the money out of roth? I'll be 59 later this year, and early next year 59.5. So I could do what I can with taxable now, and put off a few projects until 59.5, take the money out of roth for the fixup and then convert up through the 24% to replace the money I borrowed, and continue on until it looks like the pretax won't exceed the 24% bracket down the RMD line.
--- End quote ---
If you are over 59.5, with access to all your retirement accounts without penalty, I'm missing the point of the Roth conversion. Just use the money from your pretax and leave Roth untouched. Withdrawal from pretax should be the same taxes as Roth conversion, no?
--- End quote ---
It was more towards avoiding the need to finance things or go into 32-35% tax bracket for a lump sum withdrawal from the pretax.
So if cost was 150k, and I need 80k for regular expense, that means I need 230k for the year. To get that out of pretax, I need to draw 300k, pay 70k fed tax, fill out the 32% bracket and about 35k worth into the 35% bracket.
vs financing over 2-3 years and staying into the 24% bracket.
But maybe if you add on interest charges, it wouldn't make too much of difference!
So then I thought take from tax and roth, and kind of empty those out, but try to replenish over the next few years.
Maybe best to just bit the bullet, take from pretax, and move on with life?
secondcor521:
I would avoid taking from pre-tax until 59.5. It seems like you have enough financial and remodeling flexibility to avoid the 10% early withdrawal penalty which applies until then (unless you're thinking of one of the exceptions; offhand I can't think of any that would apply).
I agree with NotJen about skipping the Roth conversions on any money you know you're going to spend.
Although the tax law changes frequently and sometimes in large ways, I'd be extraordinarily surprised if they took away Roth conversions or Roth contributions anytime soon.
Can you split up the remodeling into a few phases or projects, and then tackle them as your money and time permit? That way you could spread it out over a few years which could avoid the 10% early withdrawal penalty, interest payments and hassle of financing, and any need to borrow from and repay to your Roth which would also allay concerns about Congress changing the law on you mid-stream.
mistymoney:
--- Quote from: secondcor521 on January 18, 2025, 02:02:00 PM ---I would avoid taking from pre-tax until 59.5. It seems like you have enough financial and remodeling flexibility to avoid the 10% early withdrawal penalty which applies until then (unless you're thinking of one of the exceptions; offhand I can't think of any that would apply).
I agree with NotJen about skipping the Roth conversions on any money you know you're going to spend.
Although the tax law changes frequently and sometimes in large ways, I'd be extraordinarily surprised if they took away Roth conversions or Roth contributions anytime soon.
Can you split up the remodeling into a few phases or projects, and then tackle them as your money and time permit? That way you could spread it out over a few years which could avoid the 10% early withdrawal penalty, interest payments and hassle of financing, and any need to borrow from and repay to your Roth which would also allay concerns about Congress changing the law on you mid-stream.
--- End quote ---
yes - thinking this is the better route. In any event, I would not take the 10% penalty! 59.5 is - fortunately or unfortuntely! not sure which! - is +/- about 14 months away I think.
So in retiring before doing the fix ups, I would need to do so without financing, whereas if I finance, would need that lined up before retiring - so that is the issue I'm trying to unravel I think. But if I don't finance anything, then will just roll things out after 59.5 as I can. But likely do a bit beforehand non retirement funds/current income.
The one worry is I seem to be becoming more complacent about stuff that is not quite right. Maybe that will correct after decompression? But my parents did not keep up their home to the point it was a tear down at the end. I worry if I will become similarly lackadaisical - and I think harder as a single person too, to keep mindful on it all.
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