Author Topic: Roth vonversion question: want to be FI in 10 years  (Read 1804 times)

shortduck

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Roth vonversion question: want to be FI in 10 years
« on: December 20, 2019, 01:42:38 PM »
Hello

I have question and can`t find an answer for it.

Suppose I plan to to be FI in year 2030 [in next 10 years]. And majority of my funds are in either 401k and roth-ira, because I wanted to get maximum tax benefits. How do I access those funds in year 2031 ?

From what I have read, the only way is to do a roth conversion, however I have to start in year 2025 to have the funds in year 2031. But I will be still working in year 2025, so the conversion will be included with my salary and will be taxed.

Please let me your thought about it. Is there a better way to avoid those taxes ?

Thanks

newloginuser

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #1 on: December 20, 2019, 01:53:32 PM »
I'm not an expert on this but a few initial thoughts:

You can withdraw your Roth IRA contributions penalty free after 5 years, not a lot of money but its something.

Do you not have a brokerage account? I could be wrong, but I think most people around here (or at least the high wage earners) also have savings they have in a brokerage account or they keep enough in cash or low risk bonds to get through the roth conversion period.

If your expenses are really low, you could always just do side hustle work to get by while doing your conversions.

ixtap

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #2 on: December 20, 2019, 01:57:06 PM »
You can also withdraw your Roth contributions at any time. So those will offset some of the time.

Do you have access to a megbackdoor Roth in your 401k? That would allow you to increase your Roth contributions now so that they can cover more time in retirement.

You say 'the majority,' so you must have some funds in taxable. How long will those cover?

shortduck

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #3 on: December 20, 2019, 02:04:32 PM »
You can also withdraw your Roth contributions at any time. So those will offset some of the time.

Do you have access to a megbackdoor Roth in your 401k? That would allow you to increase your Roth contributions now so that they can cover more time in retirement.

You say 'the majority,' so you must have some funds in taxable. How long will those cover?

I have just "graduated" to the concept of FI. and I have just started.

My brokerage account has approx 500$ right now. But with my saving I can only do
$19,500 + $19,500 {me and wife}
and 6000 + 6000 : Roth for both of us.

Yes my wife has access to 401k roth, if this is what you mean by megbackdoor.

terran

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #4 on: December 20, 2019, 03:01:06 PM »
To get the Roth conversion ladder going you'll need 5 years of spending (including taxes on Roth conversions) in non-tax advantaged accounts and Roth contributions (which can be withdrawn tax and penalty free). If you end up not having enough available, but do have enough to FIRE you can divide out some of the tax deferred 401(k) into an IRA and initiate Substantially Equal Period Payments (SEPP) on it, which you'll be required to continue until you're 59.5. It's less flexible than Roth conversions, but it's a fine option.

Acastus

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #5 on: December 26, 2019, 04:59:42 PM »
You can withdraw regular contributions from a Roth IRA at any time with no penalty. The gains are subject to penalty until age 59.5. Roth conversions need to mature 5 years before they have no penalty.

kpd905

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #6 on: December 26, 2019, 05:59:23 PM »
Off the top of my head but someone please check my logic.

If you are maxing your Roth between now and 10 years from now you would have 5 years worth of Roth that you could access day 1 and each year you would have another year becoming available each year for the following 5 years.

You can withdraw Roth contributions immediately, so OP should have ~$120,000+ in contributions in the next ten years, plus any that they have already made as of today.

shortduck

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #7 on: December 27, 2019, 06:17:24 AM »
Yes correct $120,000 will be worth 3 years with 40,000 as expense per yer. I will still have to think about for next  2 years, until the roth conversion ladder kicks in.


I am a little surprised that why this has not been more talked about ? Is there an article to address this issue ?

nereo

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Arbitrage

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #9 on: December 27, 2019, 08:24:15 AM »
One correction - funds converted (at any point) in 2025 would be available on January 1, 2030, not 2031 (perhaps in reality January 2 due to closures).  It's based upon calendar years, and it doesn't need to be more than 5 years.  Technically, you could access some of the money after 4 years + a couple of days, if you converted on December 31, 2025.  I wouldn't actually recommend cutting it that close, but you get the point.

cangelosibrown

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #10 on: December 27, 2019, 09:40:45 AM »
Yes correct $120,000 will be worth 3 years with 40,000 as expense per yer. I will still have to think about for next  2 years, until the roth conversion ladder kicks in.


I am a little surprised that why this has not been more talked about ? Is there an article to address this issue ?

The reason this isn't talked about more is that the math is pretty difficult to retire this early without having some savings outside of retirement accounts. Unless you're saying you have quite a bit of money in 401k/IRA's right now, and absolutely no savings in brokerage accounts, it's going to be difficult to retire in 10 years unless you either 1. plan on having other sources of income post retirement or 2. save more money than you're allowed to put in 401k/IRAs. Both of which make your question moot.

Using an extremely generous 7% growth rate (and that's on top of inflation), I estimate you'd have 700k in your retirement accounts in 10 years if you max out every year for 10. That's quite a bit shy of providing 40k of income, at least according to conventional wisdom.

The other important distinction to make is that these are the only "penalty free" ways of accessing the money. The penalty is only 10%, which I believe MadFientist shows in a post is still better than having not put the retirement accounts.

shortduck

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #11 on: December 27, 2019, 09:50:36 AM »
One correction - funds converted (at any point) in 2025 would be available on January 1, 2030, not 2031 (perhaps in reality January 2 due to closures).  It's based upon calendar years, and it doesn't need to be more than 5 years.  Technically, you could access some of the money after 4 years + a couple of days, if you converted on December 31, 2025.  I wouldn't actually recommend cutting it that close, but you get the point.

Thanks good point.

stepingum

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Re: Roth vonversion question: want to be FI in 10 years
« Reply #12 on: December 30, 2019, 08:25:31 PM »
We're in a similar boat as you, but I get the feeling it isn't all that common. We will have minimal $$ in taxable because we don't want the FAFSA hit so our plan is to get about half in ROTH contributions and then strategically set up a SEPP to meet the rest of our spending. We will only need $12-15k per year from that, so it doesn't seem all that onerous to commit to until 59.5. We will be 50 when we start that, so less than 10 years of required distributions. Depending on how old you'll be in 2030, I think it's certainly worth considering!

 

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