The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: IowaStache on October 30, 2014, 09:59:07 AM
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http://www.madfientist.com/traditional-ira-vs-roth-ira/
http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
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You pretty much nailed it down. The "Principal" in the roth does not look back to the 401k. It is the amount that was placed/converted into the Roth. Look at it like this. If a regular 401k, you did not pay taxes on the contribution or on the returns; there is no reason that they would be treated differently when converting to Roth.
The stuff you can't freely withdraw consists of the returns within the Roth after conversion.
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1) No
2) Yes
My understanding is that you should have enough in your taxable accounts to cover 5 years of expenses. The first year you retire, you convert what you expect to be your expenses 5 years later from traditional to Roth. You pay taxes on that amount, but assuming your needs are not very high, your tax rate won't be high either. Same thing 2nd year, convert and pay taxes, 3rd year, 4th year, 5th year, then on the sixth year you take out the contributions from the first year, and live off those, now tax free (since you paid the taxes when you converted). Depending on how early you RE, you'd keep going, so you may keep up the conversions and paying taxes on those until you are less than 5 years from 59.5.
I could be wrong, but that's what I got out of it.
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The strategy as I understand it is to convert just enough to keep your taxes low (below whatever bracket you set as your No Go space). This may mean you have money in taxable accounts, contribute to a Roth IRA as you work, or work part time to get you through the ~5 years it takes to convert enough to get you through 5 years of retirement.
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1) No. The amount you convert (and pay tax on) becomes your principal that you can draw before 60.
2) Whatever you convert to Roth will go on your tax return as income. Do it right and you won't pay much tax.
There are conflicting goals hidden within this strategy.
Goal #1-gain access to a lot of money before 60.
Goal #2-deplete your T.IRA before 70 when RMDs begin.
Goal #3-don't pay a lot of tax.
If you have other sources of cash to live on like taxable investments, rental income, roth contributions or something else goal 1 becomes less important which is great for goal 3. This is sort of what the madfientists roth ira horserace post was all about. For tax purposes, it's best to transfer during a dip/recession. You get to move a big chunk in and pay a low tax relative to the potential value. But doing this hurts goal #1 because you want high principal to be able to draw down.
For now my plan is to ignore goal #1 completely, and deplete the T.IRA by 70 and pay the lowest tax amount possible.
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so... This stuff is confusing. Compounded by the fact that everyone is in a different situation (different income, retirement plans, live in different states, etc...) Is there some kind of software that allows you to at least understand what the best scenario is for your own family? I have started messing with MINT, but not sure if it could do that.
I know we all could spend days reading through all this stuff and keeping up with changes, and to a certain extent you need to educate yourself. But it is really complex and with all of life's distractions; it is scary that a bad decision can set you back.
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so... This stuff is confusing. Compounded by the fact that everyone is in a different situation (different income, retirement plans, live in different states, etc...) Is there some kind of software that allows you to at least understand what the best scenario is for your own family? I have started messing with MINT, but not sure if it could do that.
I know we all could spend days reading through all this stuff and keeping up with changes, and to a certain extent you need to educate yourself. But it is really complex and with all of life's distractions; it is scary that a bad decision can set you back.
I'm not aware of one that would emcompass all these complexities. You can try cfiresim (and I've only messed with it a bit, so I'm not intimately familiar) but I don't think it gets down to this level.
What are your goals, your age, your current holdings? If you don't care to share with the entire world you can send me a PM and I will help you work up a rough strategy.