The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: SuperSecretName on March 01, 2017, 08:55:52 PM
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regarding roth conversion ladder:
wouldn't you really only need 4 years, since it's based on tax years?
year 1: convert Dec
year 2-4: doesn't matter
year 5: withdraw Jan
??
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I think so, but even with an A in Calculus I have trouble with this.
I am confident that you are correct in that converting in December of year 1 and withdrawing in January of year 5 meets IRS rules for the 5 year period.
The way I figure how much is needed:
Suppose you spend $40K per year and start with $160K in your pipeline.
Convert the $40K in December of year 1 that you want to spend in January of year 5.
One month later, withdraw $40K in January of year 2. Pipeline down to $120K.
One year later, withdraw $40K in January of year 3. Pipeline down to $80K.
One year later, withdraw $40K in January of year 4. Pipeline down to $40K.
One year later, withdraw the $40K in January of year 5. This is the $40K you converted in December of year 1.
Given the above analysis, it looks like you could even be as low as 3x annual expenses for the majority of the year (January through December) and only be up to 4x annual expenses for a few weeks around the end of the year (December through January). But that somehow doesn't seem right. Oh well, I'm sure someone will be along to correct me if I am mistaken.
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Cool if correct (this isn't an area I've read much about).
One possible gotcha: If you RE in November or December, you'd owe much higher marginal tax rates on the first December conversion (since it'd get taxed along with almost a full year of regular income so you'd have more income in higher tax brackets) than if you waited until January.
If you RE in January or February, then you're still going to be waiting almost five years after your retirement date before you can pull money out of your retirement accounts without penalty using a Roth conversion pipeline whether you do your first conversion right away (January) or wait until you've been retired for almost a year (December).
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4 years and a day, yes.
Funds converted to your Roth IRA on December 31st of 2017 will be eligible for tax-free and penalty-free withdrawal on January 1 of 2012, four years and one day later, because the period encompasses five calendar years.