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Learning, Sharing, and Teaching => Investor Alley => Topic started by: forummm on June 17, 2015, 06:14:13 PM

Title: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on June 17, 2015, 06:14:13 PM
Did you know that you can withdraw funds from your Roth IRA, traditional IRA, 401k, Roth 401k, TSP, Roth TSP, 403b, or 457b* before age 59.5 and without a penalty? It's true!

The secret is using the Roth IRA Conversion Pipeline ("Roth Pipeline") and/or Substantially Equal Periodic Payments (SEPP--also called 72t).

For the Roth Pipeline, the simple steps are
1) Open a Roth IRA
2) Figure out how much you want to withdraw from your 401k/tIRA 5 years from now
3) Move that amount from your 401k/tIRA to your Roth IRA (called a "conversion"), paying any normal income tax due on that amount. No penalty will be due.
4) The next year, and each year thereafter, repeat steps 2 and 3
5) After your converted funds have been sitting in the Roth IRA for 5 tax years (i.e. becoming "seasoned") they can be withdrawn without paying any further tax or penalty. The 5 year rule starts counting the beginning of the tax year you convert it, so it doesn't actually have to "season" for 5 years. For example if you convert some money from your traditional IRA to your ROTH IRA on December 31, 2015 you can take that contribution out penalty free on January 1, 2020 which is only 4 years and 1 day.

For SEPP:
The rules are somewhat complicated and I won't go into too much detail here. It's much less flexible than the Roth Pipeline. You choose 1 of 3 different IRS-approved methods to define payments that are "substantially equal".  Then you are locked into using that same method to withdraw substantially equal amounts from your account(s) each year until the year you turn 59.5. If you deviate from that plan then you are retroactively assessed a 10% penalty on all payments previously withdrawn using the SEPP method. Whether you pay the penalty or not, SEPP distributions are taxable as income--even distributions from a Roth IRA.

Here are some links that explain these in more detail:
https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/
http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

[MOD NOTE:  We get this question often enough, it's worth just putting the link right here]
https://www.madfientist.com/how-to-access-retirement-funds-early/ (https://www.madfientist.com/how-to-access-retirement-funds-early/)

[END NOTE]

You can also withdraw any Roth IRA contributions (but not earnings) at any time. The same applies for Roth 401k contributions once you have separated from the employer sponsoring your Roth 401k plan.

Please feel free to comment on this thread, ask questions, or add additional clarifying information. I will keep editing this original post to improve it over time.

*Note that for 457b plans you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method. https://www.bogleheads.org/wiki/457(b)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: kpd905 on June 17, 2015, 06:22:45 PM
Roth Conversion Ladder

This method is probably the most recommended, because it allows you to completely control your tax rate.  You roll your 401k to a traditional IRA, and then convert chunks of it each year to a Roth IRA.  The amount you convert to a Roth IRA is taxed as ordinary income for the year you convert it.

Five years after converting a chunk of money, you can withdraw it from your Roth IRA at any age without penalty.  This means   you need five years of expenses to fund your life for those first five years.  You can use funds in a taxable account, a 457b account, or Roth IRA contributions.  These can all be used at any age without penalty. 

So you quit your job, roll your 401k to a traditional IRA, then estimate how much you need to convert to cover your expenses in five years.  If your expenses now are $40,000, and you assume a 3% annual inflation rate, you need to convert $46,370 to cover your expenses in five years.


Good Resource on Roth Conversions: http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on June 17, 2015, 06:41:18 PM
This method is probably the most recommended, because it allows you to completely control your tax rate.  You roll your 401k to a traditional IRA, and then convert chunks of it each year to a Roth IRA.  The amount you convert to a Roth IRA is taxed as ordinary income for the year you convert it.

The bolded part isn't actually required by law. If your 401(k) has bad funds, definitely roll it into a traditional IRA first. If it actually has better funds than you can get in an IRA (like Vanguard institutional class funds), you can leave your money to grow in the 401(k) until you're ready to move it to your Roth IRA. This is also subject to plan limits. The federal TSP, for example, doesn't allow you to do this.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: frugalnacho on June 18, 2015, 06:21:27 AM
The 5 year rule starts counting the beginning of the tax year you convert it, so it doesn't actually have to "season" for 5 years.

For example if you convert some money from your traditional IRA to your ROTH IRA on December 31, 2015 you can take that contribution out penalty free on January 1, 2020 which is only 4 years and 1 day.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: offroad on June 18, 2015, 07:00:48 AM
But you still pay the taxes at your higher rate for that tax year. Assuming your tax rate at retirement would be much less.

Say you make $100k per year. So you pay at the highest tax rate. But at retirement you downsize to $50k per year. You tax rate is cut down much less.

Just noting this.


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Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cookie on June 21, 2015, 04:36:12 PM
So If I have a TSP, I have to move it to a traditional IRA, then the roth IRA? Or are there more rules?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on June 21, 2015, 04:59:37 PM
So If I have a TSP, I have to move it to a traditional IRA, then the roth IRA? Or are there more rules?

For traditional pre-tax TSP contributions, you probably want to move the whole thing to a traditional IRA because I think you can only make one partial distribution from your TSP (the 2nd one has to clean it out, IIRC). Then you convert however much money from the IRA to the Roth each year (paying normal income tax on it). Once it's sat in the Roth long enough you can pull it out without penalty.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: TomTX on June 21, 2015, 07:07:29 PM
So If I have a TSP, I have to move it to a traditional IRA, then the roth IRA? Or are there more rules?

For traditional pre-tax TSP contributions, you probably want to move the whole thing to a traditional IRA because I think you can only make one partial distribution from your TSP (the 2nd one has to clean it out, IIRC). Then you convert however much money from the IRA to the Roth each year (paying normal income tax on it). Once it's sat in the Roth long enough you can pull it out without penalty.

Whenever the TSP folks are done getting "guidance" from the IRS (they're 2.5 years in limbo so far) - you should be able to do a Roth conversion internal to the TSP.

http://federalretirement.net/tsproth.htm#CONVERTING_YOUR_TSP_TO_A_ROTH_IRA
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: stlbrah on June 22, 2015, 04:48:42 PM
What about money that started out as roth IRA (not put in with the "pipeline").

Can you withdraw that after 5 years as well?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Jeremy E. on June 22, 2015, 04:55:58 PM
Here is another link as well
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Also, stlbrah, you can withdraw contributions that were put directly into the Roth IRA without waiting 5 years(only the initial contribution, none of the returns), you only have to wait 5 years after converting from IRA or 401k to Roth

Lastly, the 10% penalty is not the worst thing that can happen, sometimes it makes sense to take the penalty. Lots of people have unique situations and they need to come up with the plan that suits them best.

It's possible a combination might fit someone best, if someone doesn't have enough money to make it all 5 years with taxable accounts, they could use the SEPP method while also starting to convert money for the Roth IRA Escape Hatch Loophole(or whatever you wanna call it). For instance, if someone was 35 years old today, with 500k in a retirement account as well as 50k in a taxable account, they could take 72t distributions to get up to 20k/year, I would choose the RMD method, which would instead start at closer to 10k/year probably, while also converting 10k/year to Roth, and using 10k from a taxable account. If your RMD's start to fluctuate, fluxuate the amount you convert to Roth appropriately. If you end up not having enough some year, and can't get the money any other way, then take money out and just incur the 10% penalty. This combination method isn't the best for everyone, but it's a way to help if you don't have enough in taxable accounts for the first 5 years.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: sirdoug007 on June 22, 2015, 05:08:37 PM
Here is a good calculator to see what you can access using Substantially Equal Periodic Payments.  Just be sure to note that the methods (other than the RMD method) require you to take a distribution of the exact same amount (to the penny!) for the life of the SEPP which is until you reach 59.5!  No adjustments for inflation or because the stock market has moved upward/downward.  This feature makes these methods very restrictive.

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

Be sure to check the latest 120% of the Federal Annual Midterm Rate at this website: http://apps.irs.gov/app/picklist/list/federalRates.html
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cressida on June 22, 2015, 05:14:41 PM
What about money that started out as roth IRA (not put in with the "pipeline").

Can you withdraw that after 5 years as well?

If you contributed money directly to your Roth, you can withdraw it at any time (always with the caveat that you can withdraw your contributions only, not the market gains on those contributions). The 5-year rule applies to conversions.

I'm pretty sure this is correct, but there might be exceptions. Seems like there always are.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on June 22, 2015, 06:15:46 PM
What about money that started out as roth IRA (not put in with the "pipeline").

Can you withdraw that after 5 years as well?

As others have said, the contributions can be removed at anytime (even later the same day you contribute them). But to withdraw the earnings you can either use SEPP, wait until 59.5, or pay the penalty.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Mr. McGibblets on June 23, 2015, 02:29:01 PM
I have a question regarding income limits. One cannot contribute to a traditional IRA if their income reaches a certain limit, correct? So would this conversion strategy of rolling over 401(k) to traditional IRA violate that?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on June 23, 2015, 02:31:14 PM
I have a question regarding income limits. One cannot contribute to a traditional IRA if their income reaches a certain limit, correct? So would this conversion strategy of rolling over 401(k) to traditional IRA violate that?

Rolling over a 401k to a traditional IRA is not restricted by income, and is a non-taxable event. You already made the contribution legally to the 401k. You're just moving it to another tax-advantaged account.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on June 23, 2015, 02:48:44 PM
I have a question regarding income limits. One cannot contribute to a traditional IRA if their income reaches a certain limit, correct? So would this conversion strategy of rolling over 401(k) to traditional IRA violate that?

In addition to what forummm already said (that there are no income limits restricting transfers between different retirement accounts), there is also no income limit for contributing to a traditional IRA. There is an income limit for deducting traditional IRA contributions from your taxable income, but the contributions themselves can be made regardless of income. These non-deductible contributions are commonly made as part of the backdoor Roth IRA tactic.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: CmFtns on June 24, 2015, 10:30:42 AM
I'm glad this got pinned. Easy to find for other confused souls like myself.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Mr. McGibblets on June 26, 2015, 10:51:04 AM
Pardon my ignorance on the topic - I am generally well-versed in personal finance but can't seem to wrap my head around this concept. I am going to selfishly use my use case as an example. If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on June 26, 2015, 12:14:34 PM
Pardon my ignorance on the topic - I am generally well-versed in personal finance but can't seem to wrap my head around this concept. I am going to selfishly use my use case as an example. If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?

Yes, if you make very little income now, and pay little or no tax now, contributing to a Roth IRA can be a very good idea. All the gains will be untaxed! I did this myself when my income was lower. I still contribute to a Roth now though because I make too much to get a traditional IRA deduction. I would prefer to get the deduction if they raised the income limit.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on June 26, 2015, 12:51:28 PM
If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?
Especially if you start with Roths and already have enough in them to get you to age 59.5, your age and/or time to retirement is irrelevant when choosing traditional vs. Roth.  What is relevant is your current marginal bracket vs. your projected marginal bracket in retirement.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: thedayisbrave on June 27, 2015, 11:59:05 AM
THANK YOU for pinning this!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Mr. McGibblets on June 29, 2015, 08:38:31 AM
Pardon my ignorance on the topic - I am generally well-versed in personal finance but can't seem to wrap my head around this concept. I am going to selfishly use my use case as an example. If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?

Yes, if you make very little income now, and pay little or no tax now, contributing to a Roth IRA can be a very good idea. All the gains will be untaxed! I did this myself when my income was lower. I still contribute to a Roth now though because I make too much to get a traditional IRA deduction. I would prefer to get the deduction if they raised the income limit.

How about if you're young and your income is relatively high (~100k)?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on June 29, 2015, 09:22:16 AM
Pardon my ignorance on the topic - I am generally well-versed in personal finance but can't seem to wrap my head around this concept. I am going to selfishly use my use case as an example. If I am young and my income is such that contributing to a Traditional IRA results in little tax incentives, would I still contribute to a Roth IRA while I am young in order to realize untaxed gains? Then, as I approach retirement age (7 or so years out), start contributing to a traditional in anticipation of rolling it over to a 401(k)?

Yes, if you make very little income now, and pay little or no tax now, contributing to a Roth IRA can be a very good idea. All the gains will be untaxed! I did this myself when my income was lower. I still contribute to a Roth now though because I make too much to get a traditional IRA deduction. I would prefer to get the deduction if they raised the income limit.

How about if you're young and your income is relatively high (~100k)?

Depends. Your income may be too high to qualify for a traditional IRA deduction. If so, then it's better just to contribute to a Roth.

If you can take the traditional IRA deduction, then you have to judge whether your tax rate during retirement will be lower than it is now. If it will be lower (which it will for most high earners), then you'd probably benefit from contributing to a traditional IRA.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: johnny847 on June 30, 2015, 08:45:50 AM
Finally a sticky on the topic. This question comes up way to often on the forum
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Mr. McGibblets on June 30, 2015, 02:05:14 PM
Found a useful link:
http://www.investopedia.com/ask/answers/081414/can-i-deduct-my-individual-retirement-account-ira-contribution-my-tax-return.asp
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: turketron on June 30, 2015, 04:35:30 PM
Possibly a dumb question about Roth IRA ladders, but I've researched them a bit and haven't seen it discussed anywhere before... Are you required to make a conversion every year in order to keep withdrawing yearly after 5 years?  E.g. instead of converting, say, $10k each year and then withdrawing that $10k each year after 5 years, is there a reason why you can't convert $100k, wait 5 years, and then withdraw $10k yearly over the next 10 years?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on June 30, 2015, 04:37:07 PM
Possibly a dumb question about Roth IRA ladders, but I've researched them a bit and haven't seen it discussed anywhere before... Are you required to make a conversion every year in order to keep withdrawing yearly after 5 years?  E.g. instead of converting, say, $10k each year and then withdrawing that $10k each year after 5 years, is there a reason why you can't convert $100k, wait 5 years, and then withdraw $10k yearly over the next 10 years?

You certainly could do that.

Due, however, to the progressive tax structure you would likely pay more tax on a single $100K conversion than on $10K for each of 10 years.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: turketron on June 30, 2015, 04:41:49 PM
You certainly could do that.

Due, however, to the progressive tax structure you would likely pay more tax on a single $100K conversion than on $10K for each of 10 years.

Oh, right, because you're taxed at the time of conversion, duh. Like I said, I'm sure I was missing something obvious. Thanks for the quick reply!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on July 02, 2015, 10:54:04 AM
Conversation on the FAFSA and Roth Pipeline:
http://forum.mrmoneymustache.com/ask-a-mustachian/fafsa-and-roth-pipeline-income-alternatives/
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: fattest_foot on July 13, 2015, 03:31:30 PM
I'm curious if anyone has done the math to figure out when it makes sense to do Roth versus Traditional to get through the early stages of FIRE?

My wife and I are at the point now where regardless of which one we choose, we'll be in the 25% tax bracket for that income (~$87k after 401k reduction). We had started Roth's when I was in the military because I had so much tax free income due to deployments and so I became somewhat partial to them. After my cursory research on the FI blogs/forums, it sounded like the Roth Conversion Ladder was an amazing tool to use -- after the first 5 years of FIRE.

But what about those first 5 years of FIRE? My original intention was to contribute the max ($11k) per year to Roth's, and then in around 10 years when we're ready to FIRE we'd have somewhere around $150k in Roth basis. We could then pull this money out without worry. Unfortunately, $150k wouldn't quite be enough to get us through the first ladder conversion.

So now the question becomes; do I lower my AGI by $11k now (and still hit the 25% bracket) by contributing to the traditional, use Roth's for the bulk of our first few years of FIRE and then pay penalties, or save cash in the last 2-3 years before FIRE (which will likely also be in the 25% bracket)?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MoonShadow on July 13, 2015, 04:40:56 PM
I'm curious if anyone has done the math to figure out when it makes sense to do Roth versus Traditional to get through the early stages of FIRE?


Too many variables to guess.

Quote

My wife and I are at the point now where regardless of which one we choose, we'll be in the 25% tax bracket for that income (~$87k after 401k reduction). We had started Roth's when I was in the military because I had so much tax free income due to deployments and so I became somewhat partial to them. After my cursory research on the FI blogs/forums, it sounded like the Roth Conversion Ladder was an amazing tool to use -- after the first 5 years of FIRE.


The AGI tax bracket isn't the only consideration, but generally, it's a better idea to sock it all away into a 401k and take the deduction if you are deep into the 25% bracket.  If you retire after 55 from the company that manages the 401k, you can take distributions from it without the 10% penalty.  In which case you may, or may not, benefit from the Roth conversion ladder between 55 & 60.  But another consideration is required minimum distributions, it's usually advantageous to depend upon the 401k and leave the roth for over 70.


But what about those first 5 years of FIRE? My original intention was to contribute the max ($11k) per year to Roth's, and then in around 10 years when we're ready to FIRE we'd have somewhere around $150k in Roth basis. We could then pull this money out without worry. Unfortunately, $150k wouldn't quite be enough to get us through the first ladder conversion.

So now the question becomes; do I lower my AGI by $11k now (and still hit the 25% bracket) by contributing to the traditional, use Roth's for the bulk of our first few years of FIRE and then pay penalties, or save cash in the last 2-3 years before FIRE (which will likely also be in the 25% bracket)?
[/quote]

Still likely better off taking the deduction now, but you aren't doing anything 'wrong' if you choose otherwise.  You can also split the contribution limit between a regular IRA & roth.  But if you have a 401k, or better, an HSA; put as much as they will let you into that and whatever extra you might have into a roth and you will have both taxable & non-taxable options available that will allow you to shoot or that elusive 0% effective tax bracket after FIRE.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: fattest_foot on July 13, 2015, 04:56:57 PM
Still likely better off taking the deduction now, but you aren't doing anything 'wrong' if you choose otherwise.  You can also split the contribution limit between a regular IRA & roth.  But if you have a 401k, or better, an HSA; put as much as they will let you into that and whatever extra you might have into a roth and you will have both taxable & non-taxable options available that will allow you to shoot or that elusive 0% effective tax bracket after FIRE.

I think maybe my question wasn't quite clear enough with my own personal story.

Are your only choices to start your Roth conversion ladder while still employed (thus paying at whatever tax rate you are while employed), use taxable accounts, or draw on Roth basis?

For my own situation, I was asking post-401k maxing. We will still be in the 25% bracket after that, and worse (well, worse in context of making too much), still in the 25% bracket even after $11k in traditional IRA lowering AGI. In our case, I was considering a Roth to draw the basis (however, contributions would be at 25%), taxable accounts or cash prior to FIRE (also at 25%), or eating the 10% early withdrawal penalty plus whatever taxes would be (potentially lower than 25%?). After 5 years, we'd be able to use the laddered money.

It sounds like you're saying the difference between traditional and Roth is pretty miniscule and won't matter?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MoonShadow on July 13, 2015, 05:08:29 PM
Still likely better off taking the deduction now, but you aren't doing anything 'wrong' if you choose otherwise.  You can also split the contribution limit between a regular IRA & roth.  But if you have a 401k, or better, an HSA; put as much as they will let you into that and whatever extra you might have into a roth and you will have both taxable & non-taxable options available that will allow you to shoot or that elusive 0% effective tax bracket after FIRE.

I think maybe my question wasn't quite clear enough with my own personal story.

Are your only choices to start your Roth conversion ladder while still employed (thus paying at whatever tax rate you are while employed), use taxable accounts, or draw on Roth basis?


No, there are other useful tricks, but they depend upon doing things right.

Quote

For my own situation, I was asking post-401k maxing. We will still be in the 25% bracket after that, and worse (well, worse in context of making too much), still in the 25% bracket even after $11k in traditional IRA lowering AGI. In our case, I was considering a Roth to draw the basis (however, contributions would be at 25%), taxable accounts or cash prior to FIRE (also at 25%), or eating the 10% early withdrawal penalty plus whatever taxes would be (potentially lower than 25%?). After 5 years, we'd be able to use the laddered money.

It sounds like you're saying the difference between traditional and Roth is pretty miniscule and won't matter?

No, that is not what I'm saying.  I'm saying that the tax brackets are set up so that your 'last' income is taxed highest, and in the 25% tax bracket, you are almost certainly better off with the current deduction.  Also, while you may believe that you will still be in the 25% tax bracket after retirement, this will almost certainly not be the case after a few years.  So if the math looks like an even case between a traditional or Roth IRA, it's probably still favored to the traditional in practice.  But the 25% tax bracket is about where things are questionable anyway.

Still, there are too many factors to consider.  Myself, as an example, made $129K gross last year, with an AGI of $50K, and have been exempt at federal level for the past 3 years.  You really can set up your life to pay zero legally.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on July 13, 2015, 07:22:28 PM
I'm curious if anyone has done the math to figure out when it makes sense to do Roth versus Traditional to get through the early stages of FIRE?

My wife and I are at the point now where regardless of which one we choose, we'll be in the 25% tax bracket for that income (~$87k after 401k reduction).
...
So now the question becomes; do I lower my AGI by $11k now (and still hit the 25% bracket) by contributing to the traditional, use Roth's for the bulk of our first few years of FIRE and then pay penalties, or save cash in the last 2-3 years before FIRE (which will likely also be in the 25% bracket)?

Missing one big puzzle piece: what will your marginal bracket be in the 5 year window?  E.g., if it will be 10% then an extra 10% only gets to 20%, and that is less than your current 25%.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on July 21, 2015, 05:54:03 PM
Seems the Mega Backdoor Roth (http://www.bogleheads.org/forum/viewtopic.php?f=1&t=137366) deserves a mention here as well.

See the link (and links therein) for more details and qualifiers, but if you have access to a 401k plan that allows
  - after-tax contributions above and beyond the normal employee contribution limit, and
  - non-hardship in-service withdrawals of after-tax contributions, then
this could be a great way to fund a large Roth IRA account from which to withdraw funds without penalty before age 59.5.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on July 21, 2015, 07:32:21 PM
Are your only choices to start your Roth conversion ladder while still employed (thus paying at whatever tax rate you are while employed), use taxable accounts, or draw on Roth basis?

Or use cash you've stashed away, or earn some income, or have rental properties, or be lucky enough to have a pension, or spend just a little bit less, or sell your house, or...

Lots of options. I wouldn't stop maxing out the 401ks until you are sure you need more cash, like maybe for the last few months of work.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on July 21, 2015, 11:20:58 PM
Lots of options. I wouldn't stop maxing out the 401ks until you are sure you need more cash, like maybe for the last few months of work.

Even then, if your marginal tax rate during your last year of work is at least 10% higher than your expected marginal rate during early retirement, contributing to the 401(k) and paying an early withdrawal penalty on that money the next year will be better than skipping the 401(k) and holding money in a taxable account.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MoonShadow on July 22, 2015, 11:17:58 PM
Lots of options. I wouldn't stop maxing out the 401ks until you are sure you need more cash, like maybe for the last few months of work.

Even then, if your marginal tax rate during your last year of work is at least 10% higher than your expected marginal rate during early retirement, contributing to the 401(k) and paying an early withdrawal penalty on that money the next year will be better than skipping the 401(k) and holding money in a taxable account.

Well, that's a perspective I've never considered. 
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: daveydinner on July 28, 2015, 05:39:36 PM
I save a lot to my HSA. Can that money be converted to a IRA then Roth pipeline?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on July 28, 2015, 05:46:33 PM
I save a lot to my HSA. Can that money be converted to a IRA then Roth pipeline?

No, there's no provision for moving money from an HSA to an IRA. However if you accumulated a large HSA balance because you paid your medical bills out of taxable funds, you may withdraw some money tax-free from your HSA in a future year up to the total of your medical bills.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MoonShadow on July 28, 2015, 06:19:02 PM
I save a lot to my HSA. Can that money be converted to a IRA then Roth pipeline?

No, there's no provision for moving money from an HSA to an IRA. However if you accumulated a large HSA balance because you paid your medical bills out of taxable funds, you may withdraw some money tax-free from your HSA in a future year up to the total of your medical bills.

Also, if your medical bills (after medical insurance benefits, if any) exceed 10% of your AGI, you can withdraw the amount above 10%from an IRA without the 10% penalty.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Travis on September 05, 2015, 03:05:40 PM
Are the rules for converting a TSP account still waiting on further government rules?  I have a TSP, a Roth IRA, and a taxable account and I'm trying to figure out how to access my TSP funds as part of FIRE.  I'm 35 now and I expect to fire at 45 (assuming I qualify for pension).  Is there a particular order in which I should be pulling these funds?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on September 05, 2015, 07:01:31 PM
Are the rules for converting a TSP account still waiting on further government rules?  I have a TSP, a Roth IRA, and a taxable account and I'm trying to figure out how to access my TSP funds as part of FIRE.  I'm 35 now and I expect to fire at 45 (assuming I qualify for pension).  Is there a particular order in which I should be pulling these funds?
You can only take 1 or 2 distributions from your TSP. The 2nd one has to be a full distribution. So what you should do is roll it over into an IRA. Pre-tax TSP funds get rolled over into a traditional IRA and post-tax (i.e. Roth) TSP funds get rolled over into a Roth IRA. Then you can follow the instructions here to access your funds in the IRA. Another possible option for the TSP holdings is to purchase an annuity, but most people here would just handle their own investing.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Travis on September 10, 2015, 07:04:38 PM
I posted this same question to Nords today.  Apparently he and his wife are in the middle of doing precisely this and he wrote a blog post with lots of details. It's starting to make more sense.

http://the-military-guide.com/2015/08/06/how-and-why-to-transfer-your-tsp-to-an-ira/ (http://the-military-guide.com/2015/08/06/how-and-why-to-transfer-your-tsp-to-an-ira/)

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MoonShadow on September 10, 2015, 07:18:01 PM

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?

It doesn't matter.  The IRS considers all of the Roth IRA accounts in your name (SSN?) to be one collective mass of funds for tax consideration.  So it doesn't matter how many you have, or which one you actually draw from when the time comes; the funds will be considered in the following order upon withdrawal...

First, all of the normal after-tax contributions.

Then any rolled over funds from other types of accounts; first in first out. 

Finally, any gains that have accumulated.

So you can deposit a rollover into one Roth IRA, and so long as it's aged at least five years from that particular deposit, withdraw that rollover amount from a different Roth IRA.  The IRS keeps track of it via your SSN and the required reporting under KYC laws, but they expect YOU to keep track of how much you have withdrawn, and be able to justify any withdrawals.  So while you can do what I said above, you may have to show your work and explain to a government agent that your withdrawal from account A is qualified because you rolled over into account B 5+ years ago.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Eric on September 11, 2015, 12:09:58 PM

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?

It doesn't matter.  The IRS considers all of the Roth IRA accounts in your name (SSN?) to be one collective mass of funds for tax consideration.  So it doesn't matter how many you have, or which one you actually draw from when the time comes; the funds will be considered in the following order upon withdrawal...

First, all of the normal after-tax contributions.

Then any rolled over funds from other types of accounts; first in first out. 

Finally, any gains that have accumulated.

So you can deposit a rollover into one Roth IRA, and so long as it's aged at least five years from that particular deposit, withdraw that rollover amount from a different Roth IRA.  The IRS keeps track of it via your SSN and the required reporting under KYC laws, but they expect YOU to keep track of how much you have withdrawn, and be able to justify any withdrawals.  So while you can do what I said above, you may have to show your work and explain to a government agent that your withdrawal from account A is qualified because you rolled over into account B 5+ years ago.

And to add to this, the way you and the IRS keep track of this is by using form 8606 which you'll file with your taxes every year.

http://www.irs.gov/pub/irs-prior/f8606--2014.pdf

(specifically Part III for withdrawals from the Roth)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on September 11, 2015, 01:31:16 PM
I posted this same question to Nords today.  Apparently he and his wife are in the middle of doing precisely this and he wrote a blog post with lots of details. It's starting to make more sense.

http://the-military-guide.com/2015/08/06/how-and-why-to-transfer-your-tsp-to-an-ira/ (http://the-military-guide.com/2015/08/06/how-and-why-to-transfer-your-tsp-to-an-ira/)

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?

Quote
A Fidelity e-mail alerted my spouse on 9 June when her TSP check was deposited in her rollover IRA. The next day we logged in and purchased shares in the iShares S&P Small Cap 600 Value ETF (ticker IJS). That’s roughly equivalent to the TSP’s “S” fund, but it carries a 0.25% expense ratio instead of the “S” fund’s 0.029% expense ratio.

Hopefully Nords is aware that this isn't really that equivalent to the S fund. The S fund is nearly identical to VEXAX though, which has a 0.1% ER.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Nords on September 12, 2015, 01:14:13 PM
Hopefully Nords is aware that this isn't really that equivalent to the S fund. The S fund is nearly identical to VEXAX though, which has a 0.1% ER.
That's why I used the phrase "roughly equivalent".  They're both small-cap funds, and we have more IJS shares in our taxable accounts.  That makes it easier to rebalance once in a while.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on September 12, 2015, 01:16:57 PM
Hopefully Nords is aware that this isn't really that equivalent to the S fund. The S fund is nearly identical to VEXAX though, which has a 0.1% ER.
That's why I used the phrase "roughly equivalent".  They're both small-cap funds, and we have more IJS shares in our taxable accounts.  That makes it easier to rebalance once in a while.
S is actually a mid-cap fund too (and slightly more large/mid than small). It's essentially VTSAX minus the S&P500--i.e. VEXAX.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: googily on September 16, 2015, 03:28:43 PM
We are trying to get the answer directly from Megacorp, but they are being slippery, so I thought I'd ask here.

If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?

Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: johnny847 on September 16, 2015, 03:55:00 PM
We are trying to get the answer directly from Megacorp, but they are being slippery, so I thought I'd ask here.

If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?

I unfortunately do not know the answer to your question.

However, I would like to say that I wouldn't necessarily trust what the Megacorp tells you. At the end of the day, you're the one who's going to be on the hook for any possible tax penalties of these withdrawals. Not them. They don't have a vested interest in giving you the correct answer.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: googily on September 16, 2015, 03:57:18 PM
We are trying to get the answer directly from Megacorp, but they are being slippery, so I thought I'd ask here.

If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?

I unfortunately do not know the answer to your question.

However, I would like to say that I wouldn't necessarily trust what the Megacorp tells you. At the end of the day, you're the one who's going to be on the hook for any possible tax penalties of these withdrawals. Not them. They don't have a vested interest in giving you the correct answer.

Yes, we'll also be asking our tax adviser and perhaps also a financial adviser. But we were hoping someone here may have some experience, until we get to those people with the question.


Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on September 16, 2015, 07:10:01 PM
If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?
The answer is in your question: a contractor is not an employee.

See www.401khelpcenter.com/401k_education/Early_Dist_Options.html and https://www.expertplan.com/articles/a022001.jsp, among others, for more.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: googily on September 17, 2015, 08:15:07 AM
If you declare yourself retired in the year you turn 55 (or later), can you still take penalty-free withdrawals from your 401k if you are then hired back as a contractor by the same company? Or does it have to be a full and complete severing of the employer/employee relationship?
The answer is in your question: a contractor is not an employee.

See www.401khelpcenter.com/401k_education/Early_Dist_Options.html and https://www.expertplan.com/articles/a022001.jsp, among others, for more.

Thanks, though my sense in doing some reading is that the employee/contractor line is not so cut-and-dry, that it's not good enough to just say "that person is a contractor". I did find this:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on September 17, 2015, 09:28:01 AM
Thanks, though my sense in doing some reading is that the employee/contractor line is not so cut-and-dry, that it's not good enough to just say "that person is a contractor".
Actually it is, unless someone (that person, the IRS, etc.) challenges the statement and wins in court.  There is a large financial incentive for Megacorp to keep a distinction between its employees and contractors, and Megacorp likely has plenty of lawyers who have developed policies accordingly.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on September 17, 2015, 09:45:34 AM
My understanding is that if they're reporting your income on a 1099, you're paying self-employment tax on this money, etc., the presumption is that you're a not an employee of that company. If you wish to rebut this presumption (as some Uber drivers are doing), you can file a lawsuit to that effect, showing that you meet the definition of an employee in certain ways and should therefore be entitled to the protection of various laws that apply to the employer/employee relationship. If you and the company are both happy enough considering you a contractor, I don't think the IRS has any tendency to try and prove you aren't.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: googily on September 17, 2015, 09:52:25 AM
My understanding is that if they're reporting your income on a 1099, you're paying self-employment tax on this money, etc., the presumption is that you're a not an employee of that company. If you wish to rebut this presumption (as some Uber drivers are doing), you can file a lawsuit to that effect, showing that you meet the definition of an employee in certain ways and should therefore be entitled to the protection of various laws that apply to the employer/employee relationship. If you and the company are both happy enough considering you a contractor, I don't think the IRS has any tendency to try and prove you aren't.

Thanks for this. Onward!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cathy on September 17, 2015, 10:02:13 AM
...If you wish to rebut this presumption (as some Uber drivers are doing), you can file a lawsuit to that effect, showing that you meet the definition of an employee in certain ways and should therefore be entitled to the protection of various laws that apply to the employer/employee relationship....

The Uber lawsuit discussed in the popular news media was a proceeding before a California state tribunal. It did not involve the IRS. The IRS (or more accurately, the United States) isn't bound by any state determinations of employee status unless the United States had the opportunity to litigate the issue in the state proceedings, among other requirements. See, e.g., HI-Q Personnel, Inc. v. Commissioner, 132 TC No 13 (1999), slip op (http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=8510) at 16 ("a party may invoke [collateral estoppel] only against parties to the first case or those in privity with them").


My understanding is that if they're reporting your income on a 1099, you're paying self-employment tax on this money, etc., the presumption is that you're a not an employee of that company...

I'm not aware of any authority suggesting that the fact that a taxpayer has taken a particular position on a tax form creates any special presumption against the Unites States when it seeks to take a position inconsistent with that tax form. In fact, it's usually the opposite. The burden of proof is usually on the taxpayer, subject to a few exceptions.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on September 17, 2015, 11:32:40 AM
The Uber lawsuit discussed in the popular news media was a proceeding before a California state tribunal.

There's also a class-action lawsuit in federal court (http://www.wsj.com/articles/uber-appeals-class-action-ruling-for-drivers-suit-1442362190) over this issue that was recently granted class certification by the trial judge.


I'm not aware of any authority suggesting that the fact that a taxpayer has taken a particular position on a tax form creates any special presumption against the Unites States when it seeks to take a position inconsistent with that tax form. In fact, it's usually the opposite. The burden of proof is usually on the taxpayer, subject to a few exceptions.

I'm sure you're technically correct, as always. If you were hauled in front of a tax court and accused of representing yourself as a contractor when there's some reason to believe you might actually be an employee, you would have to present evidence that you're actually a contractor.

However in the real world the IRS would have little reason to initiate such proceedings. If the company files 1099s and you file the relevant self-employment tax returns, why would they bother with trying to challenge that? Everyone is acting in good faith, the numbers on the tax returns pass the computer checks, everyone's happy.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cathy on September 17, 2015, 12:12:45 PM
There's also a class-action lawsuit in federal court (http://www.wsj.com/articles/uber-appeals-class-action-ruling-for-drivers-suit-1442362190) over this issue that was recently granted class certification by the trial judge.

From the news article, it sounds like the United States may not be involved in this proceeding either. That said, the substantive point I was making there was that collateral rulings outside of the tax context are not always usable by you against the IRS in tax proceedings.


I'm sure you're technically correct, as always. If you were hauled in front of a tax court and accused of representing yourself as a contractor when there's some reason to believe you might actually be an employee, you would have to present evidence that you're actually a contractor.

However in the real world the IRS would have little reason to initiate such proceedings. If the company files 1099s and you file the relevant self-employment tax returns, why would they bother with trying to challenge that? Everyone is acting in good faith, the numbers on the tax returns pass the computer checks, everyone's happy.

I'm sorry if it came across that I was engaging in pedantry. However, I was making a real, significant point. I just didn't really spell it out. Let me spell it out now.

The problem I have with the above quoted message is that it is basically inviting forum members to engage in fraud. But let's back up a bit to see why that is.

Back in reply #49 (http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/msg807652/#msg807652), user "googily" asked a question about an exception to the 10% additional tax for certain distributions from a qualified retirement plan. This is a question about a statute and as such, the answer should begin by looking at the statute. The statute tells us that the 10% additional tax does not apply to "distributions which are ... made to an employee after separation from service after attainment of age 55". 26 USC § 72(t)(2)(A)(v). User "googily" asks whether he or she can satisfy this requirement by (i) dummying up some paperwork that says that she or he has separated from service, (ii) taking some distributions without paying the 10% additional tax, and then (iii) actually continuing to work for the company presumably in the same capacity as before, supposedly as a "contractor".

The problem here is that the statute is concerned with whether "googily" actually separated from service, not with whether the employer has dummied up some paperwork that says she or he separated from service. This is a question of mixed fact and law but it is going to turn on whether "googily" substantively, really, actually separated from service. The fact that he or she has some paperwork that says she or he separated from service, when in fact he or she actually did not separate from service, is not going to be decisive.

It's bad advice to say that compliance with the statute is governed chiefly by what the paperwork says, because that is wrong. But of course, that's not exactly what you said; rather, you said you should just take your chances because the IRS probably won't audit it. First of all, I'm not sure what you are basing that on. I don't have any special access to what flags trigger an IRS audit, so I'm only speculating, but it wouldn't be hard to detect something suspicious if a company was filing Forms W-2 for an employee and then suddenly they start filing Forms 1099 instead and the employee is also taking distributions from a qualified retirement plan in apparent reliance on 26 USC § 72(t)(2)(A)(v). I don't know whether the IRS has a trigger for that in their audit algorithms, but it wouldn't be difficult to have one.

But let's suppose the IRS is actually unlikely to audit it. We still shouldn't be telling people to take advantage of that, because it's like saying "go ahead and engage in fraud -- you probably won't be caught!". What matters is whether the position has merit, not whether the person is likely to be caught. Taking dubious positions because you won't be caught is just leaving the rest of the US taxpayers to make up the slack for you. If you have a problem with US tax law, the solution is to persuade Congress to amend the statute, not to take rogue tax positions assuming that you won't be caught.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: googily on September 17, 2015, 12:25:21 PM
I'm sorry if it came across that I was engaging in pedantry. However, I was making a real, significant point. I just didn't really spell it out. Let me spell it out now.

The problem I have with the above quoted message is that it is basically inviting forum members to engage in fraud. But let's back up a bit to see why that is.

Back in reply #49 (http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/msg807652/#msg807652), user "googily" asked a question about an exception to the 10% additional tax for certain distributions from a qualified retirement plan. This is a question about a statute and as such, the answer should begin by looking at the statute. The statute tells us that the 10% additional tax does not apply to "distributions which are ... made to an employee after separation from service after attainment of age 55". 26 USC § 72(t)(2)(A)(v). User "googily" asks whether he or she can satisfy this requirement by (i) dummying up some paperwork that says that she or he has separated from service, (ii) taking some distributions without paying the 10% additional tax, and then (iii) actually continuing to work for the company presumably in the same capacity as before, supposedly as a "contractor".

The problem here is that the statute is concerned with whether "googily" actually separated from service, not with whether the employer has dummied up some paperwork that says she or he separated from service. This is a question of mixed fact and law but it is going to turn on whether "googily" substantively, really, actually separated from service. The fact that he or she has some paperwork that says she or he separated from service, when in fact he or she actually did not separate from service, is not going to be decisive.

I'm very interested in this, but let's be careful about the phrase "dummying" up. This would be (and it's not me, BTW), the end of health insurance, full-time hours, and presumably all other employee benefits. Along with quite possibly long stretches of time where no work is done for the company.

Not just suddenly calling the job a contract job and nothing else changing.

Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on September 17, 2015, 01:21:40 PM
I'm very interested in this, but let's be careful about the phrase "dummying" up. This would be (and it's not me, BTW), the end of health insurance, full-time hours, and presumably all other employee benefits. Along with quite possibly long stretches of time where no work is done for the company.

Not just suddenly calling the job a contract job and nothing else changing.

Maybe stating the obvious here, but ....... don't perform any contract work. You will be 55. You are only a few years away from drawing social security. You have a (likely large) 401K to draw down.

Why take the chance of possibly paying a 10% penalty when you could just stop?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: googily on September 17, 2015, 01:25:50 PM
I'm very interested in this, but let's be careful about the phrase "dummying" up. This would be (and it's not me, BTW), the end of health insurance, full-time hours, and presumably all other employee benefits. Along with quite possibly long stretches of time where no work is done for the company.

Not just suddenly calling the job a contract job and nothing else changing.

Maybe stating the obvious here, but ....... don't perform any contract work. You will be 55. You are only a few years away from drawing social security. You have a (likely large) 401K to draw down.

Why take the chance of possibly paying a 10% penalty when you could just stop?

This is an option down the ladder (behind just continuing to work beyond 55, or working part-time and using existing non-retirement-account money as needed until either stopping work or getting to 59 1/2). Just trying to research all options, especially given how fond this particular Megacorp is of giving contracts to people who they've also given early retirement severance packages to.

DH likes his work, he just wants a whole lot more flexibility and time off as he downshifts toward retirement, and knows that a contract deal could be one of the options offered.

Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: frugalnacho on October 01, 2015, 08:00:59 AM
I posted this same question to Nords today.  Apparently he and his wife are in the middle of doing precisely this and he wrote a blog post with lots of details. It's starting to make more sense.

http://the-military-guide.com/2015/08/06/how-and-why-to-transfer-your-tsp-to-an-ira/ (http://the-military-guide.com/2015/08/06/how-and-why-to-transfer-your-tsp-to-an-ira/)

Follow-up question regarding the Roth conversion ladder.  The amount "converted" is available for withdrawal 5 years later.  Is that in the same Roth IRA account that I've had forever? If so, how does the system distinguish funds that have always been there versus the converted funds?

That's not exactly correct.  It's 5 years from the beginning of the year you convert it, so really some where between 4 years 1 day and 5 years.

The 5 year rule starts counting the beginning of the tax year you convert it, so it doesn't actually have to "season" for 5 years.

For example if you convert some money from your traditional IRA to your ROTH IRA on December 31, 2015 you can take that contribution out penalty free on January 1, 2020 which is only 4 years and 1 day.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: thrifted on October 05, 2015, 10:30:38 AM
this is incredibly helpful.  thank you so much!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: bacchi on October 07, 2015, 12:25:14 PM
The 72t SEPP method can be changed once, if it's to the RMD.

"Rev. Rul. 2002-62 permits a one-time change from either the amortization method or the annuitization method to the required minimum distribution method."

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments#8


Also, Q: There is a detailed discussion about the Roth conversion ladder that I can't find. It actually discussed the various forms and where to put the numbers on the 1040. Does anyone have that bookmarked?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Spork on October 31, 2015, 12:27:48 PM

I have a question on the Traditional->Roth laddering post age 59.5.   Can I continue to ladder after 59.5?  Is there a required end where laddering is not available?  (Or maybe: laddering becomes impractical at 70.5 when RMDs kick in and make the matter moot?)

I am also assuming the goal here is to convert exactly the amount (or "at least the amount") taxed at 0%.  For example, in 2015 with no other income that might be $12,600 (standard deduction) + $8000 (2 personal exemptions) + $6,650 (deduction for max HSA contribution) = $27,250.   Correct?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Lski'stash on October 31, 2015, 03:03:07 PM
Just want to save this for when the time comes. 
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on October 31, 2015, 03:20:17 PM

I have a question on the Traditional->Roth laddering post age 59.5.   Can I continue to ladder after 59.5?  Is there a required end where laddering is not available?  (Or maybe: laddering becomes impractical at 70.5 when RMDs kick in and make the matter moot?)

I am also assuming the goal here is to convert exactly the amount (or "at least the amount") taxed at 0%.  For example, in 2015 with no other income that might be $12,600 (standard deduction) + $8000 (2 personal exemptions) + $6,650 (deduction for max HSA contribution) = $27,250.   Correct?

It can continue beyond 59.5. Not sure about 70.5 but I don't see why not. Your assumptions are correct. I would say "at least the amount" because in order to convert a large T.IRA you may need to pay some tax over time. You might have to pay 5% tax to get it all into Roth. Run your own #'s to find out.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on October 31, 2015, 04:45:38 PM

I have a question on the Traditional->Roth laddering post age 59.5.   Can I continue to ladder after 59.5?  Is there a required end where laddering is not available?  (Or maybe: laddering becomes impractical at 70.5 when RMDs kick in and make the matter moot?)

I am also assuming the goal here is to convert exactly the amount (or "at least the amount") taxed at 0%.  For example, in 2015 with no other income that might be $12,600 (standard deduction) + $8000 (2 personal exemptions) + $6,650 (deduction for max HSA contribution) = $27,250.   Correct?

It can continue beyond 59.5. Not sure about 70.5 but I don't see why not. Your assumptions are correct. I would say "at least the amount" because in order to convert a large T.IRA you may need to pay some tax over time. You might have to pay 5% tax to get it all into Roth. Run your own #'s to find out.

Yeah, no reason you couldn't keep doing Roth conversions indefinitely. After 70½ you'll need to calculate and withdraw your RMD before doing any Roth conversions, but conversions are still allowed.

As to how much is best to convert every year, it really depends on your circumstances. Before the ACA I would say there's no downside whatsoever to converting the tax-free amount, but if you're planning to get health insurance through your exchange then any additions to your AGI (even if they're not subject to income tax) will affect the amount you pay for insurance. It's still probably a good idea to do this, but you'll need to run the numbers based on your pre-tax retirement account balance and how old you are at retirement.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Spork on October 31, 2015, 05:00:17 PM

Yeah, no reason you couldn't keep doing Roth conversions indefinitely. After 70½ you'll need to calculate and withdraw your RMD before doing any Roth conversions, but conversions are still allowed.

As to how much is best to convert every year, it really depends on your circumstances. Before the ACA I would say there's no downside whatsoever to converting the tax-free amount, but if you're planning to get health insurance through your exchange then any additions to your AGI (even if they're not subject to income tax) will affect the amount you pay for insurance. It's still probably a good idea to do this, but you'll need to run the numbers based on your pre-tax retirement account balance and how old you are at retirement.

Yeah, these are exactly the scenarios I am running...  to balance our expected budget vs ACA vs taxes.  2016 is my first FIRE year, so I imagine I will make a stab at it, see how it works, and re-stab it 2017.  Even with excessive number crunching on paper, I'm expecting it to take a couple of years iteration before I figure out what I am doing.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on October 31, 2015, 09:10:01 PM

I have a question on the Traditional->Roth laddering post age 59.5.   Can I continue to ladder after 59.5?  Is there a required end where laddering is not available?  (Or maybe: laddering becomes impractical at 70.5 when RMDs kick in and make the matter moot?)

I am also assuming the goal here is to convert exactly the amount (or "at least the amount") taxed at 0%.  For example, in 2015 with no other income that might be $12,600 (standard deduction) + $8000 (2 personal exemptions) + $6,650 (deduction for max HSA contribution) = $27,250.   Correct?

It can continue beyond 59.5. Not sure about 70.5 but I don't see why not. Your assumptions are correct. I would say "at least the amount" because in order to convert a large T.IRA you may need to pay some tax over time. You might have to pay 5% tax to get it all into Roth. Run your own #'s to find out.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: ofits on November 07, 2015, 12:54:27 PM
Hello Mustachians. I am a longtime MMM reader, and I have some questions regarding the specifics of this rollover technique to ensure I properly understand it.

First: When a traditional IRA is rolled over into a Roth IRA, the amount is added to that year's taxable income. Now suppose that one doesn't have any taxable income for 2015. That would mean that an amount of the IRA equal to the 2015 standard deduction could be rolled over without paying any taxes whatsoever, correct?

Second: I understand that the funds in a Roth IRA are treated as 3 components: contributions (i.e. money actually contributed to the Roth IRA), conversions (i.e. money that used to be in a traditional IRA), and returns (i.e. interest from the investments in the Roth IRA). I'm still a bit fuzzy on this last component - if I convert my traditional IRA to a Roth IRA, does the 'return' portion of the traditional IRA count as conversion or return for purposes of not being able to touch it until after I'm 59.5?

Clarifying example: suppose I have a Vanguard IRA that lists $5,000 in 'Purchases & withdrawals' and $100 in 'Personal investment returns'. I roll the entire sum into a Roth IRA. I wait 5 years. Ignoring any returns gained in the intervening 5 years, will I be able to withdraw $5,100 penalty-free, or only $5,000?

Thanks!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on November 07, 2015, 01:00:47 PM
...suppose that one doesn't have any taxable income for 2015. That would mean that an amount of the IRA equal to the 2015 standard deduction could be rolled over without paying any taxes whatsoever, correct?
Slightly better: you get to add the personal exemption amount ($4,000 for 2015) also.

Quote
Clarifying example: suppose I have a Vanguard IRA that lists $5,000 in 'Purchases & withdrawals' and $100 in 'Personal investment returns'. I roll the entire sum into a Roth IRA. I wait 5 years. Ignoring any returns gained in the intervening 5 years, will I be able to withdraw $5,100 penalty-free, or only $5,000?
$5,100.

None of the tIRA money - not the original contribution, and not the returns - were taxed prior to the rollover.  When you did the rollover, you were taxed on the entire amount, so that is your conversion amount.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: ofits on November 07, 2015, 09:04:43 PM
...suppose that one doesn't have any taxable income for 2015. That would mean that an amount of the IRA equal to the 2015 standard deduction could be rolled over without paying any taxes whatsoever, correct?
Slightly better: you get to add the personal exemption amount ($4,000 for 2015) also.

Quote
Clarifying example: suppose I have a Vanguard IRA that lists $5,000 in 'Purchases & withdrawals' and $100 in 'Personal investment returns'. I roll the entire sum into a Roth IRA. I wait 5 years. Ignoring any returns gained in the intervening 5 years, will I be able to withdraw $5,100 penalty-free, or only $5,000?
$5,100.

None of the tIRA money - not the original contribution, and not the returns - were taxed prior to the rollover.  When you did the rollover, you were taxed on the entire amount, so that is your conversion amount.

Excellent, thank you for clarifying!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: TomTX on December 06, 2015, 09:17:41 AM
I think I've come up with a novel way to start drawing all retirement account money with little restriction starting at age 54-55. I'd like some more eyeballs and critiques on the proposal to either firm it up, or dispose of it.

http://forum.mrmoneymustache.com/welcome-to-the-forum/a-novel-approach-to-free-access-of-tira401k-money-at-age-54-55-instead-of-59-5/
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: mooreprop on December 14, 2015, 10:09:36 AM
Does anyone know the rules for a 403b?  I am a public school teacher, and was told by the advisor that I am not allowed to touch any of the money until I am 59 1/2 unless I am fired from my job.  Even if I quit, he said that I cannot get any distribution regardless of whether I am prepared to pay the 10% penalty.  This does not seem right to me.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: BarkyardBQ on December 14, 2015, 10:13:16 AM
Does anyone know the rules for a 403b?  I am a public school teacher, and was told by the advisor that I am not allowed to touch any of the money until I am 59 1/2 unless I am fired from my job.  Even if I quit, he said that I cannot get any distribution regardless of whether I am prepared to pay the 10% penalty.  This does not seem right to me.

Same rules apply for 403b and 401k alike. You can leave your employer, roll over your 403b to a Traditional IRA and then begin your conversion ladder.

Advisors for public school employees are banking on long careers, bad products, and fear. Learn everything on your own and go have a really uncomfortable (for him) conversation.

Do you have a 457b option?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on December 14, 2015, 10:19:09 AM
Does anyone know the rules for a 403b?  I am a public school teacher, and was told by the advisor that I am not allowed to touch any of the money until I am 59 1/2 unless I am fired from my job.  Even if I quit, he said that I cannot get any distribution regardless of whether I am prepared to pay the 10% penalty.  This does not seem right to me.
This thread applies both to 401k and 403b (and others - see the first post) plans.  That advisor is incorrect.  If you leave your employer (either by firing or quitting), the general rule is that you have 3 options:
1.  Leave the funds in the 403b
2.  Transfer the funds to the 403b/401k of a new employer
3.  Roll the 403b funds into an IRA

See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf for the "official" version.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: BarkyardBQ on December 14, 2015, 10:22:33 AM
See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf for the "official" version.

I have never seen this before. Does that really say I can roll over my 403b to my 457b when I leave my employer?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: dandarc on December 14, 2015, 10:27:35 AM
See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf for the "official" version.

I have never seen this before. Does that really say I can roll over my 403b to my 457b when I leave my employer?
Any money rolled into a 457B that doesn't come from a 457B doesn't get the same exclusion from the 10% penalty for withdrawals at any age.  So even if you can do it, you don't get the big 457 benefit of penalty-free withdrawals at any age on the rollover money.

This is why the 457B has to keep separate accounts if it accepts rollovers from non-457B accounts.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: BarkyardBQ on December 14, 2015, 10:41:46 AM
See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf for the "official" version.

I have never seen this before. Does that really say I can roll over my 403b to my 457b when I leave my employer?
Any money rolled into a 457B that doesn't come from a 457B doesn't get the same exclusion from the 10% penalty for withdrawals at any age.  So even if you can do it, you don't get the big 457 benefit of penalty-free withdrawals at any age on the rollover money.

This is why the 457B has to keep separate accounts if it accepts rollovers from non-457B accounts.

Ahh, I remember hearing that before. Thanks
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: FIRE4Science on December 18, 2015, 12:46:13 PM
What kills this is the "paying any normal income tax due on that amount" and the "5 year wait" after you have paid your normal income tax on it...one could just withdraw it normally and not have their money locked for future Government taxation and stealing of it. This will only free you quickly if you make over $100k/yr where you can contribute the max in your 401k/roth IRA and invest money in a taxable account to free you by even age 40.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on December 18, 2015, 01:22:42 PM
What kills this is the "paying any normal income tax due on that amount" and the "5 year wait" after you have paid your normal income tax on it...one could just withdraw it normally and not have their money locked for future Government taxation and stealing of it.
You would prefer to give the IRS an extra 10% up front (early withdrawal penalty) instead of putting in the Roth where there is a decent chance it will never be taxed?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: dandarc on December 18, 2015, 01:30:07 PM
What kills this is the "paying any normal income tax due on that amount" and the "5 year wait" after you have paid your normal income tax on it...one could just withdraw it normally and not have their money locked for future Government taxation and stealing of it.
You would prefer to give the IRS an extra 10% up front (early withdrawal penalty) instead of putting in the Roth where there is a decent chance it will never be taxed?
This.  If you really want the money before the 5 years is up in the Roth ladder, you can take it out and pay the 10% penalty retroactively.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: CanuckExpat on December 20, 2015, 01:51:53 AM
Does anyone know about taking a 401k / IRA as an annuity before 59 1/2 and lack of an early withdrawal penalty: Are there specific regulations that cover that or is it simply an application of substantial and equal periodic payments?

I recently quit jobs and got the paperwork from my old 401k provider about options for my vested balance. There was the standard options to leave the balance in the old 401k, take it as a lump sum and pay taxes + penalty if under 60, and to roll over the balance to an IRA or new employer 401k. They also listed the option to convert the balance to an annuity (looks like standard single life and joint/survivor immediate annuity) and stated "this option may allow you to receive payments before age 59 1/2 without paying the 10 percent early withdrawal penalty"

Anyone know about this?
The most information I could find with some searching was some recent-ish news (http://www.nytimes.com/2012/02/03/business/new-treasury-rules-ease-purchase-of-annuity-with-401-k.html) stating that regulations have been changed to make it easier for 401k providers to sell annuities.

Leaving aside the question if an annuity would be the ideal purchase or not, it does seem more convenient than managing the 72(t) rule yourself, or a ROTH conversion pipeline, if you wanted an annuity, a a Solution for the Cautious Retiree (http://www.mrmoneymustache.com/2012/04/14/guest-posting-annuities-a-solution-for-the-cautious-retiree/) as it were
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MoonShadow on December 22, 2015, 12:43:11 AM
Does anyone know about taking a 401k / IRA as an annuity before 59 1/2 and lack of an early withdrawal penalty: Are there specific regulations that cover that or is it simply an application of substantial and equal periodic payments?

I recently quit jobs and got the paperwork from my old 401k provider about options for my vested balance. There was the standard options to leave the balance in the old 401k, take it as a lump sum and pay taxes + penalty if under 60, and to roll over the balance to an IRA or new employer 401k. They also listed the option to convert the balance to an annuity (looks like standard single life and joint/survivor immediate annuity) and stated "this option may allow you to receive payments before age 59 1/2 without paying the 10 percent early withdrawal penalty"

Anyone know about this?

There is a whole lot to substantially equal periodic payments, and a whole lot of ways to get burned.  It's really only for people who are forced into early retirement for catastrophic medical reasons; because once you start, you can't stop.  A roth conversion pipeline is almost always a better way to get to your 401K funds early, but anyone can get to their 401K funds after 55 by just resigning after their 55th birthday.  It's the "early retirement" clause and only applies to the funds that were in your last company's 401K (and rollovers from other company 401k's that are at least 5 years old)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Monkey Uncle on December 25, 2015, 05:04:12 AM
O.K., stupid question time:  For conversions from a tIRA to a Roth that are made after age 59.5, does the waiting period apply?  I presume not, because you are past the point where you would be penalized for early withdrawals from the tIRA, but I don't think I've ever seen this question addressed specifically.  And I'm too lazy to go look it up on irs.gov.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on December 25, 2015, 10:31:56 AM
I didn't look it up either, but i'd bet dollars to donuts there is no circumstance after 59.5 where you can be charged a penalty for taking your money out.

The only applicable penalty I can think of would be from not taking an RMD after 70.5.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: sol on December 25, 2015, 10:51:14 AM
Does anyone know about taking a 401k / IRA as an annuity before 59 1/2 and lack of an early withdrawal penalty

At least for federal retirees the annuity option is genuinely penalty free but the rates are so terrible that it's actually worse overall.  The rates are bad to begin with and they get worse if you take them early.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on December 25, 2015, 10:52:13 AM
O.K., stupid question time:  For conversions from a tIRA to a Roth that are made after age 59.5, does the waiting period apply?  I presume not, because you are past the point where you would be penalized for early withdrawals from the tIRA, but I don't think I've ever seen this question addressed specifically.  And I'm too lazy to go look it up on irs.gov.
Depends on which 5 year waiting period you have in mind.

See https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ for more details.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on December 25, 2015, 11:23:31 AM
I didn't look it up either, but i'd bet dollars to donuts there is no circumstance after 59.5 where you can be charged a penalty for taking your money out.

The key is that there's no penalty for "qualified distributions." Being 59½ is one component of that. The other component is that you need to have had the Roth IRA account open for at least five years. Open your Roth IRA before age 55 and you should be free to withdraw whatever money you want after 59½ without penalty.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Monkey Uncle on December 26, 2015, 05:04:35 AM
O.K., stupid question time:  For conversions from a tIRA to a Roth that are made after age 59.5, does the waiting period apply?  I presume not, because you are past the point where you would be penalized for early withdrawals from the tIRA, but I don't think I've ever seen this question addressed specifically.  And I'm too lazy to go look it up on irs.gov.
Depends on which 5 year waiting period you have in mind.

See https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ for more details.

Thanks for that.  I was thinking of the conversion waiting period.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Monkey Uncle on December 26, 2015, 05:07:48 AM
I didn't look it up either, but i'd bet dollars to donuts there is no circumstance after 59.5 where you can be charged a penalty for taking your money out.

The key is that there's no penalty for "qualified distributions." Being 59½ is one component of that. The other component is that you need to have had the Roth IRA account open for at least five years. Open your Roth IRA before age 55 and you should be free to withdraw whatever money you want after 59½ without penalty.

Duh, yes.  Once you've hit 59 1/2, you can take a qualified distribution from your tIRA, regardless of whether you spend it or put it in your Roth.  I told you it was a stupid question. ;)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: TrulyStashin on January 18, 2016, 09:16:28 AM
Does anyone know the rules for a 403b?  I am a public school teacher, and was told by the advisor that I am not allowed to touch any of the money until I am 59 1/2 unless I am fired from my job.  Even if I quit, he said that I cannot get any distribution regardless of whether I am prepared to pay the 10% penalty.  This does not seem right to me.

I was a public school teacher and quit in 2008 to go to law school.  While in school, I rolled my 403b fund into a tIRA and then into a Roth.  Because I had no income at the time, I paid no tax.  Since 2010, my Roth has more than doubled in value (yay!) and I've never paid tax and will not pay tax on any of it.

That advisor is full of hooey.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: rubybeth on March 07, 2016, 11:22:19 AM
I think this thread needs a clarification for 457b plans: you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method.

https://www.bogleheads.org/wiki/457(b)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MoonShadow on March 07, 2016, 03:32:05 PM
I think this thread needs a clarification for 457b plans: you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method.

https://www.bogleheads.org/wiki/457(b)

Why?  Aren't 457b plans different enough to justify their own thread?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: rubybeth on March 07, 2016, 03:35:05 PM
I think this thread needs a clarification for 457b plans: you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method.

https://www.bogleheads.org/wiki/457(b)

Why?  Aren't 457b plans different enough to justify their own thread?

I'm confused why you're asking me this. There are other threads on 457b accounts, but the first line of the first post in this thread mentions the 457b and pipelines, and it's not necessary to convert 457b funds to a Roth IRA in order to access them before 59.5. It's one of the greatest things about having access to a 457b.

From the first page, OP:

Did you know that you can withdraw funds from your Roth IRA, traditional IRA, 401k, Roth 401k, TSP, Roth TSP, 403b, or 457b before age 59.5 and without a penalty? It's true!

The secret is using the Roth IRA Conversion Pipeline ("Roth Pipeline") and/or Substantially Equal Periodic Payments (SEPP--also called 72t).
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: retiringearly on April 05, 2016, 10:19:47 AM
This forum kicks major ass.  Thanks for all the awesome information.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: forummm on April 05, 2016, 11:01:19 AM
I think this thread needs a clarification for 457b plans: you can take funds from this account BEFORE age 59.5 with NO penalty, and NO need to do the pipeline method.

https://www.bogleheads.org/wiki/457(b)

Updated the intro post to reflect this.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Westoftown on May 30, 2016, 06:23:15 AM
Still likely better off taking the deduction now, but you aren't doing anything 'wrong' if you choose otherwise.  You can also split the contribution limit between a regular IRA & roth.  But if you have a 401k, or better, an HSA; put as much as they will let you into that and whatever extra you might have into a roth and you will have both taxable & non-taxable options available that will allow you to shoot or that elusive 0% effective tax bracket after FIRE.

I think maybe my question wasn't quite clear enough with my own personal story.

Are your only choices to start your Roth conversion ladder while still employed (thus paying at whatever tax rate you are while employed), use taxable accounts, or draw on Roth basis?


No, there are other useful tricks, but they depend upon doing things right.

Quote

For my own situation, I was asking post-401k maxing. We will still be in the 25% bracket after that, and worse (well, worse in context of making too much), still in the 25% bracket even after $11k in traditional IRA lowering AGI. In our case, I was considering a Roth to draw the basis (however, contributions would be at 25%), taxable accounts or cash prior to FIRE (also at 25%), or eating the 10% early withdrawal penalty plus whatever taxes would be (potentially lower than 25%?). After 5 years, we'd be able to use the laddered money.

It sounds like you're saying the difference between traditional and Roth is pretty miniscule and won't matter?

No, that is not what I'm saying.  I'm saying that the tax brackets are set up so that your 'last' income is taxed highest, and in the 25% tax bracket, you are almost certainly better off with the current deduction.  Also, while you may believe that you will still be in the 25% tax bracket after retirement, this will almost certainly not be the case after a few years.  So if the math looks like an even case between a traditional or Roth IRA, it's probably still favored to the traditional in practice.  But the 25% tax bracket is about where things are questionable anyway.

Still, there are too many factors to consider.  Myself, as an example, made $129K gross last year, with an AGI of $50K, and have been exempt at federal level for the past 3 years.  You really can set up your life to pay zero legally.

That is outstanding.  Can you detail how you made so much gross and no Federal?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on May 30, 2016, 09:35:29 AM
That is outstanding.  Can you detail how you made so much gross and no Federal?
There are ways...see http://forum.mrmoneymustache.com/taxes/do-lots-of-people-forget-that-they-will-still-need-to-pay-tax-in-retirement/.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: mathjak107 on August 08, 2016, 04:10:13 AM
the first question is does your company plan allow for periodic payments at 55 ?  most plans do not . in which case the age 55  requirement does not apply .

you can not just take penalty free withdrawals from a 401k because you are 55 and no longer working there unless the plan allows for  periodic payments .

very few plans want to get involved doling out money so they shy away from it .

if that is the case , you have to roll it over to an ira and do a 72t election the same as you would at any age since it remains at 59-1/2 for penalty free withdrawals except under certain circumstances ..

the age 55 ability to get penalty free withdrawals is quite mis-understood more often then not .
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on August 08, 2016, 07:28:57 AM
...you have to roll it over to an ira and do a 72t election....
Once the money is in the tIRA, one is not restricted to the 72t election in order to access the money without penalty.  The Roth Pipeline described in the OP for this thread  (http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/) is the suggested method.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: dandarc on August 08, 2016, 01:40:37 PM
the first question is does your company plan allow for periodic payments at 55 ?  most plans do not . in which case the age 55  requirement does not apply .

you can not just take penalty free withdrawals from a 401k because you are 55 and no longer working there unless the plan allows for  periodic payments .

very few plans want to get involved doling out money so they shy away from it .

if that is the case , you have to roll it over to an ira and do a 72t election the same as you would at any age since it remains at 59-1/2 for penalty free withdrawals except under certain circumstances ..

the age 55 ability to get penalty free withdrawals is quite mis-understood more often then not .
Source for the periodic payments requirement?  IRS indicates there will not be 10% additional tax on:

Quote
. . .
Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55 . . .

without further qualification here:

https://www.irs.gov/taxtopics/tc558.html (https://www.irs.gov/taxtopics/tc558.html)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on August 08, 2016, 09:12:56 PM
Source for the periodic payments requirement?  IRS indicates there will not be 10% additional tax on:
Quote
. . .
Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55 . . .
without further qualification here:
https://www.irs.gov/taxtopics/tc558.html (https://www.irs.gov/taxtopics/tc558.html)

While it's true the IRS will not impose a 10% penalty, there is no law requiring an employer to provide periodic 401k withdrawals. 

Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: mathjak107 on August 09, 2016, 01:50:19 AM
the 401k plan has to allow for the periodic payments and the majority do not . otherwise you can only take a lump sum .

if you take the lump sum and do not roll it over it is all taxed but with no penalty .

if you do roll it over in to an ira  you lose the ability to hit the money at 55 with no penalty .

then you can only 72t to get it out penalty free unless you do some roth conversions  but in that case it is taxed.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: dandarc on August 11, 2016, 11:10:16 AM
Maybe just semantics, but the practical requirement for the 55 rule is not strictly periodic payments - it is partial payments.  That or a small 401k balance such that withdrawing the whole thing in year 1 is no big deal.

The eTrade standard individual 401K, for example allows the following for payments:

Quote
You may choose to take your payment as a lump sum, in non-recurring partial payments, in installment payments, or in the form
of an annuity contract (other than a life annuity).

You could have a plan that allows lump-sum and partial lump-sum but not periodic payments, and the 55 rule still works.  For example, the Summary plan description for Freescale SemiConductor (http://www.nxp.com/files/company_information/benefits/2013_RetireeBenefitsBook.pdf (http://www.nxp.com/files/company_information/benefits/2013_RetireeBenefitsBook.pdf) only offers installment (periodic) withdrawal to folks who were hired before 1996 and retired after age 55, but non-recurring partial distributions are available to anyone.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Mother Fussbudget on November 07, 2016, 05:27:28 PM
I get that this thread is primarily regarding the building of a Roth Conversion Ladder - convert tIRA dollars to Roth IRA over a period of years, having them 'age' in the Roth account for 5 years, and then withdraw those conversion dollars from the Roth to cover annual expenses.  Furthermore, I get that the majority of people who are pursuing FIRE are younger than the norm (aveage age 22-to-30).  I often interact with people who (like me) are in the 'not-so-early... early-retirement' camp - those who got a late start in their 40's or 50's.

There is ANOTHER WAY to withdraw funds from a 401k or 403b ("company retirement plans") and avoid the 10% early withdrawal penalty (from IRS Publication 575) specifically for people starting FIRE in the calendar-year they turn age 55 (or older, or age 50 for qualified public safety employees).  Generally referred to as the 'Rule of 55': (quote below from http://www.401khelpcenter.com/401k_education/Early_Dist_Options.html#.WCEQlPkrLIX (http://www.401khelpcenter.com/401k_education/Early_Dist_Options.html#.WCEQlPkrLIX))
NOTE:  this does NOT apply to ALL retirement savings plans - specifically it does NOT apply to IRA & Roth IRA accounts.

Leaving Your Job On or After Age 55

The age 59½ distribution rule says any 401k participant may begin to withdraw money from his or her plan after reaching the age of 59½ without having to pay a 10 percent early withdrawal penalty.

There is an exception to that rule, however, which allows an employee who retires, quits or is fired at age 55 to withdraw without penalty from their 401k (the "rule of 55").
There are three key points early retirees need to know.

First, this exception applies if you leave your job at any time during the calendar year in which you turn 55, or later, according to IRS Publication 575 (http://www.irs.gov/pub/irs-pdf/p575.pdf).

Second, if you still have money in the plan of a former employer and assuming you weren't at least age 55 when you left that employer, you'll have to wait until age 59½ to start taking withdrawals without penalty. Better yet, get any old 401k's rolled into your current 401k before you retire from your current job so that you will have access to these funds penalty free.

Third, this exception only applies to funds withdrawn from a [company sponsored retirement plan - a 401k or 403b]. IRAs operate under different rules, so if you retire and roll money into an IRA from your 401k before age 59½, you will lose this exception on those dollars.

IRS Publication 575 (p.35) goes on to define 'qualified public safety employees' as:
"You are a qualified public safety employee if you provided police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after 
the year you attained age 50."  Qualified public safety employees also includes:  Federal law enforcement officers, Federal customs and border protection officers, Federal firefighters, Air traffic controllers, Nuclear materials couriers, Members of the United States Capitol Police, Members of the Supreme Court Police, and Diplomatic security special agents of the United States Department of State.

In practice, using the "Rule of 55" might look like this:
Sam will turn 55 in December.  In August of that year, s/he quits, is fired, or retires from his/her job at WidgetSoftware, LLC.  They can request a distribution from WidgetSoftware's 401k plan, and avoid paying 10% early withdrawal penalty.  They would continue to make distributions from their WidgetSoftware 401k plan to pay expenses during the following 5 years until reaching age 59-1/2 at which point they could begin taking withdrawals from their IRA and Roth IRA accounts.  At the same time, while withdrawing annual expense amounts from their 401k, Sam *might* also begin converting his/her IRA to a Roth IRA - not with the goal of building a Roth IRA ladder to be used prior too age 59.5, but with the goal of converting ALL their IRA funds into Roth IRA funds prior to age 70 to avoid annual required minimum distributions.

The "Rule of 55" discussion may not belong in this discussion of  Roth Conversion Ladders, and if that's the case, I will happily remove this response.
However, I have read very few references to the rule of 55 mentioned anywhere else in the forums, and know there are a lot of people who are unaware of this exception to the 59-1/2 age limit for penalty free 401k withdrawal.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: markbike528CBX on November 07, 2016, 09:17:00 PM
I am Sam
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on November 07, 2016, 09:20:49 PM
I am Sam

Sam I am.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on November 07, 2016, 09:55:11 PM
Thanks for that, Mother Fussbudget.

The age 55 rule has been mentioned several times here, but it's always good to provide a reminder for those who are planning to retire between 55-60.

Do be sure to check your employer plan's rules before you count on being able to rely on the age 55 rule. While the law does allow these withdrawals with no early withdrawal tax, many employer retirement plans do not allow partial withdrawals. These employers don't want to deal with the administrative cost of dealing with retirees who are getting monthly checks from the plan. They'd rather you roll your money into an IRA so they don't have anything to do with you anymore. Therefore they put a provision into the plan rules saying that former employees who make a withdrawal must withdraw their entire balance all at once. If this applies to you, you obviously won't be able to make periodic withdrawals from your workplace retirement plan to bridge the gap between 55 and 59½.

Of course this doesn't apply to every plan. Many employers are just fine with their retired employees keeping their money in the plan while they make withdrawals to fund their retirement. Just be sure to check what the rules are for your particular employer before you plan to rely on the age 55 rule.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: TomTX on November 08, 2016, 06:47:54 AM
Thanks for that, Mother Fussbudget.

The age 55 rule has been mentioned several times here, but it's always good to provide a reminder for those who are planning to retire between 55-60.

Do be sure to check your employer plan's rules before you count on being able to rely on the age 55 rule. While the law does allow these withdrawals with no early withdrawal tax, many employer retirement plans do not allow partial withdrawals. These employers don't want to deal with the administrative cost of dealing with retirees who are getting monthly checks from the plan. They'd rather you roll your money into an IRA so they don't have anything to do with you anymore. Therefore they put a provision into the plan rules saying that former employees who make a withdrawal must withdraw their entire balance all at once. If this applies to you, you obviously won't be able to make periodic withdrawals from your workplace retirement plan to bridge the gap between 55 and 59½.

Of course this doesn't apply to every plan. Many employers are just fine with their retired employees keeping their money in the plan while they make withdrawals to fund their retirement. Just be sure to check what the rules are for your particular employer before you plan to rely on the age 55 rule.

To me the easy workaround would be to create a Solo 401k at a provider who allows partial withdrawals, put in $100 of side-gig income,* and roll everything into that. "Retire" from your side gig. Vanguard even has a form for setting up periodic withdrawals.

Any gotchas I'm missing? I don't recall seeing this suggested previously.

*Don't have side-gig income? Craigslist some junk and declare it as income.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: FIRE4Science on December 13, 2016, 11:07:01 AM
2 major problems here.

1) "paying any normal income tax due on that amount" on the conversion. Sucks if you are still in the accumulation phase.

2) 5 years in a Roth IRA does save on any further taxes for the amounts contributed and withdrawn, but those amounts have been taxed once already, and now they are locked up for 5 years least you pay a penalty and taxes. If you've paid the tax on it on the conversion, why not just put it in a normal brokerage account, and look for benefits of long term capital gains/dividend? Paying a little tax for liquid availability of your money. Your already taxed money is then at least not locked up for 5 years, and is liquid cash.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on December 13, 2016, 11:22:29 AM
1) "paying any normal income tax due on that amount" on the conversion. Sucks if you are still in the accumulation phase.
Yes, so having ~5 years expenses in a taxable account can be useful.

Quote
2) 5 years in a Roth IRA does save on any further taxes for the amounts contributed and withdrawn, but those amounts have been taxed once already, and now they are locked up for 5 years least you pay a penalty and taxes. If you've paid the tax on it on the conversion, why not just put it in a normal brokerage account, and look for benefits of long term capital gains/dividend? Paying a little tax for liquid availability of your money. Your already taxed money is then at least not locked up for 5 years, and is liquid cash.
You could do so if you are willing to pay the extra 10% tax on a tIRA withdrawal (that you don't pay on a tIRA->Roth conversion), and any tax you might incur in the taxable account (that you wouldn't have to pay in a Roth account).

ETA: Is this an annual question? (http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/msg908108/#msg908108)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on December 13, 2016, 11:50:44 AM
2 major problems here.

1) "paying any normal income tax due on that amount" on the conversion. Sucks if you are still in the accumulation phase.

You're right that Roth conversions when you're still working full-time generally aren't the greatest idea. The whole point of this is to defer as much income as possible until after you quit working when your tax rate will be lower.

Quote
2) 5 years in a Roth IRA does save on any further taxes for the amounts contributed and withdrawn, but those amounts have been taxed once already, and now they are locked up for 5 years least you pay a penalty and taxes.

There's just the 10% early withdrawal tax if you withdraw converted amounts within five years. You don't pay your regular income tax on top of that.

Quote
If you've paid the tax on it on the conversion, why not just put it in a normal brokerage account, and look for benefits of long term capital gains/dividend? Paying a little tax for liquid availability of your money. Your already taxed money is then at least not locked up for 5 years, and is liquid cash.

As MDM pointed out, the option to pull this money into a brokerage account is there, but you'll have to pay an extra 10% tax compared to the Roth conversion.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: markbike528CBX on December 13, 2016, 01:01:15 PM

The age 55 rule has been mentioned several times here, but it's always good to provide a reminder for those who are planning to retire between 55-60.

Do be sure to check your employer plan's rules before you count on being able to rely on the age 55 rule. While the law does allow these withdrawals with no early withdrawal tax, many employer retirement plans do not allow partial withdrawals.

That partial thing hit me.   I have to wait till I'm Age 55.01 to be "retired" per a 70points plan (55+service years>70)
Dang, I was all excited about the year turning 55 rule, as it cut 11 months off my time.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: 2inabowl on December 18, 2016, 07:09:48 PM
Regarding roth conversions for spouses w/10 years age difference, is it better to convert the younger or older spouse's $ first?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Monkey Uncle on December 19, 2016, 03:21:12 AM
Regarding roth conversions for spouses w/10 years age difference, is it better to convert the younger or older spouse's $ first?

I'd convert the older spouse's first since that person is closer to RMDs.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: overwhelmed on December 19, 2016, 08:53:26 AM
Thanks for that, Mother Fussbudget.

The age 55 rule has been mentioned several times here, but it's always good to provide a reminder for those who are planning to retire between 55-60.

Do be sure to check your employer plan's rules before you count on being able to rely on the age 55 rule. While the law does allow these withdrawals with no early withdrawal tax, many employer retirement plans do not allow partial withdrawals. These employers don't want to deal with the administrative cost of dealing with retirees who are getting monthly checks from the plan. They'd rather you roll your money into an IRA so they don't have anything to do with you anymore. Therefore they put a provision into the plan rules saying that former employees who make a withdrawal must withdraw their entire balance all at once. If this applies to you, you obviously won't be able to make periodic withdrawals from your workplace retirement plan to bridge the gap between 55 and 59½.

Of course this doesn't apply to every plan. Many employers are just fine with their retired employees keeping their money in the plan while they make withdrawals to fund their retirement. Just be sure to check what the rules are for your particular employer before you plan to rely on the age 55 rule.

Big thanks to everyone offering information on this thread (especially  Mother Fussbudget & those mentioning the Rule of 55/ 55 rule)

This weekend I reviewed the plan information I could find for my 401k & just got off the phone with them.

The website (TRowe administration for my current plan) - mentions the IRS rule of 55 but wanted to make sure there wasn't any other plan documentations that I didn't see that didn't allow it.

Initially I was told that for ANY withdrawal before 59 1/2, they take the taxes & the 10% out. He said that I would need to get it back when doing my tax return. I decided that made no sense, why adhere to 1 rule (59 1/2) but not the other (55)?
I asked where I could find the information that explains that they choose to ignore the rule of 55 & as we were reviewing the legal information, he decided to keep researching.

Finally, he said that the Rule of 55 is the exception to the 59 1/2 rule, they do allow for withdrawal without penalty if you retire after 55 (following the rule) & they do not take the 10% out :)

This is a game changer for me. Glad there are some of us 'not young' people here sharing information.
So once again - thanks so much to everyone here - until this weekend I had never heard of this rule & probably never would have.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: T0dd on April 22, 2017, 12:09:04 PM
Quick conversion ladder question - I have investments in Roth 401k & Roth TSP. If I roll those over to my Roth IRA, does that still have a 5 year waiting period before I can access that money without penalty? Thanks.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on April 22, 2017, 12:43:15 PM
Quick conversion ladder question - I have investments in Roth 401k & Roth TSP. If I roll those over to my Roth IRA, does that still have a 5 year waiting period before I can access that money without penalty? Thanks.
Maybe.  Depends on other circumstances.  E.g.,
Quote
...when a designated Roth account from an employer retirement plan is rolled into a Roth IRA, the years in the Roth employer plan do not count towards the Roth IRA. Instead, under Treasury Regulation 1.408A-10, Q&A-4(a), for a Roth IRA it’s the original 5-year rule for the Roth IRA that counts. And if there was no existing Roth IRA and the rollover from the Roth 401(k) creates the account for the first time, that starts a new 5-year clock for the IRA, even if the ‘old’ Roth 401(k) had satisfied its own 5-year rule.

See Two 5-Year Rules For Roth IRA Contributions & Conversions (https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/) for the context of that quote and more details.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on April 22, 2017, 03:13:56 PM
Moving from Roth to Roth does not count as a "conversion" that would invoke the five-year waiting period used for the Roth pipeline. Whatever your original contributions were to the Roth 401(k) or Roth TSP, that amount will count as a "contribution" when it's in the Roth IRA. Like any other Roth IRA contributions, that money can be withdrawn at any time with no tax or penalty due. Any earnings that accrued within your Roth employer account would then be treated as earnings within the Roth IRA.

The other five-year rule that MDM refers to will determine whether your withdrawal counts as a "qualified distribution." For a Roth IRA distribution to be "qualified," you need to have had a Roth IRA for at least five years and also be 59½ or disabled or dead. If you haven't had a Roth IRA at all for five years, your distribution won't be "qualified," but if you're an early retiree withdrawing at age 40 your distribution wasn't going to be "qualified" anyway. So the question then becomes: what tax is due on that non-qualified distribution?

Non-qualified distributions follow the ordering rules: first contributions, the conversions, then earnings. Contributions are completely tax-free when withdrawn. Conversions are tax-free if withdrawn at least five years later, or are subject to the 10% early withdrawal tax if withdrawn sooner. Earnings counts as regular income and are taxed accordingly, plus a 10% early withdrawal tax.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: T0dd on April 22, 2017, 04:35:55 PM
Thank you both, that's great information. Yes I've had the Roth IRA since 2010 and will start to build up taxable investments soon to add to our flexibility.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: sean777 on April 29, 2017, 04:16:29 PM
Moving from Roth to Roth does not count as a "conversion" that would invoke the five-year waiting period used for the Roth pipeline. Whatever your original contributions were to the Roth 401(k) or Roth TSP, that amount will count as a "contribution" when it's in the Roth IRA. Like any other Roth IRA contributions, that money can be withdrawn at any time with no tax or penalty due. Any earnings that accrued within your Roth employer account would then be treated as earnings within the Roth IRA.

The other five-year rule that MDM refers to will determine whether your withdrawal counts as a "qualified distribution." For a Roth IRA distribution to be "qualified," you need to have had a Roth IRA for at least five years and also be 59½ or disabled or dead. If you haven't had a Roth IRA at all for five years, your distribution won't be "qualified," but if you're an early retiree withdrawing at age 40 your distribution wasn't going to be "qualified" anyway. So the question then becomes: what tax is due on that non-qualified distribution?

Non-qualified distributions follow the ordering rules: first contributions, the conversions, then earnings. Contributions are completely tax-free when withdrawn. Conversions are tax-free if withdrawn at least five years later, or are subject to the 10% early withdrawal tax if withdrawn sooner. Earnings counts as regular income and are taxed accordingly, plus a 10% early withdrawal tax.

I recently did research on figuring out my contribution basis for my Roth IRA and found out that in those ordering rules, the "contributions" part includes both regular contributions (Box 10 on 5498) and rollover contributions (Box 2). When rolling over a Roth 401(k) to a Roth IRA, both contributions and earnings in the 401(k) turn into rollover contributions for the Roth IRA (source: my 2015 5498 did not distinguish between contributions and earnings, the whole amount was in Box 2). This means that you could immediately withdraw the whole rollover amount from the IRA tax free (assuming the Roth IRA was already 5 years old). If I had known this before the rollover, I probably would have waited so that I could access the compounded earnings before I turned 59.5.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on April 29, 2017, 08:06:42 PM
I can't say I agree with your interpretation, that Form 5498 somehow transforms your money into a contribution that is freely withdrawable.

The controlling source on Roth 401(k) to Roth IRA transfers that I have found is Q-3 of this link (https://www.law.cornell.edu/cfr/text/26/1.408A-10). The question specifically asks about rollover distributions and how much counts as contributions, and the answer says that only the "investment in the contract" counts as original contributions after you do the rollover. Another section that is referenced defines "investment in the contract" basically as the amount that wouldn't count as income if you withdrew it to your checking account instead of doing a rollover. That means the original 401(k) contributions, but not the earnings.

The whole amount would be reported as a rollover contribution, but that doesn't make the whole amount non-taxable if you make an early withdrawal.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: sean777 on April 30, 2017, 07:54:10 AM
Thanks, I thought it was too good to be true but couldn't find that missing link.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: samickle on May 03, 2017, 01:15:41 PM
Pardon me if I've overlooked something, but the rules for distributions from Roth 401k subaccounts differ from the rules for a Roth IRA. Roth 401k distributions are pro-rata earnings and after-tax contributions. If Roth 401k funds are rolled-over to a Roth IRA, could distributions then be taken using the Roth IRA ordering rules (basis first)? Thanks!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on May 03, 2017, 02:00:36 PM
Yes. That's exactly what the link I posted above is about. It says that when you roll over your Roth 401(k) into a Roth IRA, the "investment in the contract" is treated as Roth IRA contributions for the purpose of the ordering rules, and any remaining balance is treated as Roth IRA earnings.
Title: When to rollover my 403b
Post by: hope4u1488 on May 28, 2017, 02:13:20 PM
When to rollover my 403b contribution? This year or next year since our income will be lower next year? Also, should I roll over directly to a Roth IRA or to a Trad IRA if I will want to use the funds after 5 or 6 years?

Me and my spouse are employed by same company...I just quit and want to rollover $6,500 from my Trad 403b to Vanguard. I'm not sure if I should roll it all over now or wait until next year since our income would be a little less. We are in a low tax bracket so would it make a difference if we waited?
Title: Re: When to rollover my 403b
Post by: MDM on May 28, 2017, 02:54:59 PM
When to rollover my 403b contribution? This year or next year since our income will be lower next year? Also, should I roll over directly to a Roth IRA or to a Trad IRA if I will want to use the funds after 5 or 6 years?
Note that a rollover from a 403b to a tIRA is not taxable, but a rollover from a 403b to Roth IRA is taxable.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: SDH on July 04, 2017, 11:43:29 AM
Ok, have I just done something stupid?  Let me explain...we are 43 and 46, would love the idea of retiring when the Mr is ~50, so 4-5 years.  I could still work part time and earn ~20-30K a year but would like to not have to, however, it's an option. 
I've been reading so much about this conversion and got excited. Most of our retirement funds are in his Roth 401K (as of today, about 242K) and I just had him switch it to a T 401K.  Was that a mistake?  I know we can pull principle from the Roth 401 K early with no tax or penalty , is that right? (I read madfientist on this)
 How much do other people pull from theirs and how much did you have in it to start?  I know in 4-5 years the balance will be larger and he does max it out.  Do you still use the same idea as pulling up to the 20K (std deduction + exemption) or is it a very personal decision based on how much you need to cover expenses and where other monies might come from (i.e. rental properties, part time work)  Also, I'm not exactly sure how to tell how much is his actual contributions vs growth to get a clear picture how much is available to us for withdraw.  Will have a closer look at his online account...
If he actually fully retires, should we(or would you) transfer that R401k to something else? Then still pull from principle withdrawals?
The money that stays in there will still continue to grow, right?  so no fear really of depleting it too early?We also have a couple of personal roth ira's that will be maxed out along the way, can you pull from principle on those too?

I'm thinking now that him having it in a t401 is irrelevant since we wouldn't have that 5 years on our side to start the conversion ladder before we needed the money.   

Your thoughts? 
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on July 04, 2017, 02:15:58 PM
Most of our retirement funds are in his Roth 401K (as of today, about 242K) and I just had him switch it to a T 401K.  Was that a mistake?  I know we can pull principle from the Roth 401 K early with no tax or penalty , is that right? (I read madfientist on this)

You can't switch money you've already contributed from Roth to traditional; any change would just be for money that you contribute in the future. Traditional contributions make a lot of sense if you have a pretty high savings rate, because that means you'll likely be pulling out less from your savings when you retire than you're earning right now, which in turn implies that your tax bracket will likely be lower in retirement.

One thing to be aware of when withdrawing early from the Roth 401(k) is that there's a pro-rata rule saying that you have to pull proportionally from principal (which can be withdrawn early tax-free) and earnings (which can't). To avoid this problem, roll your Roth 401(k) into your Roth IRA shortly after you retire. In the Roth IRA, the money comes out principal first and then earnings. Much better this way.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Padonak on July 04, 2017, 02:22:47 PM
Regarding Mega Backdoor ROTH (after tax contributions to 401K, then rollover to ROTH IRA, then start withdrawing after 5 years). Does it make sense for somebody who is currently in a high tax bracket due to a relatively high salary but expects to retire with a modest portfolio and pay 0 capital gains taxes on withdrawals? Or is it better to just contribute to taxable funds in this case?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on July 04, 2017, 02:28:47 PM
Regarding Mega Backdoor ROTH (after tax contributions to 401K, then rollover to ROTH IRA, then start withdrawing after 5 years). Does it make sense for somebody who is currently in a high tax bracket due to a relatively high salary but expects to retire with a modest portfolio and pay 0 capital gains taxes on withdrawals? Or is it better to just contribute to taxable funds in this case?
Capital gains also count toward income for Social Security benefit taxation.  Untaxed Roth withdrawals do not count.  That's just one difference.  If a mega backdoor Roth is available, seems reasonable to take advantage of it.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on July 05, 2017, 11:12:51 PM
I see very little downside to the mega backdoor Roth. The 0% capital gains rate hasn't even existed for 10 years. There's no guarantee it will last for another 50. There's no guarantee that Roth withdrawals will be tax-free forever either, but I'd put the odds of this happening at much lower than changing the 0% tax bracket to a non-zero number.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: bob22 on July 26, 2017, 03:11:18 PM
I would love for someone to explain why I don't need to meet one of the exceptions listed in IRS Pub 590-B, for a Roth conversion ladder. I fin the section on "Additional Tax on Early Distributions" to be confusing. It would seem to imply that you need to meet both the 5-year period and one of the listed exceptions--the only one of which that would seem to normally apply for FIRE would be "The distributions are part of a series of substantially equal payments," but what's the point of not using SEP (Rule 72t) if I have to meet this exception for a Roth ladder?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on July 26, 2017, 04:07:05 PM
I would love for someone to explain why I don't need to meet one of the exceptions listed in IRS Pub 590-B, for a Roth conversion ladder. I fin the section on "Additional Tax on Early Distributions" to be confusing. It would seem to imply that you need to meet both the 5-year period and one of the listed exceptions--the only one of which that would seem to normally apply for FIRE would be "The distributions are part of a series of substantially equal payments," but what's the point of not using SEP (Rule 72t) if I have to meet this exception for a Roth ladder?
Are you assuming your withdrawal must be a qualifying distribution?  That is a sufficient condition to avoid penalties, but not a necessary condition.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Flip07 on October 10, 2017, 07:33:05 AM
I have been working with some friends to help educate military on their benefits when it comes to investing while serving in a tax free zone.  The military is not great at educating their Sailors and Soldiers on some huge benefits they can reap while serving in a hostile area (Tax Free).  One of these benefits is the Roth Conversion:  So I may disseminate the concept correctly, I have a question for the crowd.

During the Roth Conversion Ladder, it is mentioned that you would convert a certain amount each year once in retirement, so you can have access to that amount five years later.  You wait until retirement because your income will be significantly reduced.

However, since I am currently serving in a tax free zone, my income this year will be drastically reduced next to nothing.  In this scenario, shouldn't I go ahead and convert my entire Traditional IRA into Roth?  Or should I at least convert up to a certain amount?  If so what is that target.  I want to have the right information so I can share it with our military brothers and sisters.  Thank you in advance.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: dandarc on October 10, 2017, 09:02:17 AM
I have been working with some friends to help educate military on their benefits when it comes to investing while serving in a tax free zone.  The military is not great at educating their Sailors and Soldiers on some huge benefits they can reap while serving in a hostile area (Tax Free).  One of these benefits is the Roth Conversion:  So I may disseminate the concept correctly, I have a question for the crowd.

During the Roth Conversion Ladder, it is mentioned that you would convert a certain amount each year once in retirement, so you can have access to that amount five years later.  You wait until retirement because your income will be significantly reduced.

However, since I am currently serving in a tax free zone, my income this year will be drastically reduced next to nothing.  In this scenario, shouldn't I go ahead and convert my entire Traditional IRA into Roth?  Or should I at least convert up to a certain amount?  If so what is that target.  I want to have the right information so I can share it with our military brothers and sisters.  Thank you in advance.
Is a Roth conversion tax free if you're serving in a tax free zone when you do it?  I don't know - maybe Nords or someone more familiar with these military specific things will find this and chime in or something.

Assuming the Roth conversion is NOT tax-free, then it comes down to "how much money are we talking about?" and "how much taxable income do you have this year already?" and finally "how much income tax are you willing to pay on the conversion?"
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Nords on October 14, 2017, 03:46:26 PM
I have been working with some friends to help educate military on their benefits when it comes to investing while serving in a tax free zone.  The military is not great at educating their Sailors and Soldiers on some huge benefits they can reap while serving in a hostile area (Tax Free).  One of these benefits is the Roth Conversion:  So I may disseminate the concept correctly, I have a question for the crowd.

During the Roth Conversion Ladder, it is mentioned that you would convert a certain amount each year once in retirement, so you can have access to that amount five years later.  You wait until retirement because your income will be significantly reduced.

However, since I am currently serving in a tax free zone, my income this year will be drastically reduced next to nothing.  In this scenario, shouldn't I go ahead and convert my entire Traditional IRA into Roth?  Or should I at least convert up to a certain amount?  If so what is that target.  I want to have the right information so I can share it with our military brothers and sisters.  Thank you in advance.
Is a Roth conversion tax free if you're serving in a tax free zone when you do it?  I don't know - maybe Nords or someone more familiar with these military specific things will find this and chime in or something.

Assuming the Roth conversion is NOT tax-free, then it comes down to "how much money are we talking about?" and "how much taxable income do you have this year already?" and finally "how much income tax are you willing to pay on the conversion?"
Thanks for the tag, Dandarc!

Flip, you're absolutely right about Roth IRA conversions in a combat zone.  For the vast majority of servicemembers, it makes sense to convert up to the top of the 10% income-tax bracket.  However relatively junior ranks (E-1-E-5, O-1) may want to dig into their tax credits (EITC, childcare, Saver's Tax Credit) to see whether they could convert up into the 15% income-tax-bracket.  In the latter situation they may convert a big enough amount to be taxed, but the income tax would be wiped out by the tax credits.

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit

You'd also want to emphasize that while they're in the combat zone it also makes sense to contribute to the Roth TSP just short of the $18K limit, and then to try to contribute to the traditional TSP up to the $54K limit.  (Because these CZTE contributions are not taxed anyway.)
 Pay close attention to the four paragraphs under this table from the TSP website:
https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/contributionLimits.html

We know (from servicemembers) that it someone hits the $18K Roth TSP limit while they're in the combat zone then the TSP computers will lock them out of the traditional TSP (and the $54K limit) as well for the rest of the year.  Nobody has volunteered to test whether this computer glitch has been fixed yet.

And finally (this is down in the weeds), for those who elect the Blended Retirement System (or are mobilized Reserve/Guard members with civilian 401(k)s or civil-service TSP accounts), that $54K limit includes matching contributions.  This means the servicemember should contribute at least 5% to their TSP (for the full DoD match) but the amount of the DoD match is included in the $54K IRC 415(c) limit.

We know (again from servicemember experience) that a TSP contribution which exceeds any limit is accepted by the TSP's computers (up to the amount of the limit) and then the excess is kicked back.  However servicemembers with 401(k)s will have to track the $54K limit on their own, because the TSP computers won't know about their 401(k).
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: hookipatm on October 28, 2017, 08:43:15 PM
Hello!

I am sure the answer is somewhere but I could not find it anywhere. Here are my plan & question:

my portfolio in my IRA is heavy in dividend stocks (including a lot of un-qualified dividends such as REITs, MLPs, ...). I am currently re-investing all of my dividends (accumulation phase). Once I start my "Roth Conversion Ladder" conversion, I will stop re-investing my dividends and build a big cash position. I will then convert this "cash" into my Roth as part of the "Roth conversion". I will never have to touch my IRA principal (until I am forced to do so). Since at that point, I will be living on 30/40K per year (from taxable accounts), I am planning on having a very small tax bill, if not zero, while doing the conversion. Am I missing something? In other words, does the IRS care whether the "cash" is originally coming from un-qualified dividends? I am 99% they do not, but would like to have your opinion. Thanks.

hookipatm
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on October 28, 2017, 09:53:20 PM
my portfolio in my IRA is heavy in dividend stocks (including a lot of un-qualified dividends such as REITs, MLPs, ...). I am currently re-investing all of my dividends (accumulation phase). Once I start my "Roth Conversion Ladder" conversion, I will stop re-investing my dividends and build a big cash position. I will then convert this "cash" into my Roth as part of the "Roth conversion". I will never have to touch my IRA principal (until I am forced to do so). Since at that point, I will be living on 30/40K per year (from taxable accounts), I am planning on having a very small tax bill, if not zero, while doing the conversion. Am I missing something? In other words, does the IRS care whether the "cash" is originally coming from un-qualified dividends? I am 99% they do not, but would like to have your opinion.
Any pre-tax amount converted from a traditional IRA to a Roth IRA will be taxed as ordinary income, regardless of how that money had been invested in the traditional IRA.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on October 28, 2017, 10:14:08 PM
In other words, No.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: hookipatm on October 29, 2017, 09:19:13 AM
Thanks a lot!!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: montiff on November 07, 2017, 08:41:06 AM
OK dumb question alert:

I'm 32 and have 100k in a 401k and make 100k a year, I contribute over the max company matching of 7% (I'm contributing 10%) and would like to be able to access my funds penalty free at the age of 45.

In your opinions which option is the best:

1. Contribute the additional 3% directly to my ROTH IRA.

2. Contribute that 3% to my IRA (for more fund options) then do a 'conversion' to my Roth IRA at 40.

3.  Keep the extra 3% in my 401k and do the 'conversion' to my Roth IRA at 40.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on November 07, 2017, 08:57:21 AM
Without any other context, I'd say #2 but that might change if you have a bunch of kids or will have substantial income after 45.

Also, if you are single why not max the 401k and T.IRA?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: montiff on November 07, 2017, 09:14:37 AM
Quote
Also, if you are single why not max the 401k and T.IRA?

So it would make more sense to do a variation of option 3? And increase my 401k contribution to 20% (13% over the matching 7%) to get close to the 401k max of $18,000...

Quote
3.  Keep the extra 3% in my 401k and do the 'conversion' to my Roth IRA at 40.


Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on November 07, 2017, 09:28:57 AM
There are other threads on "order of investing" but I'm on a phone which makes linking difficult. Someone help me out with a link please.

Again, it depends on a lot of things, but if you are trying to save a lot very quickly, the general consensus is 401k contribution to max the match (so 7% I think for you), then 5,500 into a T.IRA, the max out the 401k, then after tax investments or other.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on November 07, 2017, 09:44:32 AM
There are other threads on "order of investing" but I'm on a phone which makes linking difficult. Someone help me out with a link please.
Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153)

Quote
Again, it depends on a lot of things....
OP, just want to emphasize CS's point here.  You can look at the suggested investment order linked above and apply your own context.  Or consider How To: Write a "Case Study" Topic (https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/).
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: LiseE on November 07, 2017, 10:30:21 AM
Does this look right?  I've been reading and learning about the Conversion Ladder strategy and it seems the timing may be right in the near future.  Here are the details:

Hubby not currently working - 2018 Income = zero
March 2018 I will be taking a package from my company and getting 40 weeks of pay -  Income for 2018 = 130K
Inheritance of 200K received in 2018
1.1M in 401K (need to get this money out!)

So with the inheritance and the severance package we will have enough to live on for over 5 years and hope to get the conversion pipeline well established.  Am I on the right track here?

With Hubby and I both not generating income in 2019, THIS is the year to start our conversions as our tax bracket will be lower.  I don't know the numbers off hand but with charitable giving and standard deduction for married filing jointly lets say our total deductions for 2018 about 20K. ( we might be investing in real estate in this time frame which will offer more tax incentives so our taxable income could be even lower)

So if we convert 50K from 401K --> TraditionalIRA --> RothIRA we will have to pay the taxes on the 50K but we'll hopefully be in the 15 or 25% tax bracket.  So we need to really look at our deductions to decide how much to convert to see if getting our income down to < 13K to get the 15% bracket.

Am I understanding the timing and the tax implications correctly?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on November 07, 2017, 01:09:30 PM
Does this look right?  I've been reading and learning about the Conversion Ladder strategy and it seems the timing may be right in the near future.  Here are the details:

Hubby not currently working - 2018 Income = zero
March 2018 I will be taking a package from my company and getting 40 weeks of pay -  Income for 2018 = 130K
Inheritance of 200K received in 2018
1.1M in 401K (need to get this money out!)

So with the inheritance and the severance package we will have enough to live on for over 5 years and hope to get the conversion pipeline well established.  Am I on the right track here?

With Hubby and I both not generating income in 2019, THIS is the year to start our conversions as our tax bracket will be lower. 

Everything until here sounds great, then you sort of lost track.

If you convert $50k it will be income on your return. Assuming you have no other income and you have $20k in deductions, you would have $30k taxable income. In 2018 (not considering tax law changes) the 10% bracket goes up to $19k, and the 15% bracket goes up to $77k. So you really could convert up to $97k and still be in the 15% bracket.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Radioherd88 on February 12, 2018, 04:02:43 PM
Ok so this thread is super - as my employer sponsored advisor just told me that you can't withdraw from our 403b prior to 59.5 without penalty....

My employer offers a 403b and a 457 - is it better to max out one over the other? Given that the 457 allows you to withdraw prior to 59.5 without needing to do the conversion?

My wife has her 401k maxed out and we also have our IRA's maxed out, so this is one of our last big tax free options....
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cheddar Stacker on February 12, 2018, 05:34:31 PM
Ok so this thread is super - as my employer sponsored advisor just told me that you can't withdraw from our 403b prior to 59.5 without penalty....

My employer offers a 403b and a 457 - is it better to max out one over the other? Given that the 457 allows you to withdraw prior to 59.5 without needing to do the conversion?

My wife has her 401k maxed out and we also have our IRA's maxed out, so this is one of our last big tax free options....

457 is usually better because of the rules for easier withdrawals, but you can do both. $18,500 in 403b, and $18,500 in 457.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: dandarc on February 13, 2018, 08:01:42 AM
Ok so this thread is super - as my employer sponsored advisor just told me that you can't withdraw from our 403b prior to 59.5 without penalty....

My employer offers a 403b and a 457 - is it better to max out one over the other? Given that the 457 allows you to withdraw prior to 59.5 without needing to do the conversion?

My wife has her 401k maxed out and we also have our IRA's maxed out, so this is one of our last big tax free options....

457 is usually better because of the rules for easier withdrawals, but you can do both. $18,500 in 403b, and $18,500 in 457.
This.  Max Both.  If all things are equal regarding investment choices and you can't max both, favor the 457.  Quite often, things are not equal, so do your homework.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Radioherd88 on February 13, 2018, 03:50:07 PM
Ok so this thread is super - as my employer sponsored advisor just told me that you can't withdraw from our 403b prior to 59.5 without penalty....

My employer offers a 403b and a 457 - is it better to max out one over the other? Given that the 457 allows you to withdraw prior to 59.5 without needing to do the conversion?

My wife has her 401k maxed out and we also have our IRA's maxed out, so this is one of our last big tax free options....

457 is usually better because of the rules for easier withdrawals, but you can do both. $18,500 in 403b, and $18,500 in 457.

Ok thanks - i met with my Voya rep again to show her the IRA conversion ladder and she was thoroughly confused by it - she also couldn't really explain ANY difference between the 403b and 457 other than the 457 you can withdraw earlier IF you quit the job it's associated with. If you don't quit, you can't access it till 70. I did find this article useful:

https://www.investopedia.com/articles/personal-finance/111615/457-plans-and-403b-plans-comparison.asp

So, I think 457 it is then...

Is there a good thread on here already that compares VTSMX versus the Vanguard Retirement 2035/2045/2055 type funds that are a mixture of index funds then switch to bonds once you get closer to that date - are they just a bit more conservative than VTSMX because of the switch to bonds so in theory will perform slightly lower than VTSMX all being equal?

Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: boarder42 on February 20, 2018, 02:21:19 PM
@MDM

add this link to your OP please its probably the best analysis that also includes taking the penalty

https://www.madfientist.com/how-to-access-retirement-funds-early/
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on February 20, 2018, 02:33:19 PM
@MDM

add this link to your OP please its probably the best analysis that also includes taking the penalty

https://www.madfientist.com/how-to-access-retirement-funds-early/
I'd be happy to, except I'm not the OP for this thread.  I have reported your post to the moderators, who are able to do so.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: swampwiz on February 21, 2018, 01:22:07 AM
I have been working with some friends to help educate military on their benefits when it comes to investing while serving in a tax free zone.  The military is not great at educating their Sailors and Soldiers on some huge benefits they can reap while serving in a hostile area (Tax Free).  One of these benefits is the Roth Conversion:  So I may disseminate the concept correctly, I have a question for the crowd.

During the Roth Conversion Ladder, it is mentioned that you would convert a certain amount each year once in retirement, so you can have access to that amount five years later.  You wait until retirement because your income will be significantly reduced.

However, since I am currently serving in a tax free zone, my income this year will be drastically reduced next to nothing.  In this scenario, shouldn't I go ahead and convert my entire Traditional IRA into Roth?  Or should I at least convert up to a certain amount?  If so what is that target.  I want to have the right information so I can share it with our military brothers and sisters.  Thank you in advance.
First off, I'd like to thank you for serving our country, and I think that this seemingly small - but potentially huge - benefit of getting a super low tax rate while in a combat zone is a wonderful benefit, and I have no problem with this adding to the deficit.  We unmotivated civilians will just have to pay your taxes!

As for taking advantage of a lower tax rate, just like the price of "free" cannot be beat, so can you (almost) never go wrong with taking advantage of doing a Roth conversion at a 0%.  That said, there is one possible drawback in that the only amount that can be accessed penalty-free is the 5-year Roth conversion basis (of course, the contribution basis can also be accessed like this as well), so it could turn out that doing a big Roth conversion now instead of later - when the assets presumably will have gained in value - generates less of that conversion basis than what would have been generated had the assets been at a higher value at the time of the conversion.  I myself have had a big position in the super-volatile BRZU, which has gone to Hell and back, allowing me to convert (up to my 0% tax rate) some at the super-depressed prices, but in so doing, I might run out of TIRA to do a Roth conversion that would hit the 5-year seasoning date before hitting age 59.5 (as it turns out, it appears that I might only miss out on a 5-year seasoned Roth conversion basis tranche for a only a few months in the year that I hit 59.5, which is not all that bad considering that I will be 100% Roth!)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Mother Fussbudget on February 22, 2018, 04:07:49 PM
Hi Radioherd88.  I wanted to clarify 2 things regarding withdrawing funds penalty free after age 55 from a 403(b) - yes, even one hosted at Voya. 
1) You can only withdraw funds penalty free if you 'separate from service' with the 401K or 403(b) sponsoring company - i.e. you quit, get fired, retire, etc.
2) Voya DOES support penalty free withdrawals for 403(b) accounts for those over 55 - it says so right in their Distribution form:

Quote
"2.  Early (premature) Distribution, exception applies - This reason applies to separation from service after age 55 (including retirement) or an IRS Levy. If separated from service or retired and you are requesting a direct rollover to an IRA, 403(b) or qualified plan, check this box"
Link:  https://investments.voya.com/idc/groups/public/documents/forms_and_applications/fundspace_403b2010.pdf (https://investments.voya.com/idc/groups/public/documents/forms_and_applications/fundspace_403b2010.pdf)

I'm not surprised their representative wasn't aware of the Rule of 55.  Since I wrote the original post here 2 years ago, I've been contacted by several readers who were initially told their plans didn't support this rule... only to find later with further research that they (like 'The Dude') do 'abide' by the rules.

Example companies where reps were schooled by Mustachians:  TIAA, Voya, Employee Fiduciary, and Trans-America (the latter by me in 2/2018). 

So while I agree a 457 is probably an easier all around plan to use as a retirement savings vehicle, I did not want the earlier statement to stand unchallenged that (my rephrasing) "Voya 403(b)'s do not allow penalty free withdrawal upon separation of service."

Keep saving, and All The Best!
MFB
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: blackjack on March 04, 2018, 07:19:37 AM
"You can also withdraw any Roth IRA contributions (but not earnings) at any time"
Does this still apply if you only opened and contributed to a ROTH IRA less than 4 years and of course under 59 1/2?


Also you can only withdrawl a roth 401k or convert to a roth ira after you separated from the company?

thank you
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Nords on March 04, 2018, 08:05:19 AM
"You can also withdraw any Roth IRA contributions (but not earnings) at any time"
Does this still apply if you only opened and contributed to a ROTH IRA less than 4 years and of course under 59 1/2?
Yes, at any time, because you've already reported the money which you contributed as earned income and paid your taxes on it. 

It's on page 30 of IRS Pub 590-B:
https://www.irs.gov/pub/irs-pdf/p590b.pdf
"You don't include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)."

This is why some investors use Roth IRA contributions as emergency funds (while hoping there's no emergency need to tap the fund).  Of course you ideally won't touch your contributions because once you withdraw contribution funds, they can't compound for you any more.

Also you can only withdrawl a roth 401k or convert to a roth ira after you separated from the company?
Yep.  It's a totally different type of account from a Roth IRA (a "designated Roth account") and subject to a different set of federal laws & IRS rules.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: blackjack on March 04, 2018, 09:21:29 AM
Thank you i made my first contribution into my roth ira in dec. 2013. I will withdrawl only contribution which is 14k and i made around 5k in earnings. so i'll leave the 5k.
(need the money for a business start up)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Nords on March 04, 2018, 10:50:30 AM
(need the money for a business start up)
I hear that a lot, and I'd counter that "need" might not cover all aspects of the situation.  You're cannibalizing tomorrow's absolutely certain retirement in exchange for an uncertain chance to create revenue from a business.  You will retire one day (whether you want to or not) and you will want retirement funds.  Whether your business can get you there is a whole 'nother debate about risk, uncertainty, and opportunity luck.

I've been an angel investor for over a decade and I've heard literally hundreds of pitches for startups.  Here's what I'd advise a founder.

If your business is truly a great idea then other people will lend or invest money to help you start it up and to prove the fit of its product/service with the market.  If your business plan is good then your customers (or lenders or investors) will pay you up front to bootstrap from your revenue without having to pillage your retirement accounts.  If nobody will lend or invest or put down an advance payment then... that's how your business is likely to work out with your prospective customers, too.

Before you burn up your retirement funds for a startup, try the "other people's money" approaches first.  If you're not sure how to do that then search for accelerators, incubators, startup "boot camps", or SCORE/SBA offices in your area.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: blackjack on March 04, 2018, 11:33:59 AM
The money isn't necessarily for the business it self.. its going to be more of salary to myself until i make enough money from the business.

Having said that i will hold off withdrawing. thank you
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: bigote2032 on March 12, 2018, 11:22:36 PM
Hello, thinking about keeping taxable income bracket of 25% or below for the ladder to make any sense, but having some trouble, let me elaborate a bit below:

When I FIRE and I am ready to start doing the ladder every year, say I use my index funds to support myself until I am 59.5 and can take my first ladder paycheck after 5 years.  My taxable income will be too high since it's not only the tIRA to ROTH IRA conversion that gets taxes, also my index funds dividends and/or capital gains I get every year.

For example, say I am getting 50K a year from index funds in total, and doing annual 50K conversions, I will be at $100K taxable income.  If I cannot keep my income below 25% bracket, is there really any value of doing the ladder? And that's not accounting for an spouse that might be working and significantly increasing income if we file taxes jointly, so probably will have to file single.

Thank you!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on March 12, 2018, 11:40:39 PM
Firstly, there's no 25% bracket anymore. In 2018 the brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Secondly, withdrawing $50k from your taxable account does not necessarily imply that you will be realizing $50k of income from that account. The principal part of the shares you sell does not count as income, only the gains do. The dividends that you receive count as income whether you withdraw from the account or not.

Thirdly, there's a difference between gross income and taxable income. A $100k gross income will have a standard (or itemized) deduction subtracted from it to result in a smaller taxable income. This post-deduction taxable income is the number you use to figure your tax bracket. Supposing you had a gross income of $100k as a single person and you take the $12k standard deduction, that will result in a taxable income of $88k, which is only a little bit into the 24% bracket. Same situation as a married couple and you would barely scratch the surface of the 22% bracket.

Fourthly, capital gains and qualified dividends are taxed at a lower rate. Only the $50k of Roth conversions in your example would be taxed at the regular bracket, and only after subtracting your deductions. You'll likely be in the 12% bracket from this alone. Capital gains go on top of this. The top rate you would pay for capital gains in your example would be 15%, though much of it would be taxed at 0% if you're married.

Fifthly, you would only be having this "double income" situation for five years. After that, your pipeline will be well primed and you will have no need to realize more than one year's worth of spending as income in a year.

If not the Roth ladder, what alternative strategy are you considering, and how do you expect it to save you money in taxes?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: boarder42 on March 13, 2018, 06:47:22 AM
Hello, thinking about keeping taxable income bracket of 25% or below for the ladder to make any sense, but having some trouble, let me elaborate a bit below:

When I FIRE and I am ready to start doing the ladder every year, say I use my index funds to support myself until I am 59.5 and can take my first ladder paycheck after 5 years.  My taxable income will be too high since it's not only the tIRA to ROTH IRA conversion that gets taxes, also my index funds dividends and/or capital gains I get every year.

For example, say I am getting 50K a year from index funds in total, and doing annual 50K conversions, I will be at $100K taxable income.  If I cannot keep my income below 25% bracket, is there really any value of doing the ladder? And that's not accounting for an spouse that might be working and significantly increasing income if we file taxes jointly, so probably will have to file single.

Thank you!

you're not getting 50k in earnings from you index funds if you cash out 50k maybe only 20-30% of that is actually LTCGs and dividends.  plus the standard deduction mentioned below. 
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: bigote2032 on March 13, 2018, 11:19:39 PM
Hi boarder, can you point me to some examples of this? I am sure folks that are FIREd are doing this put would love to see some numbers. Thank you!
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on March 13, 2018, 11:32:50 PM
...can you point me to some examples of this?
Examples of...what?  Selling fund shares for $50K that one purchased years back for $20K, thus paying only long term capital gain taxes on only $30K?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on March 13, 2018, 11:59:22 PM
Hi boarder, can you point me to some examples of this? I am sure folks that are FIREd are doing this put would love to see some numbers. Thank you!

Here's an example of how this might look.

Suppose you retire this year, planning to spend $50k annually. If you're following the 4% rule that implies your portfolio is $1.25 million. Suppose $1 million of this is in traditional IRAs, while the last $250k is in VTSAX in a taxable account.

You roll over $50k from your traditional IRA to Roth to get your Roth ladder going. This counts as regular income.

Your $250k of VTSAX pays out a bit less than 2% in dividends, let's call it $5k. You need to sell some shares for the other $45k.

You have some choice about which shares to sell. The oldest ones generally will have lower cost basis, meaning higher taxes when you sell. Let's say you choose to sell some shares you bought in 2014 when the price was about $50 per share. It's a bit under $70 now, meaning you need to sell about 650 shares to get your $45k. With a $20 gain per share, that's a $13,000 capital gain that you need to report on your tax return.

Add it all up and you have $50k of regular income, plus $18k of capital gains/dividend income.

If you're single and claiming the standard deduction of $12,000, that means you're only taxed on $38k of regular income and $18k of capital gains/dividend income.

That $38k number puts you just below the top of the 12% bracket for your regular income. For the Roth conversion you would be paying 10% on the first $9,525 and 12% of the rest, or $4,369.50 in total.

For capital gains, you pay 0% up to the top of the 12% bracket (the first $700 of capital gains income in this example), and 15% after that. So you would pay an additional $2,595 in tax (($18,000 - $700) * 15%) based on your taxable capital gains and dividends.

Your total tax burden on $68k of gross income would then be $4,369.50 + $2,595 = $6,964.50, an effective tax rate a hair over 10%.

With the same income numbers but married filing jointly, you instead have a $24,000 standard deduction, meaning you're only taxed on $26k of the Roth conversion, amounting to $2,739 of tax. Your capital gains and dividends would all be taxed at 0%.

This is of course just an example. You might start retirement with some existing Roth basis that you can withdraw tax-free, reducing the amount you need to take from your taxable account. You might start with a bigger taxable account, allowing you to supplement your Roth withdrawals in years 6+ with some taxable withdrawals, thus reducing the amount you need to convert each year. There are a number of possible variables. It all depends on your particular situation.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: bigote2032 on March 14, 2018, 12:00:55 AM
Is ROTH IRA money I withdraw really considered taxable income (only capital after 5 years of conversion, not the earnings)? I have found few sites that say it's not taxable income, so should not be a problem, as opposed to traditional IRA, you already paid taxes on ROTH, if it is considered taxable income you would be double-taxed: taxed on conversion from traditional to ROTH and taxed on income tax after withdrawing the money.  Correct me if I am wrong, but this makes sense to me, double-taxing ROTH IRA would defeat the purpose and nobody would be doing it.

From: http://fairmark.com/retirement/roth-accounts/roth-distributions/taxable-distributions-from-roth-iras/

"You don’t pay tax on your Roth IRA distributions until you withdraw earnings, and you aren’t considered to be withdrawing earnings from your Roth IRA until the total amount you’ve withdrawn from all your Roth IRAs is greater than the total amount you contributed to all your Roth IRAs, including rollover contributions. If you meet certain requirements, you won’t pay tax when you withdraw earnings. But if you don’t meet those requirements, you’ll have to pay tax on the earnings you withdraw, and you may have to pay a penalty, too."
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: bigote2032 on March 14, 2018, 11:14:32 AM
Hey seattlecyclone, that example helps a lot! Thank you.

Any opinion on that article about ROTH IRA withdrawals not considered taxable income? Sorry, I posted few minutes after you!


Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: boarder42 on March 14, 2018, 12:08:56 PM
you dont pay tax on your withdrawals or the earnings* in a Roth.  *as long as your of the correct age to withdraw or you meet other requirements. 

my bridge money will likely be 50% roth contribution 50% Taxable contributions and follow a plan similar to what SC laid out above.  Staying under the 12% bracket is key for us.  but there is a large gap of free money there when you account for standard deductions. 

50k for a single person is really high btw.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on March 14, 2018, 12:13:55 PM
Hey seattlecyclone, that example helps a lot! Thank you.

Any opinion on that article about ROTH IRA withdrawals not considered taxable income? Sorry, I posted few minutes after you!
Most Roth IRA withdrawals will not be taxable.  Some will.  The quote from the Fairmark article seems an accurate synopsis of when they will and won't.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on March 14, 2018, 03:42:56 PM
Yep, pre-59½ withdrawals of Roth IRA earnings will generally count as income. Withdrawals of your contributions and conversions never count as income, nor do withdrawals of earnings when you're old enough to take a qualified distribution.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: bigote2032 on March 14, 2018, 06:13:57 PM
Got it, thanks seattlecyclone, MDM and boarder42 for your helpful advise!! :)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: DreamFIRE on March 14, 2018, 07:34:56 PM
Check your brokerage account funds to see what your capital gains will be.  I just checked mine, and the total of my funds shows a cost basis of about 40% of the total equity, and I've always done dividend reinvestment.

As a single person, I'm allowing for a WR of $54,000/yr and adjust for inflation.  I'm in a LCOL area, but it doesn't seem that high considering I want a nice fun/travel fund.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Cognitive Miser on March 23, 2018, 02:11:06 PM
Does anyone have a fancy VETTED spreadsheet they can share, which implements a Roth ladder including taxes?  I'm looking for something with several columns which show 401k/TSP balances, Roth balances (contributions, conversions, and earnings), Taxable accounts, Income needed in retirement, and breaks out what taxes are owed on conversions and withdrawals?  Also which incorporates inflation and expected returns.  I made one, but it has errors, and I'm so frustrated with it I'm about to scrap it.  It goes from right now (while I'm still working and building up my taxable and 401k balances) to age 80, so it covers my initial conversion period (from 401K to Roth) when I'm drawing down taxable, the period where I'm withdrawing conversions from my Roth, the period where I switch to withdrawals from my federal TSP account after age 59.5, and then back to Roth (earnings) for late retirement.  It's pretty darn complex. Just wondering if someone else has something equally complex, but CORRECT.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: boarder42 on March 26, 2018, 12:26:27 PM
Does anyone have a fancy VETTED spreadsheet they can share, which implements a Roth ladder including taxes?  I'm looking for something with several columns which show 401k/TSP balances, Roth balances (contributions, conversions, and earnings), Taxable accounts, Income needed in retirement, and breaks out what taxes are owed on conversions and withdrawals?  Also which incorporates inflation and expected returns.  I made one, but it has errors, and I'm so frustrated with it I'm about to scrap it.  It goes from right now (while I'm still working and building up my taxable and 401k balances) to age 80, so it covers my initial conversion period (from 401K to Roth) when I'm drawing down taxable, the period where I'm withdrawing conversions from my Roth, the period where I switch to withdrawals from my federal TSP account after age 59.5, and then back to Roth (earnings) for late retirement.  It's pretty darn complex. Just wondering if someone else has something equally complex, but CORRECT.

https://i-orp.com/paper/index.html

go play with this.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Leisured on June 11, 2018, 01:52:30 AM
Thank you NorCal for the article. I must remember the name Morgan Housel.

Two good quotes:

When most people say they want to be a millionaire, what they really mean is “I want to spend a million dollars,” which is literally the opposite of being a millionaire. This is especially true for young people.

It helps, I’ve found, when making money decisions to constantly remind yourself that the purpose of investing is to maximize returns, not minimize boredom. Boring is perfectly fine. Boring is good. If you want to frame this as a strategy, remind yourself: opportunity lives where others aren’t, and others tend to stay away from what’s boring.



Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: OurTown on June 15, 2018, 09:58:33 AM
It looks like I will need to bridge from 2024 (when I turn 55) to 2029 (when I turn 59.5).  We have a 457(b) through Wife's work, which we will be able to access as soon as she retires regardless of age.  I can also access my 401(k) at the firm if I can keep working through 2024 (age 55).  The only disadvantage is I don't control the investments in the 401(k), and I can't roll it over and still take it early without penalty.  In fact, not only do I not control the investments, I don't even know what the investments are!  It could be invested in Dutch tulip bulbs for all I know.  I also don't have any access to a current balance.  We get a paper report once a year that shows last year's balance.  Since I'm flying blind, I've been investing only up to the match in the 401(k), and I am maxing out the rest of my space in a 403(b) in my side gig.  I have to make a decision starting in 2019 (my age 50) as to whether I should add in the extra $6,000 catch up contribution to the 401(k).  Probably the answer is yes, even though it's a bit of a black hole.

     
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: boarder42 on June 15, 2018, 10:07:04 AM
It looks like I will need to bridge from 2024 (when I turn 55) to 2029 (when I turn 59.5).  We have a 457(b) through Wife's work, which we will be able to access as soon as she retires regardless of age.  I can also access my 401(k) at the firm if I can keep working through 2024 (age 55).  The only disadvantage is I don't control the investments in the 401(k), and I can't roll it over and still take it early without penalty.  In fact, not only do I not control the investments, I don't even know what the investments are!  It could be invested in Dutch tulip bulbs for all I know.  I also don't have any access to a current balance.  We get a paper report once a year that shows last year's balance.  Since I'm flying blind, I've been investing only up to the match in the 401(k), and I am maxing out the rest of my space in a 403(b) in my side gig.  I have to make a decision starting in 2019 (my age 50) as to whether I should add in the extra $6,000 catch up contribution to the 401(k).  Probably the answer is yes, even though it's a bit of a black hole.

   

if i were that old when i retired i'd just use SEP. 
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: OurTown on June 15, 2018, 10:21:44 AM
I am, indeed, quite old.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: boarder42 on June 15, 2018, 10:44:02 AM
I am, indeed, quite old.

that wasnt the point of my comment - just that it would be much simpler and with how many years you have much less risk with the shortcomings of it for someone retiring in their 30s or 40s.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Travis on July 18, 2018, 09:19:09 PM
The scenario SeattleCyclone laid out may end up being very similar in form to my retirement.  I'm pretty sure I'm going to receive a pension which I can predict today plus or minus $10k/year.  I know how much I'll need in dividends and LTCG to pad the rest, but how much of my income will be unqualified dividends is another variable.  I know how much I received last year, but I'm not FIREing for a few more years.  Is there a more or less known rate of growth for taxable VTSAX dividends?  Do they grow at the same rate as the overall gains?  Whatever that amount is will determine how much room I'll have to do conversions each year.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: bob22 on July 26, 2018, 07:56:18 AM
I've attached a paper entitled "Substantiation of the use of a Roth Conversion or Rollover to a Roth to Avoid Additional Tax on Early Distributions from IRAs and Certain Other Retirement Plans." I'm including the beginning few paragraphs which include its justification and feedback I'm looking for, because I believe that it will be useful to others.

Justification for this paper: There are quite a few sources on the Internet that espouse the "Roth Conversion Ladder" as a method to obtain access to assets in tax-advantaged accounts to fund early retirement, without paying additional tax on early distributions. A number of these sources go into a lot of detail on how the Roth Conversion Ladder is implemented, but what I've found that these sources provide limited traceability back to and explanation of IRS rules that permit (or at least do not inhibit) this tax "loophole." Sometimes there is traceability to the IRS publications, but often there is none. In a few cases there is in-depth but narrowly focused analysis of specific IRS rules. Rules that I've found are ambiguous and very subject to interpretation. It's for this reason that I have included inline traceability. I'm writing this paper because I want to understand as much as I can about the logical basis for the "gray areas" so that I can make an informed decision on whether or not to use this method--it's not enough for me to assume that it's valid to do something just because others have. I want to understand what is explicitly stated, what is inferred, and why so that I'm prepared to discuss this with an accountant, the brokerage that holds my IRAs, or anyone that can potentially throw up road blocks that delay my ability to use this method. Because not everyone agrees on what is and isn't allowed.
 
Feedback: I'm looking for input on this paper that will help to make it more correct, complete, and unambiguous. I understand that this level of detail doesn't work for everyone, and there are some that won't see the need for this--that's not the type of feedback I'm looking for.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: dandarc on July 26, 2018, 03:45:24 PM
bob22 - I'd personally add something about the ordering rules on Roth IRA distributions. These can be found here:
https://www.irs.gov/publications/p590b#en_US_2017_publink1000231071 (https://www.irs.gov/publications/p590b#en_US_2017_publink1000231071)

Otherwise, how do you know if "distribution is of conversion or certain rollover contributions"?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Unique User on August 01, 2018, 11:07:56 AM
bob22 - I'd personally add something about the ordering rules on Roth IRA distributions. These can be found here:
https://www.irs.gov/publications/p590b#en_US_2017_publink1000231071 (https://www.irs.gov/publications/p590b#en_US_2017_publink1000231071)

Otherwise, how do you know if "distribution is of conversion or certain rollover contributions"?

Thanks for the link, I was just wondering on the conversions. 

"Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first)."

I converted our Traditional IRAs to Roth in 2008, values had tanked and we had zero income that year.  So if I start a ladder from our traditional IRAs in our first year of retirement, does this mean we can take out (1) contributions then (2) conversions from 2008 and then start on the laddered amounts?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: dandarc on August 01, 2018, 02:11:44 PM
Yes exactly. You already paid tax on the 2008 conversion, and the conversion was more than 5 years ago, so no penalty would be due were you to withdraw all of your regular contributions and start dipping into the 2008 conversion amount. 

You'd have to withdraw the amount of your regular contributions, plus the amount of that 2008 contribution before there is even a possibility of a penalty.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: Unique User on August 02, 2018, 08:15:42 AM
Thanks Dandarc!  That helps with my planning.  We're (hopefully) only 20-23 months away. 
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: dustinst22 on October 04, 2018, 09:53:03 AM
Sorry for the newb question -- has anyone done this conversion with a SEP?  Is the process the same?
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on October 04, 2018, 10:01:14 AM
Sorry for the newb question -- has anyone done this conversion with a SEP?  Is the process the same?
Yes.  A SEP-IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRAs. (https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps)
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: thesis on October 25, 2018, 04:04:00 PM
Dear holy hell, this took a long time to find.

I've been bothered lately about the comments (also appearing in the original post) that Roth IRA contributions can be withdrawn any time, tax free. This is true, but I finally found the IRS link that proves this:

https://www.irs.gov/publications/p590b#en_US_2017_publink1000231057

Quote
Are Distributions Taxable?

You don't include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also don't include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering Rules for Distributions , later.
(emphasis mine)

The big links on the side of the IRS site have an unfortunate bug where they simply roll up or roll down their contents, and do not lead to their corresponding anchor in the page, such that only the final sub-links lead to actual paragraphs. I had to URL-hack to get the link that goes directly to that specific paragraph :)

Turns out that "Designated Roth Account" is IRS speak for Roth 401(k), Roth 403(b), or some such accounts, and THOSE are subject to pro rata taxation for non-qualified distributions:

https://www.irs.gov/retirement-plans/designated-roth-accounts-distributions

(the more formal information was somewhere else, too).

Posted here for future reference :)

Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: FIPharm on November 29, 2018, 10:17:17 AM
Hello MMMs,

I was wondering if someone could clarify the information below. I was under the impression that I would be able to still withdraw money tax-free/penalty free before age 59 1/2 but the information below says I need to meet AT LEAST ONE of the following. . . there an age requirement now? and the other requirements. . .?

Thank you guys for all your help, I really appreciate it.



Considerations for owners of Roth IRAs
Generally, converted assets in the Roth IRA must remain there for at least 5 years to avoid penalties and taxes. Distributions from a Roth IRA are tax-free and penalty-free provided that the 5-year aging requirement has been satisfied and at least one of the following conditions has been met:

- You reach age 59½
- You pass away
- You become disabled
- You make a qualified first-time home purchase

RMDs are not required during the lifetime of the original owner of a Roth IRA. RMD amounts are not eligible to be converted to a Roth IRA.



 Source:

https://www.fidelity.com/building-savings/learn-about-iras/convert-to-roth
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: sol on November 29, 2018, 10:24:45 AM
Hello MMMs,

I was wondering if someone could clarify the information below. I was under the impression that I would be able to still withdraw money tax-free/penalty free before age 59 1/2 but the information below says I need to meet AT LEAST ONE of the following. . . there an age requirement now? and the other requirements. . .?

Thank you guys for all your help, I really appreciate it.



Considerations for owners of Roth IRAs
Generally, converted assets in the Roth IRA must remain there for at least 5 years to avoid penalties and taxes. Distributions from a Roth IRA are tax-free and penalty-free provided that the 5-year aging requirement has been satisfied and at least one of the following conditions has been met:

- You reach age 59½
- You pass away
- You become disabled
- You make a qualified first-time home purchase

RMDs are not required during the lifetime of the original owner of a Roth IRA. RMD amounts are not eligible to be converted to a Roth IRA.



 Source:

https://www.fidelity.com/building-savings/learn-about-iras/convert-to-roth

There are multiple kinds of money in your Roth IRA, and they have different withdrawal rules. 

1.  Your regular $5k/year contributions can be withdrawn at any time without penalty or taxes due.

2.  Rollover amounts from another account, which much sit in the Roth for part of at least 5 calendar years and can then be withdrawn without penalty or taxes.

3.  Earnings on either of the above two types of contributions, which must follow the rules you have quoted. 

So in effect, you can only get back out (early and for free) the same number of dollars you have put in.  Any additional balances that result from investment returns of any sort are restricted until retirement age.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: seattlecyclone on November 29, 2018, 11:55:20 AM
Regarding the bit you quoted from Fidelity, those requirements (be 59½, dead, disabled, buying a first home) have always been the requirements for a qualified distribution. Qualified distributions from Roth IRAs are always tax-free.

The Roth conversion ladder that we discuss in this thread relies on non-qualified distributions. A common misconception is that a non-qualified distribution is always subject to taxes and penalties, but in the case of your direct contributions and five-year-old conversions, this is not the case.
Title: Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
Post by: MDM on November 29, 2018, 01:45:32 PM
Generally, converted assets in the Roth IRA must remain there for at least 5 years....
Another exception to "Generally" is the amount of non-deductible traditional contributions converted to Roth.  See Backdoor Roth IRA (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA).  Those amounts (subject to withdrawal ordering rules - these are #3 in http://retirementlc.com/wp-content/uploads/2017/07/2017-07-06-Roth-IRA-Distribution-Ordering-Rules.pdf) may be withdrawn at any time without tax or penalty.