Author Topic: Roth or not for early retirement?  (Read 4734 times)

sloof70

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Roth or not for early retirement?
« on: November 17, 2013, 05:37:18 PM »
Is using the Roth is a good option for someone that wants to retire before 59.5?  Currently, I max my SIMPLE IRA, my Roth, and then contribute to a Vanguard index fund (VTSMX).  My Roth is being managed by a financial adviser and is going into various American Funds.  If I plan to retire at 40 (15 years), does it make more sense to put that $5500 into a Roth and rely on withdrawing the principal plus SEPP distributions, or just to put it into my Vanguard account and have all the flexibility but eat the taxes?

Frankies Girl

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Re: Roth or not for early retirement?
« Reply #1 on: November 17, 2013, 06:55:05 PM »
I'd say yes based off of what I've read (but someone clarify if I'm off base).

You can withdraw your contributions (not the dividends/profit) at any age, and having one in place already before you RE means you can start doing a Roth pipeline. You can shift funds from a regular IRA into a Roth and then get your money out tax free as long as you stay under certain limits of income/capital gains.

http://www.mrmoneymustache.com/forum/ask-a-mustachian/help-me-understand-the-roth-conversion-pipeline-idea-and-its-benefits/
http://www.madfientist.com/retire-even-earlier/

sloof70

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Re: Roth or not for early retirement?
« Reply #2 on: November 17, 2013, 07:40:12 PM »
You can withdraw your contributions (not the dividends/profit) at any age, and having one in place already before you RE means you can start doing a Roth pipeline. You can shift funds from a regular IRA into a Roth and then get your money out tax free as long as you stay under certain limits of income/capital gains.
Thank you!  I think I've seen this mentioned but had no idea what it meant (and didn't investigate because I didn't think it was what I was looking for).  Hopefully this loophole will still be around in 2028.

Emilyngh

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Re: Roth or not for early retirement?
« Reply #3 on: November 17, 2013, 08:38:57 PM »
I used to be all about the Roth....before I knew about the Roth pipeline, that is.   We basically have our emergency fund in a Roth now.   I like knowing that we can withdraw our contributions if needed.   But, going forward, we're probably going to focus more on putting money in tax-deferred accounts (now that we have plenty in a Roth for emergencies).

aj_yooper

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Re: Roth or not for early retirement?
« Reply #4 on: November 18, 2013, 06:24:47 AM »
I think it depends on your tax bracket now and what bracket in which you will be retiring.  Thus, if you are in the 25% or higher marginal tax bracket now, but you plan to retire in the 10-15% bracket, then, IMO, the tax deferred accounts win, as you are transporting money from employment to a lower bracket (retirement).  If you retire in the same bracket as you are in presently, then, IMO, a Roth is sweeter, as you have more flexibility in withdrawals.

Also, consider losing the financial adviser and go free style, if possible.  The typical adviser's job is to convert your account to his; they do not generally have a fiduciary interest ethos.

sloof70

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Re: Roth or not for early retirement?
« Reply #5 on: November 18, 2013, 09:58:32 AM »
I think it depends on your tax bracket now and what bracket in which you will be retiring.  Thus, if you are in the 25% or higher marginal tax bracket now, but you plan to retire in the 10-15% bracket, then, IMO, the tax deferred accounts win, as you are transporting money from employment to a lower bracket (retirement).  If you retire in the same bracket as you are in presently, then, IMO, a Roth is sweeter, as you have more flexibility in withdrawals.
Despite the fact I will likely retire making a six figure salary (today's bucks), I want to live off $20-25k.  I plan to work a "real" job (good pay, benefits) for the next 10 years, and then switch to something more interesting and let my assets grow for another 5+ years.  With this Roth pipeline trick, does it essentially mean I can count on a 4% withdrawal no matter how my money is structured?

FirePaddle

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Re: Roth or not for early retirement?
« Reply #6 on: November 18, 2013, 04:27:08 PM »
The 4% safe withdrawal rate simply applies if you plan to live only off of investment gains only for the rest of your life, read/review this:

http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

The Roth pipeline option is there in case you want to access money in retirement accounts before age 60.  It's a chuck of money you move from a traditional IRA to a Roth IRA, pay the income taxes when you move it (a lot cheaper if you do this once retired), let it sit for 5 years, and then it can be withdrawn penalty free.  There are a ton of posts on the pipeline, some by me, and it's worth reviewing, but it seems simple enough, but quite powerful if you/your employer has been feeding retirement accounts during your working career but you want to spend some of it before age 60.

Of course, you need to make sure you are not depleting your retirement accounts too much since this money has to last from age 60-death, unless you plan to make money during retirement, which many do.

Tom