Author Topic: Withdrawal plans - Roth 401k - Margin Instead of selling taxable  (Read 921 times)

boarder42

  • Walrus Stache
  • *******
  • Posts: 8110
Alright so I'm pretty heavy into planning withdrawal strategy - we have a few unique things that I don't know if many people consider so I'll lay out the plan here and am open to advice and input on changing things. 

First a Roth 401k is not like a Roth IRA in terms of the ease of contribution withdrawals.  Here are the main issues as well as a link to an article from an FI CPA blogger - who was on ChooseFI Podcast. https://fitaxguy.com/roth-401k-withdrawals/

1. If you roll it to a roth IRA you start a 5 year clock before you can withdraw any of your contributions.
2. If you leave it as a 401k any withdrawal will include the earnings that it made for instance if your roth 401k is worth 100k and its 50k cont/ 50k earnings. and you withdraw 50k- 25k will be earnings. There is a loop hole to avoid this being taxed the penalty on the 25k.  You withdraw 50k and move roll the 25k earnings to a roth IRA. 

Margin borrowing vs selling shares. 
1. Your money stays invested and margin is variable but currently only 1.59% at IBKR
2. It can be called anytime
3. You can borrow more than 50% currently at IBKR for spending - this is variable as well. 

Initial plan was take roth contributions/5 and pull that out each year plus sell taxable at about 40k per year to supplement and get about 4k of contributions from our HSA receipt collection.  This gets us right around our fluffyFATfacepunch worthy 85k annual spending. 

Flaws in current plan include the issues with 40k of my roth contributions being 401k and my wife has a mega back door roth setup with about 35k of roth 401k backdoor that becomes available based on when it was rolled 5 years later. 

Learned about margin and exploring the risk issues but you all know me pretty well i like to live on the edge if i get large efficiency gains so I'll probably push this a bit.

Current plan

https://forum.mrmoneymustache.com/journals/finally-fi-now-what/msg2858926/#msg2858926

Note I do have income of 15k expected tax free per year in the yearly spend not seen in the table

One question I've yet to answer is when i pull the money from the Roth 401k and I convert the earnings to Roth IRA can i just put that in my normal IRA and still use the accrued contributions without resetting the clock on it or do I need a whole bunch of separate Roth IRAs
« Last Edit: June 17, 2021, 01:50:08 PM by boarder42 »

boarder42

  • Walrus Stache
  • *******
  • Posts: 8110
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #1 on: June 17, 2021, 01:51:32 PM »
Also need to understand if i can even do anything with my roth 401k

The 401(k) plan may not allow partial distributions pre-age 59 1/2 after separation from service. - CONFIRMED I CAN DO PARTIAL


NOTE:  I love this shit but I can see why people need financial professionals esp early retirees.  It's a minefield
« Last Edit: June 17, 2021, 02:02:56 PM by boarder42 »

PathtoFIRE

  • Pencil Stache
  • ****
  • Posts: 787
  • Age: 42
  • Location: Dallas
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #2 on: June 17, 2021, 02:16:38 PM »
1. If you roll it to a roth IRA you start a 5 year clock before you can withdraw any of your contributions.

Do you already have an existing Roth IRA?

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 6008
  • Age: 36
  • Location: Seattle, WA
    • My blog
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #3 on: June 17, 2021, 02:19:02 PM »
1. If you roll it to a roth IRA you start a 5 year clock before you can withdraw any of your contributions.

No you don't. If you roll it to a Roth IRA the contributions are treated exactly the same as if they were originally made to the Roth IRA. No five-year clock required there.

1. If you roll it to a roth IRA you start a 5 year clock before you can withdraw any of your contributions.

Do you already have an existing Roth IRA?

This doesn't even matter. The only reason it would matter if you've had a Roth IRA of any type open is if you wanted to make a qualified withdrawal. Early withdrawals of principal aren't qualified withdrawals; they're tax-free anyway.

boarder42

  • Walrus Stache
  • *******
  • Posts: 8110
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #4 on: June 17, 2021, 02:31:42 PM »
1. If you roll it to a roth IRA you start a 5 year clock before you can withdraw any of your contributions.

No you don't. If you roll it to a Roth IRA the contributions are treated exactly the same as if they were originally made to the Roth IRA. No five-year clock required there.

1. If you roll it to a roth IRA you start a 5 year clock before you can withdraw any of your contributions.

Do you already have an existing Roth IRA?

This doesn't even matter. The only reason it would matter if you've had a Roth IRA of any type open is if you wanted to make a qualified withdrawal. Early withdrawals of principal aren't qualified withdrawals; they're tax-free anyway.

you're right none of that matters that guy wrote a whole lot of words that seem confusing when its just as simple as roll it over for someone like me then i can withdraw at leisure.  On that note what about mega backdoor roth conversions?  Don't i still need to wait 5 years to access that or does rolling it to an IRA solve his issue as well.

terran

  • Magnum Stache
  • ******
  • Posts: 3480
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #5 on: June 18, 2021, 07:40:15 AM »
As the other responses have alluded, the only 5 year rule that matters when rolling over direct Roth 401(k) contributions is that you have to have had SOME Roth account (including the Roth 401(k) I'm fairly sure) open for at least 5 years.

As for the mega backdoor Roth, the taxable portion of the conversion will incur a penalty if withdrawn before 5 years and comes out after direct contributions, but before the non-taxable part of the conversion. I'm fairly sure this is by year, so only if you're taking out conversions made within 5 years will the taxable portion have a penalty. Even if you have to pay a penalty on the taxable portion it might be worthwhile as it's likely to be insignificant compared to the non-taxable portion of the conversion this would give you access to. I find this table of Roth Distribution Ordering Rules helpful.

Basically, once you roll the Roth 401(k) over to Roth IRA it acts just like if all the transactions had happened in the IRA.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 6008
  • Age: 36
  • Location: Seattle, WA
    • My blog
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #6 on: June 18, 2021, 01:24:34 PM »
As the other responses have alluded, the only 5 year rule that matters when rolling over direct Roth 401(k) contributions is that you have to have had SOME Roth account (including the Roth 401(k) I'm fairly sure) open for at least 5 years.

No, you really, really don't. You could start out with no retirement accounts whatsoever, contribute $1,000 to a brand new Roth 401(k), quit your job the next week, roll the money into your very first Roth IRA, and withdraw up to $1,000 the week after that tax-free.

There are two five-year rules.

The first five-year rule says you need to have your account open five years before you can make a qualified withdrawal. The other requirement to make a qualified withdrawal is that you have to be 59 (or disabled or dead). The withdrawals we talk about during early retirement are not qualified withdrawals because you're not old enough, and this rule is therefore irrelevant for these. Open a Roth IRA before you're 54 and you're all set on this rule. Time in your Roth 401(k) will carry over to another Roth 401(k), but the clock resets on the transfer to a Roth IRA. Again, open any Roth IRA before you turn 54 and you're good here.

The second five-year rule is about when you can freely withdraw money you converted from pre-tax to Roth. You have to wait five years to do these withdrawals for free.

Neither of these five-year rules affects how long you need to wait to withdraw your direct Roth contributions, even if there's a Roth 401(k)->IRA rollover in there somewhere. Direct Roth contributions and conversions of after-tax balances can all be withdrawn for free at any time, with the caveat that the Roth IRA ordering rules may force you to take out some pre-tax conversions before after-tax conversions in certain situations.

terran

  • Magnum Stache
  • ******
  • Posts: 3480
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #7 on: June 18, 2021, 02:22:59 PM »
You're right on the 5 year rule for qualified withdrawals. I got myself turned around on that.

I may be misunderstanding you, but there is a 5 year wait for the taxable portion (ie the gains before conversion) of after-tax to Roth conversions and they come out before the non-taxable portion of the conversion. Like I said, this is likely minimal as long as you've been converting shortly after contribution.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 6008
  • Age: 36
  • Location: Seattle, WA
    • My blog
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #8 on: June 18, 2021, 05:11:59 PM »
Right, that's basically what I said. The after-tax part of your conversion can be taken out for free at any time. If you've also been doing taxable conversions, the ordering rules make it so that the only way to get at this tax-free after-tax conversion money is to first withdraw your penalty-applying pre-tax conversion amounts from the same or prior years.

boarder42

  • Walrus Stache
  • *******
  • Posts: 8110
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #9 on: June 19, 2021, 07:07:01 AM »
You're right on the 5 year rule for qualified withdrawals. I got myself turned around on that.

I may be misunderstanding you, but there is a 5 year wait for the taxable portion (ie the gains before conversion) of after-tax to Roth conversions and they come out before the non-taxable portion of the conversion. Like I said, this is likely minimal as long as you've been converting shortly after contribution.

i had no gains before conversion i put after tax money into my 401k and fidelity instantly rolled it into a Roth 401k.  to be clear i have to wait 5 years for these contributions?

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 6008
  • Age: 36
  • Location: Seattle, WA
    • My blog
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #10 on: June 19, 2021, 10:07:34 AM »
You're right on the 5 year rule for qualified withdrawals. I got myself turned around on that.

I may be misunderstanding you, but there is a 5 year wait for the taxable portion (ie the gains before conversion) of after-tax to Roth conversions and they come out before the non-taxable portion of the conversion. Like I said, this is likely minimal as long as you've been converting shortly after contribution.

i had no gains before conversion i put after tax money into my 401k and fidelity instantly rolled it into a Roth 401k.  to be clear i have to wait 5 years for these contributions?

Nope. The after-tax part of your conversion is free to withdraw right away.

terran

  • Magnum Stache
  • ******
  • Posts: 3480
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #11 on: June 19, 2021, 10:39:06 AM »
You're right on the 5 year rule for qualified withdrawals. I got myself turned around on that.

I may be misunderstanding you, but there is a 5 year wait for the taxable portion (ie the gains before conversion) of after-tax to Roth conversions and they come out before the non-taxable portion of the conversion. Like I said, this is likely minimal as long as you've been converting shortly after contribution.

i had no gains before conversion i put after tax money into my 401k and fidelity instantly rolled it into a Roth 401k.  to be clear i have to wait 5 years for these contributions?

Nope. The after-tax part of your conversion is free to withdraw right away.

I'd need a source on that before I'd be willing to rely on that statement. Everything I've seen says that the taxable portion of a conversion has a penalty if withdrawn before 5 years. After-tax converted to Roth is only non-taxable to the extent that the amount converted is less than or equal to the amount contributed to after-tax. Gains in after-tax that are then converted to Roth are taxable and therefore need to be left 5 years to avoid a penalty based on everything I've seen. I'd be happy to be proven wrong, but I don't think I will be.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 6008
  • Age: 36
  • Location: Seattle, WA
    • My blog
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #12 on: June 19, 2021, 10:44:15 AM »
I never said the gains could be withdrawn for free. They cannot. I was only talking about the amount you converted that was already after-tax at the time of conversion.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 6008
  • Age: 36
  • Location: Seattle, WA
    • My blog
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #13 on: June 19, 2021, 11:29:06 AM »
To be painstakingly clear, here is the ordering for Roth IRA withdrawals and how it is taxed:

* Direct contributions (principal only): no tax.
* Conversions before 2017 (principal only): no tax.
* Conversions of pre-tax amounts from 2017 (principal only): 10% early withdrawal tax if withdrawn in 2021, no tax after that.
* Conversions of post-tax amounts from 2017 (principal only): no tax.
* Conversions of pre-tax amounts from 2018 (principal only): 10% early withdrawal tax if withdrawn in 2021-22, no tax after that.
* Conversions of post-tax amounts from 2018 (principal only): no tax.
* Conversions of pre-tax amounts from 2019 (principal only): 10% early withdrawal tax if withdrawn in 2021-23, no tax after that.
* Conversions of post-tax amounts from 2019 (principal only): no tax.
* Conversions of pre-tax amounts from 2020 (principal only): 10% early withdrawal tax if withdrawn in 2021-24, no tax after that.
* Conversions of post-tax amounts from 2020 (principal only): no tax.
* Conversions of pre-tax amounts from 2021 (principal only): 10% early withdrawal tax if withdrawn in 2021-25, no tax after that.
* Conversions of post-tax amounts from 2021 (principal only): no tax.
* Growth: counts as regular income and taxed accordingly, plus 10% early withdrawal tax.

The after-tax amount of your conversion is tax-free to withdraw. Period. If you had pre-tax conversions you might have to wade through those first to get there though.

terran

  • Magnum Stache
  • ******
  • Posts: 3480
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #14 on: June 19, 2021, 03:22:26 PM »
I never said the gains could be withdrawn for free. They cannot. I was only talking about the amount you converted that was already after-tax at the time of conversion.

I think you may be using after-tax in a way I'm not (and in a way that I'd argue is inaccurate). In a workplace retirement plan "after-tax" is a specific part of the plan (often called a "source") which can hold both contributions (non-taxable) and gains (taxable). Saying the "after-tax amount of your conversion is tax-free" is either confusing or incorrect since after-tax denotes a particular part of the plan. Using after-tax to indicate whether the conversion is taxable or not leads to the type of confusion that's going on in this thread. You could say the "post-tax amount of your conversion is tax-free" although that seems overly confusing as well since there's a temptation to use after-tax and post-tax interchangeably.

boarder42, I'm sorry for the confusion. I THINK seattlecyclone and I are saying the same thing, but are just using the terminology in different ways. When you convert from the after-tax source in your 401(k) to the Roth source in your 401(k), the amount you contributed to the after-tax source will be converted tax free and can be withdrawn any time without tax or penalty once you roll the Roth 401(k) over to a Roth IRA. Any gains you have in the after-tax source of your 401(k) that you subsequently convert to Roth 401(k) will be taxed and given that they were taxable conversions they'll incur a penalty if withdrawn within 5 tax years of when they were converted. Since the taxable portion of a conversion is withdrawn before the non-taxable portion of a conversion you may have to pay a penalty if you withdraw a particular years conversion within 5 years, but it will likely be small since the taxable portion of a conversion in any given year was likely small. If your after-tax source contributions are converted to Roth quickly enough or the markets go down between contribution and conversion then there would be no taxable portion of the conversion and therefore no penalty even if you withdraw immediately.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 6008
  • Age: 36
  • Location: Seattle, WA
    • My blog
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #15 on: June 19, 2021, 03:30:44 PM »
I was using after-tax and pre-tax to refer to the actual dollars being converted, not the section of your account that the converted money came from. Convert after-tax dollars and you can withdraw those dollars any time. Convert pre-tax dollars (whether it's if from the section of your account where you contributed after-tax dollars or elsewhere) and the five year wait applies.

boarder42

  • Walrus Stache
  • *******
  • Posts: 8110
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #16 on: June 19, 2021, 06:47:27 PM »
So this is all super simple. Both 401ks can be converted to IRAsand any contributions to roth can be withdrawn immediately. Regardless of how it got there. I mean that's how I thought this worked but that post confused me

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 6008
  • Age: 36
  • Location: Seattle, WA
    • My blog
Re: Withdrawal plans - Roth 401k - Margin Instead of selling taxable
« Reply #17 on: June 19, 2021, 07:57:26 PM »
Yep! In your case where the after-tax was automatically converted before it had a chance to grow, you don't need to worry one bit about the calendar when withdrawing your principal.