Author Topic: Penalty free 401k withdrawal (slow conversion to Roth)  (Read 1112 times)

T-Money$

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Penalty free 401k withdrawal (slow conversion to Roth)
« on: April 16, 2020, 06:14:00 AM »
https://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Strategy 2: Use the Roth IRA Escape Hatch Loophole

Don’t go google searching that term, because I just made it up. But here’s a trick I learned only recently from a fellow blogger named No Debt MBA:

Build up your 401k and any other savings, then quit your job to begin retirement – hooray!
You are now in a low tax bracket – you can actually roll over a chunk of your 401k into a Roth IRA account and pay income taxes on it at this point.
Then you let it sit in the Roth IRA for a minimum of 5 years
At this point, you can withdraw all of the principal (but not the gains yet, no big deal), penalty-free!
To be extra fancy, you could just roll over enough to cover your annual spending (say, $30,000) once per year into the Roth account, and pay the minimal income taxes. This would build a 5-year pipeline so that you would be able to withdraw an equal amount from the Roth account each year once you got the pipeline filled out. Of course, you also have to set aside money (or do some part-time work, or pay some 401k early withdrawal penalties) to get you through the first five years while you are waiting for the first batch to finish “fermenting”. But it is still a definite loophole that can help you spring out your 401k money penalty-free.

In the above blog post (Strategy #2), Mr. Money Mustache discusses being able to use contributions to a 401k without penalty before the typical retirement age.  If I'm reading it correctly, converting a small amount of traditional 401k or IRA funds to a Roth, waiting 5 years and then taking out the contribution.

My question is, if I currently convert a small portion of a Traditional IRA/401K to a Roth do I still need to wait 5 years before I can use the contribution without penalty? 

MasterStache

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Re: Penalty free 401k withdrawal (slow conversion to Roth)
« Reply #1 on: April 16, 2020, 06:19:38 AM »
https://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Strategy 2: Use the Roth IRA Escape Hatch Loophole

Don’t go google searching that term, because I just made it up. But here’s a trick I learned only recently from a fellow blogger named No Debt MBA:

Build up your 401k and any other savings, then quit your job to begin retirement – hooray!
You are now in a low tax bracket – you can actually roll over a chunk of your 401k into a Roth IRA account and pay income taxes on it at this point.
Then you let it sit in the Roth IRA for a minimum of 5 years
At this point, you can withdraw all of the principal (but not the gains yet, no big deal), penalty-free!
To be extra fancy, you could just roll over enough to cover your annual spending (say, $30,000) once per year into the Roth account, and pay the minimal income taxes. This would build a 5-year pipeline so that you would be able to withdraw an equal amount from the Roth account each year once you got the pipeline filled out. Of course, you also have to set aside money (or do some part-time work, or pay some 401k early withdrawal penalties) to get you through the first five years while you are waiting for the first batch to finish “fermenting”. But it is still a definite loophole that can help you spring out your 401k money penalty-free.

In the above blog post (Strategy #2), Mr. Money Mustache discusses being able to use contributions to a 401k without penalty before the typical retirement age.  If I'm reading it correctly, converting a small amount of traditional 401k or IRA funds to a Roth, waiting 5 years and then taking out the contribution.

My question is, if I currently convert a small portion of a Traditional IRA/401K to a Roth do I still need to wait 5 years before I can use the contribution without penalty?

I would say yes because I don't believe there is a way around the 5 year waiting period to withdraw contributions. Someone else may be able to confirm.

terran

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Re: Penalty free 401k withdrawal (slow conversion to Roth)
« Reply #2 on: April 16, 2020, 06:35:34 AM »
No need to invent a new term, this is commonly called the "Roth conversion pipeline" or "Roth conversion ladder" (I think the second term is more common).

If you convert from traditional to Roth now then you'll have to wait 5 years from now to withdraw penalty free, but not 5 years from retirement (unless you're retiring now). Is that your question?

T-Money$

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Re: Penalty free 401k withdrawal (slow conversion to Roth)
« Reply #3 on: April 16, 2020, 07:19:11 AM »
No need to invent a new term, this is commonly called the "Roth conversion pipeline" or "Roth conversion ladder" (I think the second term is more common).

If you convert from traditional to Roth now then you'll have to wait 5 years from now to withdraw penalty free, but not 5 years from retirement (unless you're retiring now). Is that your question?

Yes, that was exactly my question.  I was hoping the 5 year restriction was eased with changes in tax law, CARES Act, etc.

I guess I'll have to remain hopeful.

MDM

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Re: Penalty free 401k withdrawal (slow conversion to Roth)
« Reply #4 on: April 16, 2020, 12:03:00 PM »
My question is, if I currently convert a small portion of a Traditional IRA/401K to a Roth do I still need to wait 5 years before I can use the contribution without penalty?
If you simply want to withdraw money now without penalty, the CARES act allows you to take up to $100K.  No penalty, but it will be taxed.

 

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