Author Topic: Detailed mechanics of Roth IRA ladder  (Read 557 times)

FIRE 20/20

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Detailed mechanics of Roth IRA ladder
« on: June 16, 2020, 11:52:48 AM »
I think I have a pretty good understanding of the Roth IRA ladder concepts, but I'm not sure on the execution details. I'm looking for guidance from people who have actually started to use their Roth IRA ladders in FIRE.  Some quick details about my situation:

I am FIREd and have >5 (about 7-8) years of expenses in after tax accounts.  My last day of work was in April of 2019.  My income from the first 1/3 of 2019 and savings carried me through 2019.  Starting in 2020, this year, I will have zero income from employment for (hopefully) the rest of my life.  My plan is to use my savings and post-tax investments to pay my bills for the next 5 years, including 2020.  To generate income to spend in 5 years and to generate income to get me above the Medicaid thresholds and into the ACA bands, I plan to transfer money (let's say $25k for example) from my 401(k) with Fidelity into a Roth IRA with Vanguard.  This will be the first rung in my Roth IRA ladder.  I will continue this each year moving forward.  I think I understand the process conceptually pretty well, but I don't know how to actually do it. 

My question is this - how do I actually execute this?  Do I do some sort of online transfer?  Do I call Vanguard?  Do I call Fidelity?  If I call what specific verbiage do I need to use to get them to understand what I want to happen so the transfer is properly executed?  Would this be substantially easier if everything was with Vanguard?  The fees with Fidelity are extremely low and I'm happy with the investment options so I'm not looking to move everything to Vanguard, but I could if it would help make this easier. 

Any help would be greatly appreciated. 


ixtap

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Re: Detailed mechanics of Roth IRA ladder
« Reply #1 on: June 16, 2020, 12:11:43 PM »
If you included your age, I missed it. Since this is MMM, and concerned about this particular issue, I will assume you are less than 59.5. Heck, I will even assume you are less than 55. Rules may change at those ages...

The first step is more details about your 401k plan. Partial distributions can be tricky, which is why many step by step guides recommend rolling your 401k into an IRA (which you have stated you prefer not to do).

MDM

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Re: Detailed mechanics of Roth IRA ladder
« Reply #2 on: June 16, 2020, 12:32:14 PM »
Probably the easiest thing, if your age and your 401k plan allow, is to convert the desired amount each year from the 401k to a Roth IRA at Fidelity: one ten minute phone call each year.

As ixtap noted, though, you may or may not be in this position.

seattlecyclone

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Re: Detailed mechanics of Roth IRA ladder
« Reply #3 on: June 16, 2020, 12:55:40 PM »
This is something that really depends on the companies involved. For transfers between companies you'll probably need a phone call to Fidelity where you explain you want to withdraw part of your 401(k) to convert to a Roth IRA held elsewhere. Fidelity will likely mail you a check that you would then need to forward to Vanguard.

I do know from experience that converting from a traditional IRA to a Roth IRA all within Vanguard just involves a few mouse clicks on their website. If you're set on having your Roth IRA with Vanguard and wish to minimize the hassle of performing these transactions in the long term you'll probably find it easiest to just move the whole thing over to Vanguard once.

FIRE 20/20

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Re: Detailed mechanics of Roth IRA ladder
« Reply #4 on: June 16, 2020, 01:05:40 PM »
Wow, thanks for such quick replies!

@ixtap, I am 43 years old.  I am not sure what details about my 401(k) would be helpful, but I'm happy to provide those details if I know what would be helpful.  I'm definitely open to rolling my 401(k) into an IRA, but I've seen guidance here on why it's better to keep your 401(k) where it is rather than move it to an IRA.  I believe the reasons were that some states better protect 401(k)s than IRAs, and IRAs have different rules for RMDs.  Here's the thread:
https://forum.mrmoneymustache.com/investor-alley/noob-question-on-what-to-do-with-401k-after-leaving-company/

With that said, I am absolutely open to moving everything to Vanguard.  That would make things easier for me once it's done, but the differing state protections issue that @Car Jack mentioned in that thread gave me pause. 

I like @MDM's idea of just opening a Roth IRA with Fidelity and making that 10 minute phone call.  But what do I say to make sure it's done correctly?  Do I just tell them to take $25k (or whatever) from my 401(k) and convert it to a Roth IRA?  Is it that simple?  Or do I need to have them do it in a particular way? 

Thanks again for such quick replies!

terran

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Re: Detailed mechanics of Roth IRA ladder
« Reply #5 on: June 16, 2020, 01:14:41 PM »
Probably the easiest thing, if your age and your 401k plan allow, is to convert the desired amount each year from the 401k to a Roth IRA at Fidelity: one ten minute phone call each year.

This. Except I might consider rolling the 401(k) over to an IRA first. Then you can make the transfer online at Fidelity, so it would be even faster.

I suppose if I had extremely good investment options in the 401(k) I might leave it there, although there's only so much improvement that can be made on the low costs options at Fidelity and it's not much. Some states have worse bankruptcy/liability protection for iRAs than the federal 401(k) protections so that could be a factor too. 

secondcor521

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Re: Detailed mechanics of Roth IRA ladder
« Reply #6 on: June 16, 2020, 01:35:03 PM »
But what do I say to make sure it's done correctly?  Do I just tell them to take $25k (or whatever) from my 401(k) and convert it to a Roth IRA?  Is it that simple?  Or do I need to have them do it in a particular way? 

I have my traditional IRA and my Roth IRA at Vanguard, so for me the process is done with a couple of clicks on the website and is called a Roth conversion.  The following January they send me a 1099-R with the taxable value of the conversion in box 2a, which I plug into my tax program.

I don't know what complexities having a 401(k) vs. a traditional IRA are, or having the money at two different institutions, but overall it's not that hard.  If you explain that you want to do a Roth conversion then they should do the right thing.

MDM

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Re: Detailed mechanics of Roth IRA ladder
« Reply #7 on: June 16, 2020, 01:35:42 PM »
But what do I say to make sure it's done correctly?  Do I just tell them to take $25k (or whatever) from my 401(k) and convert it to a Roth IRA?  Is it that simple?  Or do I need to have them do it in a particular way?
If your 401k is invested in multiple funds, you'll have to tell them how much to take from each fund.

But the first thing to ask is if your 401k plan allows for partial rollovers.  Many do, but not all.

Because you are under age 59.5, and retiring before age 55, you'll not want anything withheld for taxes: any amount not converted is subject to a 10% penalty for you.

If the 401k uses Fidelity funds, you may be able to transfer "in kind": keep the same investments, just in a different account.  If the 401k uses proprietary funds, the money will transfer as cash and you'll need to choose where to invest it in the Roth IRA, after it arrives there.

FIRE 20/20

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Re: Detailed mechanics of Roth IRA ladder
« Reply #8 on: June 16, 2020, 01:41:34 PM »
Probably the easiest thing, if your age and your 401k plan allow, is to convert the desired amount each year from the 401k to a Roth IRA at Fidelity: one ten minute phone call each year.

This. Except I might consider rolling the 401(k) over to an IRA first. Then you can make the transfer online at Fidelity, so it would be even faster.

I suppose if I had extremely good investment options in the 401(k) I might leave it there, although there's only so much improvement that can be made on the low costs options at Fidelity and it's not much. Some states have worse bankruptcy/liability protection for iRAs than the federal 401(k) protections so that could be a factor too.

Thanks.  Based on the website linked below it appears that my state has good protections for tIRAs.  I think I may roll everything over to a tIRA because I don't think I'm likely to need the additional protections that a 401(k) provides over a tIRA in my state, and I would like this to be easy.  If I roll it over I may move everything to Vanguard because I have everything else there.  I'll log onto Vanguard's website to see if I can figure out the "few clicks" that it takes to make the transfer.  I have a small old 401(k) that I converted years ago to a tIRA at Vanguard, so I should be able to see if I can figure it out using that account.  Those "few mouse clicks" that @seattlecyclone mentioned are exactly the thing that I'm nervous about.  I have no idea what those clicks are, but maybe looking at the small tIRA I have at Vanguard will make it clear.

Here's the link that I found with state IRA protections:
https://www.thetaxadviser.com/content/dam/tta/issues/2014/jan/stateirachart.pdf

Again - thanks to all of you for such quick responses! 

MDM

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Re: Detailed mechanics of Roth IRA ladder
« Reply #9 on: June 16, 2020, 01:44:17 PM »
I'll log onto Vanguard's website to see if I can figure out the "few clicks" that it takes to make the transfer.
How to convert a traditional IRA to a Roth IRA | Vanguard may be useful.

secondcor521

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Re: Detailed mechanics of Roth IRA ladder
« Reply #10 on: June 16, 2020, 01:57:47 PM »
I'll log onto Vanguard's website to see if I can figure out the "few clicks" that it takes to make the transfer.
How to convert a traditional IRA to a Roth IRA | Vanguard may be useful.

Here's how I do it:

Log on to Vanguard
Go to My Accounts / Balances and Holdings
Find my traditional IRA
Click on the "Convert to Roth IRA" link

From there I just enter in the number of shares I want to convert.  And as far as tax withholding goes, Vanguard won't do federal or state withholding on Roth conversions requested online.  Dunno if you can do tax withholding if you call in; I've never needed to bother.

FIRE 20/20

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Re: Detailed mechanics of Roth IRA ladder
« Reply #11 on: June 16, 2020, 02:38:15 PM »
Thanks again for all the responses.  It seems that moving everything to a tIRA with Vanguard and then following the instructions in @MDM posted and directions that @secondcor521 posted should make it very easy.  I'm a lot less nervous about this now.  I just want to avoid screwing something up that causes me to get a huge tax bill or that makes me pay the 10% penalty. 

seattlecyclone

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Re: Detailed mechanics of Roth IRA ladder
« Reply #12 on: June 16, 2020, 09:12:57 PM »
Do make sure you keep records of all the money you put into a Roth IRA and how it got there. Each year you make early withdrawals from your Roth IRA you'll need to fill out a Form 8606 to show how much of that withdrawal (if any) is subject to tax. To do that you'll need to enter your basis in your IRA from contributions and conversions, so you'll need to keep track of these amounts.