Author Topic: How to withdraw funds from your IRA and 401k without penalty before age 59.5  (Read 295812 times)

dandarc

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #200 on: December 12, 2018, 10:06:23 AM »
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.  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#3 in http://retirementlc.com/wp-content/uploads/2017/07/2017-07-06-Roth-IRA-Distribution-Ordering-Rules.pdf) may be withdrawn at any time without tax or penalty.
Huh. I thought those were subject to the 5 year wait as well. TIL.
The ordering rules when making a non-qualified withdrawal from your Roth IRA are thus:

1. Regular contributions
2. Conversions on a first-in, first-out basis
    a. Taxable portion (the amount required to be included in gross income because of the conversion or rollover)
    b. Non-taxable portion
3. Earnings

In a Roth IRA, the penalty only would apply to taxable items - it is a 10% additional tax on the taxable portion. If you've done your backdoor Roth IRA well, item 2.a will be minimal - typically you're aiming to convert more or less immediately after the deposit is made so that there are no earnings when you convert, so if you've done it perfectly, 100% of the backdoor Roth conversion is the "non-taxable" portion.

That being said, if it has been 5 years or more since the conversion, the "taxable portion" essentially shifts into the "non-taxable portion".

frugalnacho

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #201 on: December 19, 2018, 08:35:34 PM »
Is it really 5 years? It was my understanding that it's the 5th year after the conversion is made and only the tax year counts.  So if you convert on December 31, 2018 you would satisfy the 5 year "seasoning" on January 1, 2023 which is really only 4 years and 1 day later.

Is that correct?

Nords

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #202 on: December 19, 2018, 10:35:56 PM »
Is it really 5 years? It was my understanding that it's the 5th year after the conversion is made and only the tax year counts.  So if you convert on December 31, 2018 you would satisfy the 5 year "seasoning" on January 1, 2023 which is really only 4 years and 1 day later.

Is that correct?
That's correct-- five tax years, not five calendar years.

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

GUNDERSON

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Is there anything that changes about this process if one is using a solo 401k?
Thanks!

secondcor521

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #204 on: December 12, 2019, 04:28:44 PM »
^ Your research is wrong.

First, anyone can withdraw Roth contributions at any point without penalty or taxes.  There is no need to wait 5 years or to attain any particular age.

Second, the age is 59.5, not 59.

Third, while your statement about taxes on earnings before 59.5 is accurate, it is incomplete.  In addition to paying taxes, generally a 10% early withdrawal penalty will apply (unless the withdrawal qualifies for one of the exceptions).

Fourth, plug your blog elsewhere.

rush20

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I'm new to the website and am interested in learning more about investing and retirement planning. Why are people converting to ROTH IRA for retirement instead of leaving it in the tIRA? Why would your tax bracket be higher when you retire at age 59.5? If you're income when you retire are your withdrawals from LTCG and dividends, how would that be higher than your current salary? Shouldn't a tIRA be more beneficial?

MDM

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I'm new to the website and am interested in learning more about investing and retirement planning. Why are people converting to ROTH IRA for retirement instead of leaving it in the tIRA?
Some (incorrectly) think that tax free earnings in a Roth make it inherently superior to traditional.  Some (who may or may not be correct) think their marginal tax rate on withdrawal now will favorable in comparison with that rate later.

Quote
Why would your tax bracket be higher when you retire at age 59.5?
Many possible reasons, including
- having "too much" in traditional (perhaps including an inherited IRA)
- having a very good pension
- expecting a higher marginal rate in just a few years, including IRMAA tiers and/or Soc. Sec. benefits.
- etc.

Quote
If you're income when you retire are your withdrawals from LTCG and dividends, how would that be higher than your current salary? Shouldn't a tIRA be more beneficial?
If LTCG and dividends are your only income later, then a tIRA is likely more beneficial now.

See Investment Order and Traditional versus Roth - Bogleheads for more.

rmorris50

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Anyone just pay the penalty, especially when filing married and jointly and your other spouse isn't subject to the tax penalty. My calculations show it's only a 5% effective penalty in my case. My spouse has no interest in retiring and I am screaming to leave the corporate world. Our effective tax rate would be 24% instead of 19%, including state (NC at 5.25%). Any penalty sucks, but given the fact both our incomes right now put us in the top marginal tax bracket, this is still a decrease for us (yes, I am the breadwinner but have been socking most of it away)! I've looked into Roth conversions, SEPPs, and all that sort, but the penalty isn't that bad and leaves me plenty of flexibility still. And with my deferred comp, pension and SS I am not so scared to spend down my pre-tax IRA first in my early retirement years, at least low enough to a level where it doesn't grow out of control and I have massive force outs at 70.

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Anyone just pay the penalty, especially when filing married and jointly and your other spouse isn't subject to the tax penalty. My calculations show it's only a 5% effective penalty in my case. My spouse has no interest in retiring and I am screaming to leave the corporate world. Our effective tax rate would be 24% instead of 19%, including state (NC at 5.25%). Any penalty sucks, but given the fact both our incomes right now put us in the top marginal tax bracket, this is still a decrease for us (yes, I am the breadwinner but have been socking most of it away)! I've looked into Roth conversions, SEPPs, and all that sort, but the penalty isn't that bad and leaves me plenty of flexibility still. And with my deferred comp, pension and SS I am not so scared to spend down my pre-tax IRA first in my early retirement years, at least low enough to a level where it doesn't grow out of control and I have massive force outs at 70.

Why would you want to pay the penalty when you can just do a SEPP instead? How long until you are 60?

Why is your spouse not subject to the penalty? If spouse is over 60, or disabled or something and can avoid a penalty, draw down spouses assets first to avoid the penalty.

A 10% penalty is not the end of the world, but if you can avoid it, why elect to pay it?

rmorris50

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Anyone just pay the penalty, especially when filing married and jointly and your other spouse isn't subject to the tax penalty. My calculations show it's only a 5% effective penalty in my case. My spouse has no interest in retiring and I am screaming to leave the corporate world. Our effective tax rate would be 24% instead of 19%, including state (NC at 5.25%). Any penalty sucks, but given the fact both our incomes right now put us in the top marginal tax bracket, this is still a decrease for us (yes, I am the breadwinner but have been socking most of it away)! I've looked into Roth conversions, SEPPs, and all that sort, but the penalty isn't that bad and leaves me plenty of flexibility still. And with my deferred comp, pension and SS I am not so scared to spend down my pre-tax IRA first in my early retirement years, at least low enough to a level where it doesn't grow out of control and I have massive force outs at 70.

Why would you want to pay the penalty when you can just do a SEPP instead? How long until you are 60?

Why is your spouse not subject to the penalty? If spouse is over 60, or disabled or something and can avoid a penalty, draw down spouses assets first to avoid the penalty.

A 10% penalty is not the end of the world, but if you can avoid it, why elect to pay it?

I turn 46 this summer and my spouse turns 51. He plans to keep working and won't draw on retirement accounts until 60 at the earliest, so his income is subject to just normal tax is what I meant. I would love to retire now,  but by 50 at the latest (save a little more, let investments recover, etc). My spouse makes ok money, but he has never been the breadwinner and our lifestyle would be drastically reduced and he may divorce me (half joke, half serious). And SEPP doesn't provide enough for me to contribute to the household and keep us in a middle-class lifestyle. Starting at 55, I also have deferred comp from ages 55-70, and then if I defer pension and SS until 70 that is more than enough for me to live off of. So I don't need to make sure my IRA supports me to very old age. And if I keep working and just let the IRA grow I will just have massive forceouts from the IRA starting at 70. Just seems to make more sense to retire very soon and use my IRA to bridge the gap to age 55. Thus the reason i am willing to pay the penalty.

rmorris50

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I should also add my IRA is currently $1 million and we have no children and won't. I don't plan on making any extended family rich off my hard work either :-)

nickelwise

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Does anyone know if HSA can be converted to Roth the same way a Traditional IRA can? A lot of conversion ladder guides recommend doing the maximum HSA contribution every year in order to squeeze out more tax-free Traditional --> Roth IRA conversions. I'm worried I could drain my Traditional too quickly and then be left with a giant HSA that I can't use for Roth conversions, and then have some years before age 65 where my standard deduction is wasted due to no money left in the Trad IRA to convert.

HSA is often touted as the "ultimate retirement account", having all the advantages of the other types of retirement accounts plus more. But if it lacks the Roth conversion option, that's actually a major drawback it could have in some situations compared to Traditional IRA.

Obviously, a certain amount in HSA will be desirable because you'll get it out tax-free due to claimable medical expense. We don't know where the threshold will be for our own future medical needs, but at a certain point there could be a threshold of "too much" in the HSA if your Traditional account runs out before you can take advantage of all your tax-free conversion potential.

This concern won't apply to everyone, such as those who retire with most of their money in a Traditional IRA, since they have little chance of it running out early. Sequence of returns will also have a big impact on exactly when the account could potentially run dry.

Of course, if there is a major healthcare overhaul in the US at some point, who knows what will happen to HSA accounts. If one day we do single-payer or something like that, maybe HSAs will get discontinued and just turned into Trad IRAs.

MDM

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I'm worried I could drain my Traditional too quickly and then be left with a giant HSA that I can't use for Roth conversions, and then have some years before age 65 where my standard deduction is wasted due to no money left in the Trad IRA to convert.

HSA is often touted as the "ultimate retirement account", having all the advantages of the other types of retirement accounts plus more. But if it lacks the Roth conversion option, that's actually a major drawback it could have in some situations compared to Traditional IRA.
If one contributes only to HSAs and not to IRAs and 401ks, that problem could arise.  In general, it might take a very specific set of circumstances for one to "drain my Traditional too quickly and then be left with a giant HSA."

Do you have an example (with numbers) in mind?

nickelwise

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Well, say you retire at 40 with 400k in Trad IRA, 40k in HSA, and the rest of your money in taxable.

Then, every year of retirement, you max your HSA contribution, and then convert an amount from your Trad IRA to Roth equal to that year's standard deduction plus your HSA contribution. Then say you get an unfavorable sequence of returns that sees your balances drop drastically at the start of your retirement and stay low for several years. With the market low, your conversions drain your Trad IRA low enough that even during the market recovery, you're converting money out of it faster than it can recoup its losses. Many years later, you finally end up draining it down to zero, and all along you've been doing a max HSA contribution every year in order to speed up your IRA conversions. Now you've got a fat 6-figure HSA that keeps growing with market returns, and until 65 your standard deductible is "wasted" with no conversions to "spend" it on.

I didn't run hard numbers, but it seems like a plausible scenario.

secondcor521

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Does anyone know if HSA can be converted to Roth the same way a Traditional IRA can? A lot of conversion ladder guides recommend doing the maximum HSA contribution every year in order to squeeze out more tax-free Traditional --> Roth IRA conversions. I'm worried I could drain my Traditional too quickly and then be left with a giant HSA that I can't use for Roth conversions, and then have some years before age 65 where my standard deduction is wasted due to no money left in the Trad IRA to convert.

HSA is often touted as the "ultimate retirement account", having all the advantages of the other types of retirement accounts plus more. But if it lacks the Roth conversion option, that's actually a major drawback it could have in some situations compared to Traditional IRA.

Obviously, a certain amount in HSA will be desirable because you'll get it out tax-free due to claimable medical expense. We don't know where the threshold will be for our own future medical needs, but at a certain point there could be a threshold of "too much" in the HSA if your Traditional account runs out before you can take advantage of all your tax-free conversion potential.

This concern won't apply to everyone, such as those who retire with most of their money in a Traditional IRA, since they have little chance of it running out early. Sequence of returns will also have a big impact on exactly when the account could potentially run dry.

Of course, if there is a major healthcare overhaul in the US at some point, who knows what will happen to HSA accounts. If one day we do single-payer or something like that, maybe HSAs will get discontinued and just turned into Trad IRAs.

As far as I know, they cannot.  While HSAs do have certain tax characteristics that help with retirement, they are intended to save you money on taxes for health related expenses and are not a retirement vehicle per se.

If you're concerned, then do the math and either drain your traditional IRA more slowly, or work longer and thus have a larger traditional IRA to start with.

MDM

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Well, say you retire at 40 with 400k in Trad IRA, 40k in HSA, and the rest of your money in taxable.
How much in taxable, and what safe withdrawal rate is being used?

nickelwise

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Just to make it up, let's say it's a 3.25% SWR and a $25k/year withdrawal. Overall stash is $770k, consisting of $400k IRA, $40k HSA, $330k taxable.

For my example, I intentionally invented these numbers such that $25k out of $770k is within the safe withdrawal rate assumption, but the current standard deduction plus the current HSA contribution limit exceeds the same safe withdrawal rate coming out of the $400k IRA. I did this just so that the assumption of the safe withdrawal rate could hold true for the overall drawdown, while still allowing for the possibility that the drawdown out of the IRA in the amount of standard deduction plus HSA contribution could cause it to run out of money.

Of course, my constructing it that way would become useless if we say that our SWR assumption is contingent on a certain allocation of stocks/bonds, but we keep all of our bonds in tax-advantaged accounts, which throws off the assumption of each account being individually expected to conform to the overall portfolio's SWR.

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Nope, no Roth conversion option for the HSA. I would avoid contributing so much to one of these that you're worried about the annual growth outpacing your typical medical bills.

MDM

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Just to make it up, let's say it's a 3.25% SWR and a $25k/year withdrawal. Overall stash is $770k, consisting of $400k IRA, $40k HSA, $330k taxable.

Well, say you retire at 40 with 400k in Trad IRA, 40k in HSA, and the rest of your money in taxable.
Then, every year of retirement, you max your HSA contribution, and then convert an amount from your Trad IRA to Roth equal to that year's standard deduction plus your HSA contribution.

If 3.25% is indeed safe for 50 years (assuming an age 90 life expectancy), then you should be able to make 25 years at which point the HSA turns into a traditional IRA at worst.

secondcor521

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Nope, no Roth conversion option for the HSA. I would avoid contributing so much to one of these that you're worried about the annual growth outpacing your typical medical bills.

@seattlecyclone, it seemed to me in my HSA research that dying with an HSA is penalized by the tax code.  So my current HSA strategy is to have my HSA balance stay small enough so that I can drain it completely in a reasonable time frame starting in my late 60s.

Can you explain why it would be OK for it to grow so large as you imply above?

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Nope, no Roth conversion option for the HSA. I would avoid contributing so much to one of these that you're worried about the annual growth outpacing your typical medical bills.

@seattlecyclone, it seemed to me in my HSA research that dying with an HSA is penalized by the tax code.  So my current HSA strategy is to have my HSA balance stay small enough so that I can drain it completely in a reasonable time frame starting in my late 60s.

Can you explain why it would be OK for it to grow so large as you imply above?

Huh? I suggested not contributing so much that you expect it to grow out of control. You're absolutely right about dying with a large HSA being a bad thing: your heirs will be required to take it all out (and be taxed on it) in the year of your death. Compare this to IRAs where they can spread withdrawals out over ten years. Not great!

secondcor521

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Nope, no Roth conversion option for the HSA. I would avoid contributing so much to one of these that you're worried about the annual growth outpacing your typical medical bills.

@seattlecyclone, it seemed to me in my HSA research that dying with an HSA is penalized by the tax code.  So my current HSA strategy is to have my HSA balance stay small enough so that I can drain it completely in a reasonable time frame starting in my late 60s.

Can you explain why it would be OK for it to grow so large as you imply above?

Huh? I suggested not contributing so much that you expect it to grow out of control. You're absolutely right about dying with a large HSA being a bad thing: your heirs will be required to take it all out (and be taxed on it) in the year of your death. Compare this to IRAs where they can spread withdrawals out over ten years. Not great!

OK, thanks for confirming what I thought.  Your phrasing just confused me a bit - I would hit the point where I was worried about draining my HSA in a reasonable time frame long before I would hit the point where I was concerned about the annual growth outpacing my typical medical bills.  I thought you were suggesting that it was OK for an HSA to get to endowment levels, but evidently you weren't.

asauer

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #222 on: November 22, 2020, 03:14:26 PM »
Question about Roth conversation and taxation.  I will retire in 18 months at age 43.  My husband will continue working for another 7 years and retire at age 50.  Can I begin my Roth conversion after I retire with the same income tax advantages or will we need to wait until he retires?  We are married filing jointly so I would imagine we would have to wait.

dandarc

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #223 on: November 22, 2020, 03:24:50 PM »
@asauer - you'll pay whatever your marginal tax rate is whenever you decide to convert any amount from Traditional to Roth. May or may not make sense for you to convert while your husband is still working. You certainly can do Roth conversions while your husband is still working if you think it makes sense to do so, all things considered.

Many folks pick a tax bracket they are comfortable paying & locking in and convert to take taxable income up to the top of that tax bracket in any given year.

Blue Gem

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Hi folks, quick question. Are the investment gains that the roth conversion makes in the 5 years of "maturing" also withdrawable penalty-free before age 59.5? I assume not, but just wanted to check.

Nords

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Hi folks, quick question. Are the investment gains that the roth conversion makes in the 5 years of "maturing" also withdrawable penalty-free before age 59.5? I assume not, but just wanted to check.
Nope, just the amount from the traditional account that was transferred to the Roth IRA for the conversion.

You could withdraw the gains, but you'd have to pay the 10% penalty. 

secondcor521

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Hi folks, quick question. Are the investment gains that the roth conversion makes in the 5 years of "maturing" also withdrawable penalty-free before age 59.5? I assume not, but just wanted to check.
Nope, just the amount from the traditional account that was transferred to the Roth IRA for the conversion.

You could withdraw the gains, but you'd have to pay the 10% penalty.

Nords is correct.

Further, the IRS doesn't let you pick and choose what you're withdrawing.  When you withdraw from a Roth, it's always contributions first, then conversions oldest to newest, then gains last.  Fortunately, this generally matches what you'd want to do anyway.

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Hi folks, quick question. Are the investment gains that the roth conversion makes in the 5 years of "maturing" also withdrawable penalty-free before age 59.5? I assume not, but just wanted to check.
Nope, just the amount from the traditional account that was transferred to the Roth IRA for the conversion.

You could withdraw the gains, but you'd have to pay the 10% penalty.

Nords is correct.

Further, the IRS doesn't let you pick and choose what you're withdrawing.  When you withdraw from a Roth, it's always contributions first, then conversions oldest to newest, then gains last.  Fortunately, this generally matches what you'd want to do anyway.

This is probably a very dumb question, but when you say "When you withdraw from a Roth, it's always contributions first, then conversions oldest to newest, then gains last," what does that mean in terms of the nuts and bolts of you withdraw it. By this, I mean, I have a Roth IRA with Vanguard. I sell some VTSAX, for example, from it for cash and move to pull it out. Does this mean that whatever I sell will be calculated as my contributions until the dollar amount goes above what I actually contributed into the account and then it counts as conversions until my conversion amounts are gone and then gains until it was empty? By this, I mean, is it all "theoretical" and unrelated to me actually selling and how the VTSAX I bought has actually gone up in value and totally related to how much money I actually put in?

Nords

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Nords is correct.

Further, the IRS doesn't let you pick and choose what you're withdrawing.  When you withdraw from a Roth, it's always contributions first, then conversions oldest to newest, then gains last.  Fortunately, this generally matches what you'd want to do anyway.

This is probably a very dumb question, but when you say "When you withdraw from a Roth, it's always contributions first, then conversions oldest to newest, then gains last," what does that mean in terms of the nuts and bolts of you withdraw it. By this, I mean, I have a Roth IRA with Vanguard. I sell some VTSAX, for example, from it for cash and move to pull it out. Does this mean that whatever I sell will be calculated as my contributions until the dollar amount goes above what I actually contributed into the account and then it counts as conversions until my conversion amounts are gone and then gains until it was empty? By this, I mean, is it all "theoretical" and unrelated to me actually selling and how the VTSAX I bought has actually gone up in value and totally related to how much money I actually put in?
Yes.  You can read about it on page 31 of IRS Pub 590-B "Ordering Rules for Distributions", including the example at the end of the section:
https://www.irs.gov/pub/irs-pdf/p590b.pdf

Your cost basis of your shares of VTSAX and their gains have nothing to do with the order in which you're assumed to make the IRA withdrawals.  That's how the realized gains of taxable accounts are handled.

secondcor521

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Nords is correct.

Further, the IRS doesn't let you pick and choose what you're withdrawing.  When you withdraw from a Roth, it's always contributions first, then conversions oldest to newest, then gains last.  Fortunately, this generally matches what you'd want to do anyway.

This is probably a very dumb question, but when you say "When you withdraw from a Roth, it's always contributions first, then conversions oldest to newest, then gains last," what does that mean in terms of the nuts and bolts of you withdraw it. By this, I mean, I have a Roth IRA with Vanguard. I sell some VTSAX, for example, from it for cash and move to pull it out. Does this mean that whatever I sell will be calculated as my contributions until the dollar amount goes above what I actually contributed into the account and then it counts as conversions until my conversion amounts are gone and then gains until it was empty? By this, I mean, is it all "theoretical" and unrelated to me actually selling and how the VTSAX I bought has actually gone up in value and totally related to how much money I actually put in?
Yes.  You can read about it on page 31 of IRS Pub 590-B "Ordering Rules for Distributions", including the example at the end of the section:
https://www.irs.gov/pub/irs-pdf/p590b.pdf

Your cost basis of your shares of VTSAX and their gains have nothing to do with the order in which you're assumed to make the IRA withdrawals.  That's how the realized gains of taxable accounts are handled.

Nords is correct again. :)

To say it a different way, the IRS doesn't care one whit about what happens inside a Roth IRA - it's one big black box.  They only look at dollar amounts going in and coming out.  You contributed $X dollars.  You converted $Y dollars.  The balance in the Roth is $Z dollars.  When you withdraw, you withdraw $W dollars.  Whether it was in Zimbabwean banana futures contracts or VTSAX inside your Roth they don't care.

thrifted

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I have 2 questions, as I am now looking into investing in property and buying a car. I just moved back to Southern California after 8 years as a renter in NYC.

Here's my portfolio:
$236k in retirement funds with TIAA CREF
(note: 8% employer contribution, matching not necessary to reap the benefits)
$34k in regular savings in a credit union
a $3k IRA in another credit union

Is it worthwhile to convert retirement to IRA so you can withdraw and have a larger down payment to buy property?

My friends have owned property for quite a while but all saved in cash and no one pulled from other investments. I just want to make sure I do everything I can to get the most conservative loan. I was far from MMM exposure when I faced a foreclosure during the 2008 bubble and I am so weary of making another obvious mistake. I'm willing to wait to buy if I can rent a modest room from my cousins who have a spare room available for rent. But of course prices will more than likely rise.

I also feel like I need to buy a car. It will be used but my other question if there are any other tips related to deciding how much down payment to put. I like to leave my savings alone and just contribute $1k/month. Now $200 a month or so of that will be going to a car.



I turned 40.5 this month and am aiming to be FIRE by 50. I now live in Southern California, where home prices are astronomical. I used to like in NYC, where I felt fine renting. 

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Do you have a pension lined up? Your savings seem rather low for your time to retirement. As such, pulling from retirement funds seems like a poor choice.

The good news is, SoCal generally favors renting when you run the rent buy calculations. I pay less in rent than I would be paying in interest + taxes, even if I had put 20% down when I first rented this unit 3+ years ago. And the HOA went up shortly after we moved in, but the landlord only raised the rent by that amount when we renewed two years later.

Do you need a car right away? Some areas you do, but it is worth asking yourself.


thrifted

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Hi ixtap!

Good question. I do not have a pension and actually never worked for a company who offers one. I been toying with the idea of moving into a government job exactly for the pension. County is hiring but there's a longer wait on federal for now during the pandemic I believe.

I manage to not need a car on a daily basis and borrow one from a relative if there is something urgent and the errand cannot be run in a carpool. I'm going to test drive cars when I return to SD (I'm in the midst of moving back) but I'm really weary about buying one.  I've always lived in walkable areas in SD but needed a car for weekly errands or commuting to work. I could go for a carpool option again.

I don't want to waste a penny ever again!

Your insight is super appreciated!

TomTX

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I manage to not need a car on a daily basis and borrow one from a relative if there is something urgent and the errand cannot be run in a carpool. I'm going to test drive cars when I return to SD (I'm in the midst of moving back) but I'm really weary about buying one.  I've always lived in walkable areas in SD but needed a car for weekly errands or commuting to work. I could go for a carpool option again.

I don't drive many miles, so a state surplus Crown Vic was an amazing deal. Bought 4 years ago for $2,300, only thing I've put into it is routine maintenance.

Joe Schmo

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Can this be done with a TSP?
It is looking like we will be moving to a country with a relatively high tax rate on funds and it may be beneficial to cash out retirement now vs being taxed on roth/ira monies in the future.

Nords

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Can this be done with a TSP?
You can convert a Thrift Savings Plan account to a Roth IRA, @Joe Schmo, but there's a few caveats:
1.  The TSP does not permit in-plan conversions, so-
1.a.  You have to be out of the military before you can start converting your TSP, and
1.b.  You can't convert your traditional TSP to a Roth TSP.

2.  After you're out of the military then you can roll your traditional TSP over to a traditional IRA and do a Roth IRA conversion as discussed in the other posts of this thread.

3.  After you're out of the military then you can roll your Roth TSP over to a Roth IRA.  If you've had a Roth IRA for at least five tax years before you did this Roth TSP--> Roth IRA rollover, then you can immediately withdraw the contributions you've made to the Roth TSP.  (Just like withdrawing contributions to a Roth IRA.)  Gains in the Roth TSP have to wait until you meet one of the penalty-free withdrawal conditions.

4.  If you have contributions to either the traditional TSP or Roth TSP from Combat Zone Tax-Exempt pay, then you can withdraw them anytime after rolling over the TSP to an IRA.  Most veterans leave them in the TSP for the compounding, and some IRA custodians don't want to track the basis of CZTE contributions to a traditional IRA so they'll send you a check for that, but you're able to withdraw them tax-free and penalty-free.

Keep your TSP statements that show what you've contributed to the traditional TSP, what you've contributed to the Roth TSP, and what you've contributed from CZTE pay.  Not all IRA custodians track this information.

https://themilitarywallet.com/early-withdrawals-tsp-ira/

wantstoinvest

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #236 on: September 15, 2023, 11:49:02 AM »
This is more of a general question, but I have roughly 500k in 401ks between me and my wife and 250k in a taxable brokerage, along with some savings.

Say we hit 2million bucks in all the accounts and want to retire, we are in our mid 30s. We cant live on the 4% wtihdrawal rate for the 401k money without doing something like this, correct?

dandarc

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #237 on: September 15, 2023, 12:00:00 PM »
This is more of a general question, but I have roughly 500k in 401ks between me and my wife and 250k in a taxable brokerage, along with some savings.

Say we hit 2million bucks in all the accounts and want to retire, we are in our mid 30s. We cant live on the 4% wtihdrawal rate for the 401k money without doing something like this, correct?
Disclaimer: Taxes are highly individual so do your own homework with your specifics.

But in general, you'd have options that just have different tax consequences in this scenario.

1. Use taxable brokerage - you'd owe capital gains on any gains their might be. This can be a low-cost option, and your 401k / IRA continues to grow. Eventually you'd presumably switch over to that account when the taxable account runs out, and then you'd pay regular income tax tax (and possibly additional tax depending on your age) on withdrawals.

2. Straight-up withdraw from the traditional 401K (or IRA if you've transferred to an IRA at separation, and it is likely that if you really are retiring that's a good move). Then you'd owe whatever your regular income taxes would be on that withdrawal + 10% additional tax.

3. Set up a 72-t substantially equal periodic payment arrangement - avoids the 10% additional tax, but not at all flexible - once you start you have to keep taking money out until the account either runs out or you hit 59.5 (minimum of 5 years).

4. Roth Ladder - you'd live off your taxable account while at the same time converting the money you'll need in 5+ years to a Roth IRA. Then once each conversion has aged 5 years, you can withdraw tax and penalty free (only the amount of conversion - not any earnings). Complicated and requires managing over many years, but can help minimize your tax bill.

So yeah - money is not really locked up in retirement accounts.  There's just different consequences tax-wise depending on how you take money out when the time comes.
« Last Edit: September 15, 2023, 12:02:13 PM by dandarc »

wantstoinvest

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #238 on: September 15, 2023, 12:11:52 PM »

Disclaimer: Taxes are highly individual so do your own homework with your specifics.

But in general, you'd have options that just have different tax consequences in this scenario.

1. Use taxable brokerage - you'd owe capital gains on any gains their might be. This can be a low-cost option, and your 401k / IRA continues to grow. Eventually you'd presumably switch over to that account when the taxable account runs out, and then you'd pay regular income tax tax (and possibly additional tax depending on your age) on withdrawals.

2. Straight-up withdraw from the traditional 401K (or IRA if you've transferred to an IRA at separation, and it is likely that if you really are retiring that's a good move). Then you'd owe whatever your regular income taxes would be on that withdrawal + 10% additional tax.

3. Set up a 72-t substantially equal periodic payment arrangement - avoids the 10% additional tax, but not at all flexible - once you start you have to keep taking money out until the account either runs out or you hit 59.5 (minimum of 5 years).

4. Roth Ladder - you'd live off your taxable account while at the same time converting the money you'll need in 5+ years to a Roth IRA. Then once each conversion has aged 5 years, you can withdraw tax and penalty free (only the amount of conversion - not any earnings). Complicated and requires managing over many years, but can help minimize your tax bill.

So yeah - money is not really locked up in retirement accounts.  There's just different consequences tax-wise depending on how you take money out when the time comes.

Ah I see thanks, so I need to really beef up our brokerage so we can potentially live off it earlier than when we draw down from our 401ks

secondcor521

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #239 on: September 15, 2023, 03:16:02 PM »

Disclaimer: Taxes are highly individual so do your own homework with your specifics.

But in general, you'd have options that just have different tax consequences in this scenario.

1. Use taxable brokerage - you'd owe capital gains on any gains their might be. This can be a low-cost option, and your 401k / IRA continues to grow. Eventually you'd presumably switch over to that account when the taxable account runs out, and then you'd pay regular income tax tax (and possibly additional tax depending on your age) on withdrawals.

2. Straight-up withdraw from the traditional 401K (or IRA if you've transferred to an IRA at separation, and it is likely that if you really are retiring that's a good move). Then you'd owe whatever your regular income taxes would be on that withdrawal + 10% additional tax.

3. Set up a 72-t substantially equal periodic payment arrangement - avoids the 10% additional tax, but not at all flexible - once you start you have to keep taking money out until the account either runs out or you hit 59.5 (minimum of 5 years).

4. Roth Ladder - you'd live off your taxable account while at the same time converting the money you'll need in 5+ years to a Roth IRA. Then once each conversion has aged 5 years, you can withdraw tax and penalty free (only the amount of conversion - not any earnings). Complicated and requires managing over many years, but can help minimize your tax bill.

So yeah - money is not really locked up in retirement accounts.  There's just different consequences tax-wise depending on how you take money out when the time comes.

Ah I see thanks, so I need to really beef up our brokerage so we can potentially live off it earlier than when we draw down from our 401ks

Maybe, maybe not.

Note that you can combine strategies.  I'm currently doing options 1 and 4, and will probably add option 3 starting in January (I turn 54.5 in November, so the timing works well).

You can also split your IRAs into parts and do multiple 72(t)s with different parameters on each of them.  This is an arcane way to do things so maybe not that many people know about the ins and outs.  But it's quite possible if you're willing to invest the time to learn and understand.  You can also always do a one time one way switch to the RMD method on any 72(t), so there's a tiny bit of flexibility there.

I didn't particularly beef up my taxable before retiring because I was going to do the Roth ladder (which is more flexible than 72(t) but does generally require having five years of spending available to prime the pump).

As a side benefit, retirement assets such as traditional IRAs and Roth IRAs are not included in FAFSA for SAI.  If you plan to retire with teenage FAFSA college-bound kids, it can be noticeably helpful.

dandarc

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #240 on: September 16, 2023, 11:16:32 AM »
*what secondor wrote - I should have listed the various options without implying you choose only 1. Overarching point is simply that "different account types have different rules - you don't HAVE to jump through any particular hoops if you don't want to."

secondcor521

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #241 on: September 16, 2023, 12:52:48 PM »
*what secondor wrote - I should have listed the various options without implying you choose only 1. Overarching point is simply that "different account types have different rules - you don't HAVE to jump through any particular hoops if you don't want to."

FWIW, I don't think you implied only choosing one; I think the other poster just concluded that on their own and I wanted to point out they didn't have to in case it made a difference to their planning to have more (i.e. combination) options.

I also think the additional point that one usually doesn't have to beef up their taxable in order to FIRE is important, because "beefing up taxable" can often be a suboptimal FIRE strategy in two ways - it can result in higher taxes over a lifetime and can result in a later FIRE date than preferred.  The other poster seemed to be stuck on this point as well.

tasimo

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #242 on: November 27, 2023, 10:40:43 PM »
I'm not sure if it was mentioned before, I didn't see it, but how would a Roth 401k work?  It's all post-tax so I would think it would be even easier than a 401k tIRA to Roth IRA.  Do you have to convert the Roth 401k to IRA first, then is it subject to the same rules about withdrawing contributions before 59.5 or would 5 year laddering it into an IRA turn contributions and gains both into early withdrawal penalty-free funds?  Can it just go into the same Roth IRA I use for backdoor conversions, or a new one so as not to commingle? 

I had the choice setting up with my employer years ago and had chosen the Roth 401k rather than traditional, in retrospect it was probably a mistake.  At least at this point it seems like I'll have a large percentage not taxed on the way out so maybe I can think of the total nest egg is more valuable tax-less money. 

Nords

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #243 on: November 27, 2023, 10:51:50 PM »
I'm not sure if it was mentioned before, I didn't see it, but how would a Roth 401k work? 

I've edited this post to apply to a Roth 401(k):
3.  After you're out of the military job* then you can roll your Roth TSP 401(k) over to a Roth IRA.  If you've had a Roth IRA for at least five tax years before you did this Roth TSP 401(k)--> Roth IRA rollover, then you can immediately withdraw the contributions you've made to the Roth TSP 401(k).  (Just like withdrawing contributions to a Roth IRA.)  Gains in the Roth TSP 401(k) have to wait until you meet one of the penalty-free withdrawal conditions.

https://themilitarywallet.com/early-withdrawals-tsp-ira/

(* Or while you're still in the job, if your employer's Roth 401(k) allows in-service conversions.)

That link to TheMilitaryWallet has additional links to the tax code which are applicable to both the Roth Thrift Savings Plan and to Roth 401(k)s.

tasimo

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #244 on: November 27, 2023, 11:02:34 PM »
I'm not sure if it was mentioned before, I didn't see it, but how would a Roth 401k work? 

I've edited this post to apply to a Roth 401(k):
3.  After you're out of the military job* then you can roll your Roth TSP 401(k) over to a Roth IRA.  If you've had a Roth IRA for at least five tax years before you did this Roth TSP 401(k)--> Roth IRA rollover, then you can immediately withdraw the contributions you've made to the Roth TSP 401(k).  (Just like withdrawing contributions to a Roth IRA.)  Gains in the Roth TSP 401(k) have to wait until you meet one of the penalty-free withdrawal conditions.

https://themilitarywallet.com/early-withdrawals-tsp-ira/

(* Or while you're still in the job, if your employer's Roth 401(k) allows in-service conversions.)

That link to TheMilitaryWallet has additional links to the tax code which are applicable to both the Roth Thrift Savings Plan and to Roth 401(k)s.

Thanks!

ixtap

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #245 on: November 28, 2023, 08:59:47 AM »
We have been using the MBR to Roth IRA and I always forget to include DH's Roth IRA contributions in our available Roth calculations...looks like that is another year's expenses readily accessible.