Roth Conversion Ladder: Animated Diagram

[welliamwallace]

What's up Tax Nerds? I got tired of trying to explain the Roth Conversion Ladder with words, and even though Mad Fientist's article is great, nothing beats animated diagrams. So I made my own video explaining the details of the Roth Conversion Ladder: One of the main methods for accessing your retirement account money early without paying penalties.

Video Link:
https://youtu.be/MoipP27KFG0

[pmac]

@welliamwallace Great video. Super helpful to see this illustrated!


What about a video on another topic I haven't seen covered as much.

Let's say you retire early at 35 or 40, renounce your US citizenship and move to the Cayman Islands, Belize, SE
Asia, etc...

What kind of money would you owe the US government? Does it depend on the account type (IRA, Taxable, 401k) etc....

How are capital gains treated?

I think I read somewhere that as long as it's less than $2 million in total assets it's not that big of a penalty to renounce citizenship.

Thanks!

[welliamwallace]

That would make for an awesome video. Unfortunately I'm not an expert on that one, I'll have to do some research and put it on my list of future projects!

[pmac]

Thanks! I'm not an expert either haha.

I've been trying to piece together the answer to the question of renouncing US citizenship for early retirees. Especially with healthcare costs getting out of control here in the US, would be nice to have the option of joining a country with more inexpensive care.

[Cezil]

As a mainly visual learner, thank you for this video.  I've been confused about the Roth conversion ladder for a long time, and I have read multiple articles about it (including the ones already mentioned), but..reading isn't the same as visually seeing it happen in "real time" with an explanation as we go along.  Your video really helped it sink in for me.  Thanks again!

[CowboyAndIndian]

Good video! Thanks

Let us know when you post more videos. Please post to this thread again, so that we can be notified.

[BlueHouse]

My main worry is that I don't know when to start that Roth conversion ladder.  If I start too early, I can't stop it because I have to make substantially equal distributions from my 401K.  Or do I?  Is the substantially equal part forever or just until a certain age?  I'm pretty close anyway -- I THINK I want to start that ladder at age 54 (which is coming up fast)

ETA:
Ah, a quick google makes me realize I have nothing to worry about.  One needs to continue the SEPP for 5 years or until they reach 59.5, and then the amounts can change.  Thank you very much.


So if I understand the ladder correctly, in years 1-5, I draw down $40K and immediately reinvest that in my Roth, and I draw down another $40K from my Roth prior year contributions or another account to live on, right?  So taxable income would still only be $40K. 

[FIREball567]

My main worry is that I don't know when to start that Roth conversion ladder.  If I start too early, I can't stop it because I have to make substantially equal distributions from my 401K.  Or do I?  Is the substantially equal part forever or just until a certain age?  I'm pretty close anyway -- I THINK I want to start that ladder at age 54 (which is coming up fast)

ETA:
Ah, a quick google makes me realize I have nothing to worry about.  One needs to continue the SEPP for 5 years or until they reach 59.5, and then the amounts can change.  Thank you very much.


So if I understand the ladder correctly, in years 1-5, I draw down $40K and immediately reinvest that in my Roth, and I draw down another $40K from my Roth prior year contributions or another account to live on, right?  So taxable income would still only be $40K.

You're thinking about a 72t which you can't stop until you're 59.5. A roth conversion is different. Once you start, you're not forced to continue.


Sent from my iPhone using Tapatalk

[BlueHouse]

My main worry is that I don't know when to start that Roth conversion ladder.  If I start too early, I can't stop it because I have to make substantially equal distributions from my 401K.  Or do I?  Is the substantially equal part forever or just until a certain age?  I'm pretty close anyway -- I THINK I want to start that ladder at age 54 (which is coming up fast)

ETA:
Ah, a quick google makes me realize I have nothing to worry about.  One needs to continue the SEPP for 5 years or until they reach 59.5, and then the amounts can change.  Thank you very much.


So if I understand the ladder correctly, in years 1-5, I draw down $40K and immediately reinvest that in my Roth, and I draw down another $40K from my Roth prior year contributions or another account to live on, right?  So taxable income would still only be $40K.

You're thinking about a 72t which you can't stop until you're 59.5. A roth conversion is different. Once you start, you're not forced to continue.


Sent from my iPhone using Tapatalk

I'm not sure I understand what you're telling me.  In order for me to start the Roth ladder, I need to withdraw from my 401K and convert to a Roth IRA (a taxable event).  So the 401K withdrawal is the part that is either a 72t or a SEPP.  That's my understanding, but correct me if I'm missing something. 
Thanks

[Boofinator]

My main worry is that I don't know when to start that Roth conversion ladder.  If I start too early, I can't stop it because I have to make substantially equal distributions from my 401K.  Or do I?  Is the substantially equal part forever or just until a certain age?  I'm pretty close anyway -- I THINK I want to start that ladder at age 54 (which is coming up fast)

ETA:
Ah, a quick google makes me realize I have nothing to worry about.  One needs to continue the SEPP for 5 years or until they reach 59.5, and then the amounts can change.  Thank you very much.


So if I understand the ladder correctly, in years 1-5, I draw down $40K and immediately reinvest that in my Roth, and I draw down another $40K from my Roth prior year contributions or another account to live on, right?  So taxable income would still only be $40K.

You're thinking about a 72t which you can't stop until you're 59.5. A roth conversion is different. Once you start, you're not forced to continue.


Sent from my iPhone using Tapatalk

I'm not sure I understand what you're telling me.  In order for me to start the Roth ladder, I need to withdraw from my 401K and convert to a Roth IRA (a taxable event).  So the 401K withdrawal is the part that is either a 72t or a SEPP.  That's my understanding, but correct me if I'm missing something. 
Thanks

The Roth ladder is a series of conversions from your 401k to Roth IRA (you then withdraw 5 years down the line). It is unrelated to a SEPP (or 72t), which is a withdrawal directly from your 401k. These are two completely separate methods to accomplishing the same goal: acquiring money from your retirement accounts without paying any sort of penalty. As I understand it, you have to choose one or the other (you cannot do both).

[bacchi]

The Roth ladder is a series of conversions from your 401k to Roth IRA (you then withdraw 5 years down the line). It is unrelated to a SEPP (or 72t), which is a withdrawal directly from your 401k. These are two completely separate methods to accomplishing the same goal: acquiring money from your retirement accounts without paying any sort of penalty. As I understand it, you have to choose one or the other (you cannot do both).

You can do both if you're using more than one account.

[Boofinator]

The Roth ladder is a series of conversions from your 401k to Roth IRA (you then withdraw 5 years down the line). It is unrelated to a SEPP (or 72t), which is a withdrawal directly from your 401k. These are two completely separate methods to accomplishing the same goal: acquiring money from your retirement accounts without paying any sort of penalty. As I understand it, you have to choose one or the other (you cannot do both).

You can do both if you're using more than one account.

I stand corrected.