Ages 40+ and not FIRED - IRA ladder, savings,? What's your transition plan?

[DeskJockey2028]

I've read a bit about doing a Roth IRA ladder, moving your pre-tax retirement savings to an IRA and starting a 5 year deposit/draw down cycle from IRA to Roth. Like this: http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/

For those of us who won't be retiring as early - how do you plan to handle withdrawing funds from your pre-tax investments (401k, 403b, etc)? If I retire at 55 (the earliest potential I think I could go at) that leaves me 4.5 years to get by until I can access my money without penalty. I could build up a cash buffer to keep me going for a year or two, and there are other strategies to get the money out. Doing the Roth IRA Conversion ladder thing doesn't seem to make the most sense for me though. And I could be entirely wrong here - which is why I'm seeking opinions and math from others.

How do you plan to bridge the gap between your leaving the workforce and turning 59.5? How would you do it if you only had to account for 3-5 years of gap time?

[wenchsenior]

I, too, am uncertain about one particular aspect of this...the Roth Conversion Ladder. 

I understand the advantage of it for people retiring early, what about for people not retiring early? The earliest DH would stop working is age 60, and he can access his funds without penalty at the point.  He only has two chances to access his retirement funds after retiring, too, which potentially complicates things.

Would there still be a point in doing the Roth Conversion Ladder to save taxes down the road? Or is it not that big a deal if you retire after 59.5?

[BFGirl]

I plan to use taxable accounts to bridge the gap until I can take out of my IRA.  I plan to retire between 53-55.

I do believe you can take out of your IRA before 59.5 with a procedure where you take equal payments over a number of years.  I think there is a sticky for it at the top of one of the forum threads.

I am not sure whether or not I will do a Roth conversion or not.  I will likely remain in the same tax bracket I am now due to a pension, so I'd still pay the same amount of tax on any withdrawals/conversions.  However, if I did convert to a Roth over the next few years, I think it would still grow tax free.  I wouldn't need to access the Roth in the next several years, so I think I'd be okay.  I'm still not certain what the best thing to do in this situation is.

[SimplyFinanciallyFree]

You can access contributions from your Roth IRA as long as the account has been open for 5 or more years, which is why the Roth conversion ladder works.  We are planing to use our taxable investment account and Roth contributions for the first 5 years.  Basically, just make sure you have enough saved outside of your IRA/401(k) to cover your expenses during those 5 years.

[DeskJockey2028]

That's one way I'll be doing it. I'll have about 12 years of Roth IRA contributions. If I can max them out for 11 of those 12 years, I'll have invested about 63,600 bucks. Hopefully the first seven years of returns plus my initial 7 years of investments will give me close to 2 years of spending power. (I'm planning between $45k and $50k a year). But that's just two years.

I may have to set up a taxable investment account and start putting some money in there in the next few years to try to make up the 3ish year gap the above plan introduces while I'm waiting to access everything else at 59.5 years of age. By then I'll be able to withdraw from my Roth IRA that I've converted my 403b into.

[MDM]

You can access contributions from your Roth IRA as long as the account has been open for 5 or more years, which is why the Roth conversion ladder works.

Direct contributions to a Roth IRA may be withdrawn at any time without tax or penalty.

Amounts converted to a Roth IRA are subject to that 5 year rule.

See Two 5-Year Rules For Roth IRA Contributions & Conversions for more.

[MDM]

If I retire at 55 (the earliest potential I think I could go at) that leaves me 4.5 years to get by until I can access my money without penalty.

Fortunately, that is not true. :)

If you retire from your company in the year you turn 55 (or later), you can access your 401k/403b without penalty.  Tax still applies, but not penalty.  See Tax Topics - Topic 558 Additional Tax on Early Distributions from Retirement Plans Other Than IRAs for more.

[MDM]

Would there still be a point in doing the Roth Conversion Ladder to save taxes down the road? Or is it not that big a deal if you retire after 59.5?

If you can delay SS and/or pension, then you can do Roth conversions at lower tax rates after retirement.

How big a deal it is depends on your specific situation.  It could be minor or significant.

[Mustache ride]

Is there any reason to not roll over an old 401k into a traditional ira? I plan on doing the pipeline when I get there, assuming it's still available when I retire.

[DeskJockey2028]

Also fortunately you're reading this forum! That's excellent news! Thanks!

If I retire at 55 (the earliest potential I think I could go at) that leaves me 4.5 years to get by until I can access my money without penalty.

Fortunately, that is not true. :)

If you retire from your company in the year you turn 55 (or later), you can access your 401k/403b without penalty.  Tax still applies, but not penalty.  See Tax Topics - Topic 558 Additional Tax on Early Distributions from Retirement Plans Other Than IRAs for more.

[MDM]

Is there any reason to not roll over an old 401k into a traditional ira? I plan on doing the pipeline when I get there, assuming it's still available when I retire.

Main reason would be "if that interferes with doing a Backdoor Roth IRA."  If that is not an issue, then a minor consideration would be "if the 401k has access to institutional class (i.e., very low cost) investment options."

[wenchsenior]

Would there still be a point in doing the Roth Conversion Ladder to save taxes down the road? Or is it not that big a deal if you retire after 59.5?

If you can delay SS and/or pension, then you can do Roth conversions at lower tax rates after retirement.

How big a deal it is depends on your specific situation.  It could be minor or significant.

Oh, good point. I never even considered delaying the pension.

This is obviously going to take lots of 'scenario' calculations. 

[MDM]

If you can delay SS and/or pension, then you can do Roth conversions at lower tax rates after retirement.

Oh, good point. I never even considered delaying the pension.

If the monthly pension amount is the same regardless of when you start taking it, there is no sense delaying it.

If the monthly pension amount increases if you delay the start, then some "what if...?" scenarios would be worth evaluating.

[sisto]

I've read a bit about doing a Roth IRA ladder, moving your pre-tax retirement savings to an IRA and starting a 5 year deposit/draw down cycle from IRA to Roth. Like this: http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/

For those of us who won't be retiring as early - how do you plan to handle withdrawing funds from your pre-tax investments (401k, 403b, etc)? If I retire at 55 (the earliest potential I think I could go at) that leaves me 4.5 years to get by until I can access my money without penalty. I could build up a cash buffer to keep me going for a year or two, and there are other strategies to get the money out. Doing the Roth IRA Conversion ladder thing doesn't seem to make the most sense for me though. And I could be entirely wrong here - which is why I'm seeking opinions and math from others.

How do you plan to bridge the gap between your leaving the workforce and turning 59.5? How would you do it if you only had to account for 3-5 years of gap time?

You should consider checking with your workplace plan since some are done in a way that let's you start drawing at 55 when you retire. For me if I wait that long which I doubt I do have that option. If I don't I have taxable accounts as well as a it in ROTH and have also considered paying the penalty to withdrawal early as an option. I'm currently sheltering it from paying 25% so if I had to it wouldn't be that bad. There are some thoughts on that floating around somewhere, possibly MadFIentist.

[rpr]

The plan is to have enough in Taxable accounts and Roth IRA contributions to cover 5 years of expenses. Start the 5-year rolling Roth IRA conversion ladder upon ER.  My workplace plan will allow withdrawals if retiring after 55.