Roth Conversion Ladder Explained
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- Опубліковано 8 вер 2024
- If you want to access the money in your 401k or IRA without paying the early withdrawal penalty, you can use the Roth conversion ladder. This is mostly for those interested in retiring early and have calculated they have already earned enough to retire for the rest of their lives. This is a relatively hard and rare thing to do but is facilitated by either very high earnings, very frugal spending habits of a combination of both. Watch to find out how this works and plan for your retirement!
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I think this video has changed my retirement plans. Thanks very much!
Glad I stumbled onto this video. Being able to tap your 401k/IRA before 59 1/2 is a gamechanger.
I plan on retiring in about 10 years using this strategy. I will probably take one year off to fully enjoy retirement, and then pursue short term engineering contracting gigs to keep myself busy and have extra cashflow.
Explain process and timing to do Backdoor Roth IRA!!!
I'm already achieve financial freedom and thinking if i should retire within few years. after listening to you: I think i will stay with my current work to stay touch in the business economic social interaction and have attitude myself to think everyday is a learning day to keep myself productive. Hopefully to meet you in person BTB in Malaysia! You'll love Malaysia, I promise!
Well.. someone thought I meant working for someone is the only way to keep productive. What I meant is that you should do work outside of a typical job rather than lay on a beach no working. No everyone has the ability to keep on doing their own thing since many people get bored if they do a two week stay-cation.
*As A license tax professional i enjoy talk of taxes 💪🌚*
It's too complicated...
This is only type of ladder I will ever I use in my life.
N3Rd 4 LYFE 🤓
One thing you didn't mention is that most 401k plans will not allow incremental withdrawal or conversion. You'd probably have to convert the entire 401k to a self directed IRA first and then after that settles, proceed with the incremental Roth conversion ladder. Also, most plans don't allow conversion of any type while still an employee.
Yes... but if you retire, you can convert the 401k right to an IRA immediately. Then you begin the 5 year clock.
My investing strategy is I have a Roth IRA. I am investing for 30 years minimum. I stopped screwing around with my investments when I was 31. I am 35 now. The money I had at 31 was $4600 approximately. If I retire at 65, then all of the money I accumulated up to 31 plus the money I put in until I was 35 plus dividend re-investment up through 2019 will all come out in 2049. For 2050, I will sell all the money I invest in 2020 and so on. In 2020 I will also start an HSA and invest a small amount for healthcare expenses. Most of it will be in cash. Fidelity is the only HSA I can see myself coming out on.
Excellent description. I am trying to decide about an early retirement now.
I am officially retired doing online survey and now part time job playing skill game.
Interesting.
1) Can you roll direct from 401k to Roth IRA? I was told you needed to first step through a Traditional 401k first and THEN roll to Roth IRA?
2) What is the expectation of the IRS on how you track the 5 year waiting period? Is it up to you to track each lot and ensure you never withdraw more than that? How is this tracked when reporting taxes?
$1Million in 401(k) at age 34? The max you can put in every year is 18-19k for a single person
Won't it take a little longer to get to 1 million
Add in some compounding gains?
@@RobC1999 401k (pre-tax) max is 19k and Roth (post tax - you can open one even if your employer doesnt have it) max is 6k. So max is 25k
1 million in a 401k is feasible by 34. Remember, it's not just the money you put in, also include the employer match too. Think of someone who got out of college and started their career in something that allowed them to contribute the fully allowed amount prior to and throughout the 2008 housing recession. The money contributed back then has plenty of time to grow, it's not just 'nearly 200k after 10 years' it compounds in a surprising way.
@@GuruMN that's the minority of folks
@jrscovill sweeps, you're talking to someone who owns all of this. I think you meant to repond to the post I replied to.
Any additional contribution after 25k (
With the addition of employer contribution (on a high salary) this is possible with aggressive investing.
Hmm never thought about that, I put my money into a roth-401k, I have a feeling I won't be retiring early but maybe next year I need to think about a standard 401k. I have thought about retiring early but I have no idea what I would do with all that time 🤷♂️
Always get the company match! You practice what you want to do by taking a one week vacation and forcing yourself to explore your hobbies more.
sounds like something someone would do if they plan on starting a business venture themselves, gives them a good 5 year window assuming they have cash savings 👍
I agree with you, my goal looking for this strategy is so I can stop working with stuff that I don’t like so I can focus on my projects even if they don’t give me any money, but at least I will have some money saved for my retirement, but yeah, doing nothing the entire day is not good
Would you have any advice for someone just now starting to take investing seriously when the markets are at highs?
Yes. Invest regardless of current prices. Historically, markets are at highs 1/3 of the time. New highs will continue to be hit. Keeping $ on the sidelines trying to time the market is an ineffective way to grow wealth. Plenty of research has been done on this topic and available online from reputable sources.
It's easy said then done especially when we had a great strong market. But what if the market dropping 40% and it might take several years to get your money back . Having extra money to buy more shares when the market is down it's a smart move... 20% at least in cash would be a wise move in my opinion.
@@tedmnicholas222
The problem with timing the market is that after a crash, the market can recover quite quickly.
If you are purposely keeping your money out, there is no guarantee you will be vigilant enough to get the money in to realize the recovery.
Also if you put in money now, get a 10% increase, when the market goes down 40% your initial investment won't go down 40%.
If you have an emergency fund, and you don't need the 20% cash for somthing now - that sounds way to conservative to me.
That's why people try to invest regularly - regardless of the market bull or bear.
@@thomasreedy4751 I agree, that is why currently I have only 20% in cash and my future contributions are going in a cash account until a drop.
I would really appreciate if you would be willing to answer my question. I am trying to understand why a traditional IRA is needed for the conversion process? I have googled online, watched other videos, and many folks keep saying you can convert from 401k to Roth IRA, but no mention of traditional IRA OR if the traditional IRA is mentioned no explanation of why one must convert to it before converting to a Roth IRA.
Would really appreciate if anyone can link me to sources explaining this !
Yeah but how much money are you missing out on by having the $200k for living expenses in cash and not invested?
You need to have some emergency cash. Btw, all of this money is indeed invested.
Thanks for helping all of us
=D You're welcome!
Good video. I’m gonna have to watch it again to wrap my head around it.
If I converted money in a Roth 401k to a Roth IRA, do I still have to wait 5 years?
Thanks, the visuals helped :)
Best video on the topic I have seen. Thanks for creating it.
Thanks!
You should change your name from BeatTheBush to Rick Roth, the youtube financial rapper
=D
Pretty good information. A bit confusing on when you can withdraw the first $40k. You can take the 40k out anytime. It’s the capital gains that have the five year wait period. Correct? Thx!
I wish I knew this 10 years ago. Although not knowing is a blessing. I didn’t spend my 401K money simply because I didn’t know I can get to it without penalty. LOL.
The examples you use are not bad and the basic concept is spot on; however, the majority of people that retire early (a conversion ladder only makes sense for FIRE) have the majority of their net worth tied to taxable investment accounts and/or Real Estate. You can only contribute a maximum of $19k/year into a 401(k) so even if you're making $100k+, if you're looking at FIRE, you can't retire and live off of only your $19k/year contributions that you've been making for the past 20 years. I can almost guarantee that most people will have significantly more wealth in taxable/liquid accounts than in 401k/IRA accounts. I max my 401(k) and IRA every year and my taxable investment account contributions exceed my retirement savings contribution every year. It's the only way you can FIRE. Side note: If you don't make enough to max your retirement accounts every year, then this conversion ladder won't even matter because you're not going to retire early if you can't even max your retirement accounts every year.
Add in some compounding and it can get pretty big. Add in matching.
What a great illustration. Thank you!
You're welcome!
Like the music at the end!
5 years and older than 59 1/2 qualifies as penalty free. If you’re under that age you will pay an early withdrawal penalty regardless of how long you’ve held the account.
Yeah, you'll pay 10% penalty for Roth early withdraw (under 59.5) . The early part of the video didn't describe it, but later it did.
Oh, just the GAINS are hit with a 10% penalty. I get it.
Very complex but great to know. Thanks for this!
Thank you!
Related with your post on zero taxes with Roth conversions and long-term capital gains, to keep it simple, can I just sell $89k total (for married couple) from my brokerage account? Your post assumes we sell enough stock (say $300k) to realize $89k of capital gains tax-free and buy back $211k of stock to reset things, but grows complexity and may encourage market timing. If I’m looking for simple in FIRE and not looking to maximize potential, is withdrawing $89k from my brokerage account still a good option?
Maybe change the title of the Roth (contributions) column in your spreadsheet to Roth (conversion).
=D Good point.
yes, had me baffled
Commenting before i watch the video. Good topic, hoping the content is equally as good
I think a more detailed breakdown in the spreadsheet would benefit a lot of your viewers, especially the ones with less retirement knowledge as it was pretty hard to follow that part of the video. Otherwise, pretty solid
Hmmm, I have to make things simpler and well, less information unfortunately.
If say I ladder $25k for 5 years, come year 6 can I withdraw less than $25k to optimize for taxes? Say I withdraw $20k year 6, does the extra $5k carry over and I could withdraw $30k in year 7 and so on?
Look up what countries dont have a central bank and you'll be enlightened
@@Jonathan-yr3so idk about that was just pointing attention towards the rothchilds banking problem
You'll have to pay your conversion tax from your cash.
I looked into Roth conversion when I retired 13 years ago but found it wasn't worth it even though I had a substantial amount in my 401K/IRA accounts. My problem now is that I am 69 years old and I will be required to make a minimum withdrawal at 70 1/2. I don't know if I can then deposit the required min. withdrawal into my ROTH IRA. My other option to reduce taxes is to donate a portion of my required min. withdrawal directly to 501c3 charities. I think of it as the IRS and your state governments supporting charities I like and helping me build a legacy.
if youre that old, might as well hide that shit from the irs🤣🤣😁😁
Thank you Mr. Bush. Im your number 1 fan :)
=D Thank you!
I remember during the Tech Bubble of 2001, people were sharing stories of those who lost 40% of their 401k value.
Oh... yeah.. it is getting there.
@@BeatTheBush you think we are heading to some kind of bubble ? Can you please share why?
@@_Wai_Wai_ Stock valuation is just too high...
1million In 401k by age 34 ? Come’on. What is that .000009% of the population?
less
No one buying that one eh? Ok 44.
Being someone who has maxed my 401k since out of college I cannot see how someone could reach 1m with a 12 year investment span given the turbulence we have experienced over the past 12 year period. Maybe 1/2 that amount is achievable . Maybe . I do understand you are using that value for illustrative purposes though :)
@@mucusofwanderhome6945
By maxing out do you mean the 19k tax free contribution of the 50k max allowed contribution?
Great content!
Good analysis.
Hey BTB, since you're self-employed, do you have a Solo 401k? Roth contribution limits of the Roth Solo 401k have been a game changer for me ($19k for 2019).
Quality video as usual!
There are different ways to contribute as self-employed. Another way is through SEP.
Hi - I have a question: You spent time talking about how if you are "completely retired" this would work for you. So if I wanted to do a Roth Conversion Ladder but I owned investment properties or own a company that flips properties, I wouldn't be able to take advantage of the Ladder because I'm still earning an income (even if at the time of retirement it is 'passive')?
Nice job!
Can you do the same process with a Roth 403b. I know the tax situation would be different but I'm more concerned about avoiding a 10% penalty
That T. rex is very attentive, I bet he’s a millionaire
He hopes no one notices.
Every engineer I work with here in Silicon Valley does not qualify for a Roth IRA because we make more than the maximum level.
You could be very very entry level.
They can do backdoor Roth IRA: Contribute to a non-deductible traditional IRA, then convert it into a Roth IRA
Hello BTB, in 2020, Californians will again be required to have health insurance. Share with us what a person in situations like yours do. Thanks.
I have an expenses video coming soon that talks about my health insurance.
I have had cash sitting around for years and it had not been working to generate more wealth. Can you recommend a service or someone who can help?
I was disappointed to find out that you feel you need to do work to feel like you are living a productive life. I don't need to work for someone to feel like I'm worth something, I never received that brainwash. When not working, I feel like I did when school was out for the summer back in high school. You spend time with friends, go out and enjoy hobbies, maybe build something, play some video games and watch TV, read books. You don't need to tie yourself into working to have a good life.
Work meaning 'build something', not a job work. Laying on the beach for 10 years is not productive.
I think what he mean by working is just to do something and have a purpose in life, rather than sitting at home, watching TV passively and wilt one's life away.
If you have managed to become FI before 40, you are likely a high achiever.
Those types have a hard time staying idle.
@@thomasreedy4751 ..or they have other things they want to do with their lives than dedicate themselves to another entity who demands they show up every weekday at the same time and do their bidding. Many who want to get to FI and retire early want to get out of the obligations related to working and spend time not working for an employer. Being motivated doesn't mean you can't occupy your time just because you've been wasting your time dedicating it to an employer for a decade or two.
@@GuruMN
A lot of people who are FI just become self employed. That is another word for being employed.
Good advice 👍
=D
What if I have a Roth 401K?
Missing the stuffies, but great content!
10:14 You're assuming "working for money" is the only way to "be productive".
Also consider converting to Roth to avoid 401k tax bomb at age 70, which is independent of Roth ladder.
If you are productive, you are likely going to bring in money but not always.
@@BeatTheBush A stay-at-home parent is "productive", it doesn't matter if money is tied to it.
You will pay taxes for all pretax dollars*...no way around it!
@@twincherry4958 Yes, but maybe paying 0-12% now is better than 30% later.
@@MarkUnique Yes, it all depends....I dont think anyone is planning to be poor when they retire...lol😂😂😂
Hi, does anyone know if your ira broker, Fidelity, etc., will typically track what amount of your conversions has been in your Roth IRA for at least 5 years and what hasn't? Do they also track earnings and contributons/conversions for you? Or do you need to keep all your own book keeping?
You'll get a statement of the IRA to Roth conversion from your broker at the end of the year and the copy will go to IRS. You have to keep your own tax records as well.
If you're converting 50k into Roth and get taxed on it for let's say 10k, doesn't the 10k come out of cash? Would your basis then be 50k or 40k?
40K or pay the tax on top of $50K
Sorry if covered in the video and I missed it, but would you realistically have hundreds of thousands of dollars in cash and not in a taxable investment account?
It depends if you value holding cash to be more secure. The amount you hold may depend on your burn rate. More you spend, more you hold.
If you have a Roth 401 and move that to a Roth IRA then I’m guessing you won’t be taxed?
Accurate guess
Smart!
why didn't you mention the $6,500 Roth IRA contribution limit ? doesn't add up with your math.
Because you are not contributing to a Roth but just converting it.
Can you only put 6k a year into a Roth? How are you putting 40k
There is no limitation for “conversions”.
If “contributing” to Roth then limit is 6k max up to 49 years of age.
But the contribution is also limited to earned income. If you only earned 3k then only 3k max.
Thanks for making this video. A little too complicated to understand though.
Is 50k taxed at 22%? Or is it taxed at 12% with the standard deduction ($50,000-$12,200=$37,800)?
The standard deduction, if you take it, is not taxed at all.
Yes, the standard deduction of $12,200 is not taxed. That’s not the question though.
At retirement (no income), if someone wants to convert $50k to their Roth IRA, are they taxed at 22% or 12%?
@@onlyinparadise4613 Upto 40K it's 12% and any about over upto $86K @22% for a single person. but you'll pay 22% only on $10K (50K-40K)
Isn't the Roth limit $6000 per year,$7000 if over 50 so how can you put $40000 per year?
correct
it's ira to Roth conversion my friend, not contribution....
Hmm... Should I open a Roth ira or just put money in my hsa? Or should I maximize my 401a?
You seem young.. stick with Roth 401K and contribution to HSA. You don't know what tax bracket you'll belong to at retirement with huge amount of money in in 401K plan. Roth gives you access to your money free of any taxes upon retirement.
@@Antandthegrasshopper Thanks for the advice.
Topic is difficult. My poor brain is trying to process it.
Nonetheless....clicked it ASAP. Batt ,,@10,%
I don't get how the $40k isn't taxed AGAIN when taken out before age 60.
Because it's taken out of a Roth IRA
@@carlblemming but the withdrawal age is 60
Charles Gripp you can take out any money you put in after 5 years with a Roth IRA the traditional way (i.e. if you have 30k in your Roth because you have contributed annually for x amount of years and you make less than the cap amount allowed to invest in a Roth IRA).You just can’t take out the gains without a penalty before age 59.5. That’s what makes a Roth IRA so attractive to investors. It is very flexible.
If you use the ladder, you will pay ordinary taxes on the amount you roll over unless you roll over less than the current standard deduction. For most people that are able to retire early, they will be in a lower tax bracket than when they were working. So, you technically will pay income taxes if you roll over more than the standard deduction. Just not the early withdrawal penalty. It’s still a great deal. Tax rules change all the time though .It can get very confusing.
First you have to understand the difference between traditional and roth 401k/IRA. Traditional is before they take any taxes from your paycheck but eventually when you withdraw money at 59.5 you will have to pay taxes. Roth is after tax meaning you contribute to your roth when taxes have already been taken out. With that being said, any CONTRIBUTIONS you make to your roth you can take out any time without tax because you’ve already been taxed on it.
Does this work from traditional ira to roth ira?( i rollovered a previous employer 401k to my traditional ira a few years back)
immafreak Yes, it does.
can you still work while doing the conversion ladder?
Theoretically, "yes". A key point in this video is that a conversion (e.g., partial, full, ladder) works "best" when your income drops to absolute zero for a few years; this is when your overall tax burden is extremely low. Thus, while you will pay taxes for the IRA conversion(s), your overall tax burden will keep you in lower overall tax brackets. If you are already in a higher income tax bracket, such a conversion will be painful.
I just turn 65 & start collecting social security benefits , Can I do a Roth IRA conversion ladder for $20,000 a year? I currently have $250,000 in my IRA account. Thanks
No need... I'm sure you'll use up $250K slowly during retirement. Why pay taxes on $20K when you do the conversion. Plus you've to wait 5 years to use that money.
Why would you bother converting anything when you're past the age of penalties for withdrawal on both accounts?
Do u have to quit your job to do the Roth conversion ladder?
For it to be effective, you need to not earn any money and just convert for minimal taxes.
BeatTheBush is that the case? I thought you can tap into your roth contributions penalty free and not taxed since it is taxed already (after tax). I don’t remember a rule that one needs to make little money. Can you shed some light on this?
Careful! You cannot withdraw from a Roth conversion before age 59.5 !
You can withdraw conversions/contributions anytime. The earnings depend on the 5 year rule and/or age 59.5.
@@dec1slh Thank you. I stand corrected!
Yes, I am willing to just completely stop working, that's literally the definition of retirement. I fucking hate working. I can stop working and still be productive in ways I choose to be, and it doesn't need to result in extra income. You keep presenting the false dichotomy that one is either working/making money or a lazy bum on permanent vacation. I plan to be neither of those things in retirement.
HK is in recession and people are fleeing HK. Could HK crash the global stockmarket?
It seems like a seed that could blow up.
You need talk about coppa new rules. How does effect your channel
I do? No, I do not make kid videos at all. Which kid watches videos about Roth IRAs?
What's Coppa?
6th! Kinda theoretical and not practical but thanks!
=D Well... some might need to use this.
BeatTheBush I think it is very practical for those who are planning to FIRE. Of course, everyone is in a different financial situation. Nice video. 👍🏻 😀
Roth ladder is not very money savvy. 😮
well... a really large retirement account. that rules out 90% of Americans.
Many subscribers are into this early retirement thing though.
A little judgemental about other people’s retirement choices.
lol $1million at age 34
No?
If they travel around the world they can make money on UA-cam
Possibly.
Comment
You can be productive without producing income man. Very shallow thinking in my view.
You can indeed. But my thinking is actually when you are productive, you will make income. And I cant remember the last time I called someone shallow.