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Access Retirement Accounts Early | Roth IRA Conversion Ladder No Tax or Penalty | FIRE Movement - YouTube
Channel: Hidden Freedom
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hey dave here in freedom investing in
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today's video we're going to talk about
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a roth ladder why would you even want to
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do a roth ladder
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what is it and how can it even help you
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in early retirement or in fire
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so that's what we're going to talk about
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today so let's go ahead and get started
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[Music]
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so i'm just starting to dig into a lot
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of these retirement plans and
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what's the best method for me to go
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forward roth ladder has been something
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that i've known about for about seven
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years now
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and it's been on my you know plan to do
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um now there's a lot of different
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caveats and
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a lot of different retirement plans
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there's roth ira there's roth 401k
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there's ira
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there's 401k there's solo 401k there's
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self-directed ira there's
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so many different retirement plans out
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there i am not an expert here so
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you know talk to a tax advisor i'm still
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going through all the research
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uh myself so um i do have a solo 401k
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and i'm trying to figure out
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if there's a way that i can you know
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draw some cash out of that to roll over
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into
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a roth ira but i haven't really explored
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much into that yet
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so what we're going to do today is just
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kind of show you the process of what a
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roth ladder
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is how can i help you in early
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retirement
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fire right and you know how you can
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basically
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take the money out of your 401k
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tax-free and withdrawal so be 459 and a
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half so
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let's go ahead and dig in here and look
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at the spreadsheet so
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all right here is the spreadsheet roth
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conversion ladder all right now this is
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just a standard
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401k to roth conversion okay now why
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would you even want to do that
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because you can't take money out of your
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401k
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without taking a penalty on it so you
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know you got to pay the taxes not to
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mention you got to pay that 10
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penalty right so that's if you withdraw
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before that 59 and a half years old so
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how can you access that money ahead of
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time all right now i'm happen to be 45
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years old right now
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and i'm not gonna retire here until 2022
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most likely i'll be
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47 and maybe i'll retire before my
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birthday so maybe
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maybe i'll be 46 i don't know but
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um so what it is let's just say you have
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some money
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in your 401k and
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you know you know there's a lot of
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different options you have
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you know if you're in a higher income
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bracket like i am you can't contribute
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to a roth
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okay there's a cutoff at like a 136
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okay so i haven't contributed to a roth
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ever in my life all right
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now the roth 401k i think came into
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existence around 2006 if i'm not
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mistaken
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and i think the roth iras i think came
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out around
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the late 90s if not mistaken so don't
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quote me on that go and do your own
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research but
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um and you know by i wasn't making 136
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thousand dollars back in 2006
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but i didn't even know about a roth ira
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or roth 401k or anything like that
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so they weren't really popular back then
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but uh
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so i'm in i'm in a higher income bracket
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now
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and i can't even contribute to one so um
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there is something called maybe
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maybe even heard of it a backdoor roth
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conversion
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okay back door roth they're using
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something called a
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mega conversion or mega back door right
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and it's not the back door you're
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thinking of all right so get that out of
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your head
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and there's also something called like a
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solo 401k parachute which i do have a
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solar 401k so i'm going to try to
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go through those options as well but
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let's just say you have some money into
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a 401k and you
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you're still working so you don't want
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to convert that money because guess what
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that money that you can convert every
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year
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is going to get taxed at whatever
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bracket you're in so if you're in a 40
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percent or a 30 tax bracket that money
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that gets converted is going to
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count as ordinary income and you have to
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pay that 30 or 40 percent
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tax on it all right now you wouldn't
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have to pay that penalty
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um to do the conversion but you're going
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to pay that tax on it so
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it makes sense to wait until you fire
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and have a low ordinary income like
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me right so i'm gonna have a low
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ordinary income plus if you're
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single uh you have that 12 400 deduction
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okay so this or counts as ordinary
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income so you know if you didn't have
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any other ordinary income you can
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convert up to 12 000 if you're single
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and not pay a dime in taxes okay so
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uh if you're married it's double that so
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you're at 24
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800 so you can convert 24 000 a year
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assuming you have
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no other ordinary income uh from your
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uh 401k to a roth and not pay any taxes
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on it
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all right so those are a couple of the
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rules there if you're getting any
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benefit out of this video go ahead hit
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that like and subscribe button
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and set that bell notification now
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i'm not going to talk about the back
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door roth because it kind of gets
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confusing and it gets especially if you
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have a multiple different ira accounts
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and all like that and
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it's a lot of money in those so it kind
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of gets confusing so that's the reason
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why you want to wait until you
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fire or retire early to start the roth
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conversion because you can pay
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lower you know income taxes or pay zero
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so
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let's just assume that i retire here and
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i'm at year 22 let's just say i have no
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other ordinary income
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which i happen to have from my real
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estate notes which i've talked about let
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me look at this video here
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so uh 2022 i retire
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and i'm age 47 so
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i'm just going to say i'm going to
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convert 6 000
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and from the 401k to a roth i'm not
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going to pay any tax on that
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all right now it's going to just sit
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there and then that
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immediately gets moved to the uh
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roth conversion total here which we'll
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just call like the bank or something
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like that
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i'm only living off of thirty thousand
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dollars which i'm gonna
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you know basically take out of my
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brokerage accounts or any taxable
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account
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all right in early retirement for thirty
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thousand dollars that's what i'm living
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on right now
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okay and when i'm employed and i'm
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living in denver and i'm basically
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living about thirty thousand dollars a
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year all right
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so i have inflation in there at three
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percent maybe that's a little high maybe
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it's not
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um so that is uh thirty thousand dollars
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for the first year i'm living off that
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off the taxable accounts you know the
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second year goes by we're going to
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do inflation adjusted here we're going
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to subtract or convert i should say
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another 61.80 okay that's eight the
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three percent uh inflation built in
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there
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we're going to subtract 30 000 or you
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know i guess
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you know withdrawal 30 900 and that
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could be you know dividend income or
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whatever else could just be taken right
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out of your high yield savings account
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yahaya's right so um
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and then that gets moved down here to
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the second year
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okay we got the five year holding period
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here met since 2022
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okay we're going to talk about that here
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in a second and the third year
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goes by where you convert another 63 uh
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65 because you got to understand that
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the tax bracket
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moves up every year as well that 20 000
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excuse me 20
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four hundred or the twenty four thousand
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eight hundred goes up every year as well
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so we can
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that's inflation adjust as well so we
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can kind of adjust this if we want to we
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can do
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you know three percent or something like
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that or two percent oops i screwed that
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up
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two percent
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there we go two percent um
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why do i keep messing that up two
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percent there we go
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and i can adjust those all the way down
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if i want to so anyways we'll adjust
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them back to three percent i'm just
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trying to be conservative here so
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um and i keep putting the percent sign
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in there twice for whatever reason there
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so okay there we go adjusted back
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and then we hit the third year point
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here at 20 25
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a year 2025 and 50 years old and we're
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excuse me that's the fourth year by the
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way
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and then it gets added to the withdrawal
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from roth it adds gets added to the bank
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here so this is how much we have in
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there
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after the one two three four fifth year
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right here we have thirty one thousand
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dollars just sitting in that roth
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conversion bank and now that could just
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be
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a um a retirement account and brokerage
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all right like you know
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fidelity or vanguard or schwab so that
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could be invested it doesn't have to sit
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there okay
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so that can be invested all right so and
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by the way your
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your uh 401k up here is invested as well
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right
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so most likely if you do things right
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now there's a couple different things
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here but you know you're probably
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generating more than six thousand
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dollars
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of return from that account so you're
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really not drawing that account down at
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all
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okay while you're doing this conversion
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so that's why it helps to be married
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because you can probably draw those
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accounts down
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ideally you want to draw those 401k
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accounts down to zero
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before you meet that r was the rmd the
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minimum
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the minimum required minimum
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distribution before you meet that
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required
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minimum distribution because they're
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going to require you to take out that
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money when you get to a certain age
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okay and every different count is
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different some could be 70 70 72
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so they're all different numbers there
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but don't quote me on that like i said
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do your own research but 70
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70 or 72 the irs is going to require you
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to start taking money out
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all right so and why is that a bad thing
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because guess what that counts as
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ordinary income and it's going to push
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you into another tax bracket
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and you know maybe you're getting
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dividends maybe your dividend is going
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to get start taxed now okay
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so ideally you want to try to draw that
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account down to zero
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um it's not going to work for me
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probably because i'm getting quite a bit
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of return from that account
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and unless i got married or something
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like that
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um i just don't see me be able to uh
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convert more than i can more than i'm
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generating in that account
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so if you're getting any information out
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of this video go ahead and like and
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subscribe and hit that bell notification
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all right so continuing on here we get
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to let's say 2027 we're converting 69.55
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that gets added to the bank um that's
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the withdrawal right there
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gets converted and gets added here and
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then the five year holding period met
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since 2027 so by the time we hit the
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2027 here guess what
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we have six thousand dollars available
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to us to withdraw
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tax three all right so that's why it
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gets added over here
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we're gonna take this thirty four
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thousand seven hundred and seventy eight
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dollars
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and subtract that from a brokerage
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account or whatever account you have
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there
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that's on the taxable side that you're
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living off of okay if you're using the
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three percent rule the three and a half
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percent rule the four percent rule you
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probably heard of the four percent rule
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so
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we can get take that money we have that
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money available to us now so it gets
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added over here we have forty thousand
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dollars available to us now
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you don't have to use it okay but it's
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sitting there available to you
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tax free okay so we'll move on to
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you know the next year here and guess
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what we have another uh
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chunk here that met the five-year
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holding period and that gets added to
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our withdrawal here
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and then the forty two thousand dollars
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so ideally in people in fire what they
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normally do is they normally withdraw
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from their taxable accounts until it
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gets to zero to gap them
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okay if you retire to 35 you got to have
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a lot of money
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on your taxable side that bridges you to
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the roth conversion ladder right so
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because a lot of my net worth is tied up
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in taxable accounts i'm not going to
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worry about that i don't have to worry
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about that
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all right i'm never gonna run out of
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money on the taxable side so most people
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when they retire early
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they've been stocking a lot of cash uh
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away
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in the tax deferred side so they're in a
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different bucket
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they're gonna be drawn off those taxable
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size until they can get to the minimum
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of the five year holding period where
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they can supplement that income at that
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point so
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i'm a little bit different boat so you
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kind of need to weigh that option if
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you're in my boat where
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you stocked a lot more money away in
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your taxable side and then
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you're pretty much just going to convert
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and withdraw from your taxable accounts
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and probably pretty much living off of
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that so
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um you don't like i said you don't have
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to use that money here that six thousand
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dollars is gonna you know
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we're gonna add the 61 the 63 and the 65
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it kind of just adds up here
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all right and that money could just you
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know get gains there okay
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i know the gains would be taxable if i'm
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not mistaken up until 59 i think
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i could be wrong on that um i'm not like
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an expert here so
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this is how i understand it i'm still
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doing a lot of research
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um what's best for me so uh forty five
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thousand dollars just to say you're
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living off your dividends you don't even
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need to take that money out all right so
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you can just be living off that 41 000
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and then just have that
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you know 45 000 just waiting there okay
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it's just making interest it's making
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you know dividends or anything like that
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and if you needed to take it out in a
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chunk you could you had it available for
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you okay or you can
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take out the five-year holding period
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amount and supplement your income
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if you want to that'd be 48 000. so that
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is the process of a roth conversion
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ladder um i have mine all the way out to
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uh 2020 excuse me 20 65 age
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90 which i probably won't make it to i'm
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thinking i'm just planning my retirement
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out to about 85 years old
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just given what you know where people
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have lived in my uh
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in my family so um 85
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and earlier i can retire maybe you know
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the more i can make it to right so
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you know less stress involved so there's
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all the subtractions
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you know up to 90 years old uh of income
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that i lived off of
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you know it kind of gets big real big
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here but
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those numbers look big but you got to
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understand that's you know
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several years away okay so there's
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interest
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excuse me there's inflation in there and
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all that so yeah i might be living off
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125
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000 a year but i guarantee you by the
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time i'm 90 years old that 125 000
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is going to be like probably like 25 000
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in today's money you know so
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just take that and it'll count so that's
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the process of a roth conversion ladder
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like i said i'll probably make more
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videos on this uh going forward
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um you know probably talk about like the
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backdoor conversion i'll probably talk
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about maybe the
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mega back door i'll probably talk about
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the solo 41k parachute because i do have
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a solar phone k
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i need to figure out how i can convert
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money out of solo 401k
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to like a rothsled 401k even if those
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even exist
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i'm not sure if they even do but um like
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i said
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one of the things is you want to try if
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you can
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to convert as much money as you can
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from your 401k or whatever you know
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even if it's ira or something like that
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and you want to convert that money and
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get it down to zero
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if you can before those required minimum
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distributions start all right
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so um i think that's it with this video
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if you have any comments questions or
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concerns
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i'm going to leave a comment below i
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hope this helps you out i'm also going
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to link down
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in the description and probably like the
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pinned comment i'll probably just put a
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link to my amazon affiliates link there
[912]
you can shop through amazon and not pay
[915]
a dime
[915]
extra and you can support this channel
[917]
if you want
[919]
there's no obligation there i do get a
[920]
small commission from enemy purchase
[922]
that you make
[924]
on amazon using my link you don't have
[925]
to buy that product that i'm linking you
[927]
can buy any products you want so click
[929]
on that link
[930]
buy any product you want and i'll get a
[932]
small commission you can support me for
[933]
making these videos
[935]
and which take a lot of time and uh a
[937]
lot of effort so
[940]
with that let's go in the video thanks
[942]
everybody for
[943]
watching and go ahead and like and
[945]
subscribe we'll see you next video
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