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Roth IRA Conversion Ladder For Early Retirement - YouTube
Channel: Jarrad Morrow
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you know what i love about the financial
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independence and early retirement
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community
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they are masters at hacking the system
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to take advantage of little loopholes
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when it comes to investing and saving
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money they're especially good at finding
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ways to do very
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out of the ordinary things such as
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access money in your retirement accounts
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like a 401k
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and 403 b before the age of 59 and a
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half and the best way to do this is
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through something called a roth
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conversion ladder
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which is how most people are going to be
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able to withdraw money from their
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largest retirement investment
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accounts early in this video we'll go
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through what a roth conversion is
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we'll talk about how it plays into an
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actual roth conversion ladder
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how you can benefit from it by
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potentially saving thousands of dollars
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and then i'll also walk you through step
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by step what to do to implement this in
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your life
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then after that i will give you a real
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life example so you can see it in action
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hey i'm jared with 2as and 2rs and on
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this channel we like to talk about all
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things personal finance investing and
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financial independence if you're feeling
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generous in this moment then please do
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me a huge favor and hulk smash
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that thumbs up button it's free and it
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makes me ten percent happier but
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disclaimer nothing that i say in this
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video is of course financial advice
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after you watch this video i do
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encourage you to do your own research as
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well and talk to an accountant before
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going through any of this just to be
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safe the traditional way that most
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people
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are going to access their largest
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retirement accounts like a 401k
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or a 403 b is by waiting until the age
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of 59 and a half this age wasn't just
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made up for fun though the reason is
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because if you withdraw
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any money from either of those
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retirement accounts before that age
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then you'll pay an early withdrawal
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penalty this isn't an issue for someone
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who is going to retire at a normal age
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but it's not very helpful to someone who
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is going to need to use some of that
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money during their early retirement
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since this is usually
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going to be the largest investment
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account the early retiree is going to
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need to find a way
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to be able to get a hold of some of that
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money before that age without incurring
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any penalty enter in a roth ira hack
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called the roth ira conversion in case
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you weren't aware contributions to a
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traditional 401k
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and 403 b are made with pre-tax dollars
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so you're basically putting off paying
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taxes on that money today
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so that you can pay them when you decide
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to withdraw money from those two
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accounts
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at some point in the future on the other
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hand a roth 401k is funded with after
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tax dollars
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so you're basically paying taxes on that
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money today so that you won't have to
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pay taxes on that money in the future
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when you withdraw from that account a
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roth conversion is how an early retiree
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is going to help pay for expenses
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between the day that they leave work
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until the age that they can start
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withdrawing money without incurring a
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penalty doing a roth ira conversion
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allows you to take the money from a
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traditional 401k
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or 403b and move it into a roth ira
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so that it can not only grow tax-free
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but so that you can also access that
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converted money as well because it's
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considered a quote-unquote
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roth ira contribution just so we're all
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on the same page let's cover how
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roth ira contributions work at this
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point in time an individual can
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contribute up to six thousand dollars
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per year
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into a roth ira because that six
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thousand dollars has already been taxed
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you'll never pay taxes on that
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contribution ever again
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and you can withdraw it from your roth
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ira at any point in time without paying
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penalties now if that six thousand
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dollars was invested in a roth ira which
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it should be
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and it grew to say ten thousand dollars
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then of that ten thousand dollars you
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can withdraw
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six thousand dollars of it at any point
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in time because it's your contribution
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that you already paid taxes on but you
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cannot withdraw
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any of the four thousand dollar gain
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without paying penalties when you do a
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roth conversion from a 401k or 403b
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to a roth ira then that money is
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considered a contribution and can be
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withdrawn at any point in time
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just like that six thousand dollars that
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i just mentioned for example if you did
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a roth conversion of we'll say fifty
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thousand dollars
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from a traditional 401k to a roth ira
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then you can withdraw that fifty
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thousand dollars without paying any
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penalties heads up that there is a
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waiting period before you can use this
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converted money but we'll cover that in
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just a minute now this is a rule that
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you 100
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have to know about or else it could cost
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you quite a bit of money so don't miss
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that part of the video we can't ignore
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the elephant in the room with this whole
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roth conversion process
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and that's the taxes that you'll pay for
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converting the money into a roth ira on
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the surface
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yes this stinks no one actually wants to
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pay taxes for doing this and to be
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honest
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there's no way of getting around it with
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a roth conversion but if you had to
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choose between paying more taxes or less
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taxes then which one would you choose
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because with a roth conversion you'll
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most likely pay taxes at a rate that's
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less than what you're paying with your
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current income the money you convert
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will be taxed as income by the federal
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government so those are the tax rates
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that we need to pay attention to let's
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say before quitting your job
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you and your significant other had a
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combined income of a hundred and fifty
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thousand dollars
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which would put you in a 22 tax bracket
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if you decide to leave work and retire
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early then your taxable income will
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immediately drop to zero because
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you're of course a bum who doesn't have
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a job if you converted say 45 000
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from your 401k or 403b to your roth ira
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then that amount would be taxed as
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income but the question is
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how much since you're married filing
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jointly we'd account for the standard
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deduction of 25
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100 which would drop your taxable income
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to nineteen thousand nine hundred
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dollars that would move you from the
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twenty two percent tax bracket down to
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the ten percent tax bracket and you'd
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only have to pay one thousand nine
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hundred ninety dollars
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on your forty five thousand dollar
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conversion one other thing to note is
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that this is all based on the tax rates
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today
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now i lost my crystal ball the other day
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so i can't really predict what the tax
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rates are going to be in the future
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which means that these tax rates could
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change over time this isn't anything to
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be too concerned about it's just
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something that you want to keep in mind
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when you start to do those roth
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conversions there's one more important
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step to the roth ira conversion
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and that is the latter portion when you
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convert money from a 401k or 403b
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to a traditional ira then to a roth ira
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you have to wait five years before you
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can touch that money think of it like
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planting a seed today then having to
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wait five years before you can pick the
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fruit from that tree to start eating it
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for someone who is retiring at age we'll
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say
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40 they'd start their first conversion
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that year which then would give them
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full access
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to that money at the age of 45 because
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40
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plus 5 years is 45. then the next year
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at the age of 41 they do another
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conversion so that they can access that
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money at the age of 46
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because 41 plus 5 years is 46 years old
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this process would be repeated for
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however
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long the money was needed or until you
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reached the age of 55.
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one thing to keep in mind is that every
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year you might be converting a little
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bit more than you originally did
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to account for inflation but once again
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this is nothing to worry about
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it's just the cost of doing business in
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general whether you were
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doing a roth conversion or not you'd
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still have to account for inflation with
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your normal
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normal expenses 55 is the magic number
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because at that point
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you'd have enough roth ira conversions
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completed to where your expenses would
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be covered through when you can fully
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access that traditional 401k money
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at the age of 59 and a half so you
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wouldn't necessarily need to convert any
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money at that age if you didn't want to
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as you can see you're essentially
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building what looks like a ladder by
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converting money today that you plan to
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live off of in 5 years hence the name
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roth conversion ladder i don't want to
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downplay the fact this whole process is
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going to take a decent amount of
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planning
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let's be honest you're going to have to
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project how much money you're going to
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need to live off of in five years i
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don't know about you but i barely know
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what my life is gonna look like in five
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months let alone
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five years that's why it's always
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important to be able to stay flexible
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with your spending
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you should have a little bit of cash
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reserve to help out if you happen to
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reach
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that five year period and you need a
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couple thousand dollars more to live off
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of than you originally thought this is
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something that i'm sure a lot of people
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pursuing financial independence or
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early retirement already know how to do
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but it's at least worth mentioning to
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keep up on that flexible
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step spending skill that you've learned
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along the way another disclaimer with
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the roth conversion ladder there's going
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to be that five year window where you're
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converting money from your 401k
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or 403b to your roth ira and potentially
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not earning any money for this period of
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time you're going to want to have some
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cash set aside to live off of
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and this can come from things like cash
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set aside in a bank account
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or even money from a taxable brokerage
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account that you've been accumulating
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leading up to that early retirement date
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i know this sounds outrageous because
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the amount that needs to be set aside
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could be quite a bit of money but let's
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be honest no one ever said that retiring
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early would be easy keep this in mind
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and i say this all the time to burn it
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into your memory
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everyone is going to retire at different
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ages for some
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it might be in their 30s others it might
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be in their 40s and others
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it might be in their early 50s the goal
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is to have the option to retire at an
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earlier date than the average person
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so if you can't do it in your 30s or 40s
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then who cares because at least you can
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make it happen
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in your early 50s which is still pretty
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darn young in the grand scheme of things
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one more thing to note is that i would
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caution everyone to make sure that
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retiring early and not working
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is something that they really want to do
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now it's not like you can't hop back
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into the workforce
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again if you want to but in my opinion
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most people are going to end up finding
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out
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that not earning an income doing
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something productive is going to get
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very old
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really quickly the good news is that you
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can test out retiring early
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by doing something like a mini
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retirement for one to two years
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to see what it actually feels like i
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made a video where i walk you through
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everything you need to know about taking
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a mini retirement that i'll link up down
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in the description and at the end of
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this video as well if you have any
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additional questions please leave them
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down in the comments below and don't
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forget to hulk smash
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that thumbs up button before you go
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please also down in the description i
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will have a link to get in the waiting
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list for
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our private financial independence group
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that will be opening up soon down there
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you'll also find free stocks
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resources and playlists to help with
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your financial independence and
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investing needs
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i'll see in the next one friends done
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