quote:
To access the money in the retirement accounts prior to standard retirement age without paying any penalties on the distributions, he can create something called a Roth IRA conversion ladder.

Thanks to the way Traditional IRA to Roth IRA conversions work, you are able to withdraw converted money five years after the conversion date, tax and penalty free. So in this example, assume that he converts his entire 401(k) to a Traditional IRA when he achieves FI and then, every year after that, he moves $9,750 from his Traditional IRA into his Roth IRA. He would only need to do this for five years before he could then start withdrawing $9,750 per year, tax and penalty free!

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Posted by slackster

Houston

Member since Mar 2009

85487 posts

Posted on 5/2/16 at 12:02 pm to dragginass

quote:
The laddering info was something I was ignorant of. Good stuff.

It isn't as cut an dry as that excerpt makes it out to be. You still pay the taxes on the amount you convert, you just don't pay taxes and penalties again if you leave it for 5 years.

The downside is that you may not actually retire early, so the accounts may not have the time required to make up for the taxes paid during the conversion. A 72(t) SEPP may be a suitable workaround for you as well. The money is still taxable but you don't pay the 10% early withdrawal penalties if you're careful. It may also provide more flexibility in your plan. Talk to a CPA and advisor though. Retiring is "scary" enough on your own, but doing it early is not something you want to do without careful planning.

There is an incredibly high likelihood that you'll underestimate your expenses and overestimate your investment growth, leaving you scrambling for jobs in your 70s.

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