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>because he can't touch it until he is 59.5 (w/o penalty). That's not quite true. With 5 years of preplanning, you can get money out of a 401k without any pena

>because he can't touch it until he is 59.5 (w/o penalty). That's not quite true. With 5 years of preplanning, you can get money out of a 401k without any penalty at any age (although, you will of course pay taxes on it) by doing a backdoor Roth IRA ladder.

SavantIdiot 5y ago
I've not heard of that. So it goes from one IRA into another? Why? Plus, ROTHs have yearly limits of $6k. While it can be done I don't see the benefit of doing it, esp. given the tiny amounts (compared to what is needed for retirement).
- stu2b50 5y ago
  You can rollover 401k money into a Roth IRA (but this is a taxable event and you will pay income tax on that - just a note because "Roth" in the name tricks people up). That money will count as a contribution (ie not a gain). There's also NO limit on how much you can convert. You can withdraw any amount of contributions to Roth IRAs no penalty. But you have to wait 5 years for rollovers. So basically 1. Pick how much money you'll need in 5 years 2. Rollover that much money from your 401k to a Roth IRA (pay taxes in this step) 3. 5 years later withdraw that money from your Roth IRA
  - deleted 5y ago
    [deleted]
  - SavantIdiot 5y ago
    Step two is a big deal. In fact, its kind of a headscratcher. You have to believe you can earn back the lost capital from taxation in your investment horizon for the tax free benefits of the Roth IRA to make sense. Tough computation to make. Or am I missing another benefit?
    - encoderer 5y ago
      You’ll get taxed on the IRA gains regardless. In this case, they grow tax free in the Roth after the conversion. The math works out the same.
    - stu2b50 5y ago
      I think you're confused. 401k withdrawals are always taxed, even when you're over the age limit. The tax advantage is that you aren't taxed on the way in. The benefit is that you don't get hit with the additional 10% penalty for early withdrawal from a 401k. The Roth IRA is irrelevant; it's just a vehicle for you get money out of the 401k without the penalty. You'd do this as you enter early retirement - like with a normal 401k withdrawal, in this hypothetical your tax bracket will be far lower in early retirement (and not working) as you withdraw. Basically, by doing the backdoor Roth ladder you get to pretend there's no penalty on withdrawing early. No penalty. Yes, you still get taxed.
      - SavantIdiot 5y ago
        Ah. Good point. It is not a penalty, it is just the tax all at once that you would normally pay over the life of the distribution. Unless that tax isn't capital gains and pushes you into a higher tax bracket, as opposed to a lower tax bracket if you had withdrawn over time in smaller quantities. I don't know if IRA dispursions are taxed as capital gains or income tax.
        stu2b50 5y ago
        >it is just the tax all at once that you would normally pay over the life of the distribution. It's not. You don't have to rollover the ENTIRE account. You can choose to only rollover a certain amount of money. The idea is say, you calculate that as a person you spend, say, $60k a year. So 5 years ago, you convert $80k of your 401k into a Roth IRA. It becomes ~$60k after being taxed. Your tax bracket is just the one that's an income of 80k would be at, because you only converted 80k. Now you can take that 60k and spend it on your life. Repeat every year, that's the ladder part, and you can spend money out of your 401k no penalty, normal tax rate, as if you were retirement age.
- tingletech 5y ago
  $6000 is the annual limit for contributions There is no limit for conversions. See also back door roth and mega back door roth.
bsorbo 5y ago
Adding onto this, this article compares various approaches to getting money “early” out of a 401k/tIRA (Roth conversion ladder as said here, 72t SEPP’s, early withdrawal penalty), and has the surprising conclusion that even the “just pay the 10% penalty” comes out ahead of regular taxable contributions, at least in some situations. https://www.madfientist.com/how-to-access-retirement-funds-early/ https://www.madfientist.com/how-to-access-retirement-funds-e...
jokethrowaway 5y ago
Sure, but if you're paying taxes you're defeating the purpose of the post of minimising taxes.
- stu2b50 5y ago
  You're always going to pay taxes on 401k, even if you wait. The point is to contribute to it tax free while you're still working and have a high personal income. You do the Roth ladder when you've going into early retirement - your personal income will be low because you're no longer actively working. And because taxes are progressive you are minimizing taxes.

SavantIdiot 5y ago

I've not heard of that. So it goes from one IRA into another? Why? Plus, ROTHs have yearly limits of $6k. While it can be done I don't see the benefit of doing it, esp. given the tiny amounts (compared to what is needed for retirement).

stu2b50 5y ago
You can rollover 401k money into a Roth IRA (but this is a taxable event and you will pay income tax on that - just a note because "Roth" in the name tricks people up). That money will count as a contribution (ie not a gain). There's also NO limit on how much you can convert. You can withdraw any amount of contributions to Roth IRAs no penalty. But you have to wait 5 years for rollovers. So basically 1. Pick how much money you'll need in 5 years 2. Rollover that much money from your 401k to a Roth IRA (pay taxes in this step) 3. 5 years later withdraw that money from your Roth IRA
- deleted 5y ago
  [deleted]
- SavantIdiot 5y ago
  Step two is a big deal. In fact, its kind of a headscratcher. You have to believe you can earn back the lost capital from taxation in your investment horizon for the tax free benefits of the Roth IRA to make sense. Tough computation to make. Or am I missing another benefit?
  - encoderer 5y ago
    You’ll get taxed on the IRA gains regardless. In this case, they grow tax free in the Roth after the conversion. The math works out the same.
  - stu2b50 5y ago
    I think you're confused. 401k withdrawals are always taxed, even when you're over the age limit. The tax advantage is that you aren't taxed on the way in. The benefit is that you don't get hit with the additional 10% penalty for early withdrawal from a 401k. The Roth IRA is irrelevant; it's just a vehicle for you get money out of the 401k without the penalty. You'd do this as you enter early retirement - like with a normal 401k withdrawal, in this hypothetical your tax bracket will be far lower in early retirement (and not working) as you withdraw. Basically, by doing the backdoor Roth ladder you get to pretend there's no penalty on withdrawing early. No penalty. Yes, you still get taxed.
    - SavantIdiot 5y ago
      Ah. Good point. It is not a penalty, it is just the tax all at once that you would normally pay over the life of the distribution. Unless that tax isn't capital gains and pushes you into a higher tax bracket, as opposed to a lower tax bracket if you had withdrawn over time in smaller quantities. I don't know if IRA dispursions are taxed as capital gains or income tax.
      - stu2b50 5y ago
        >it is just the tax all at once that you would normally pay over the life of the distribution. It's not. You don't have to rollover the ENTIRE account. You can choose to only rollover a certain amount of money. The idea is say, you calculate that as a person you spend, say, $60k a year. So 5 years ago, you convert $80k of your 401k into a Roth IRA. It becomes ~$60k after being taxed. Your tax bracket is just the one that's an income of 80k would be at, because you only converted 80k. Now you can take that 60k and spend it on your life. Repeat every year, that's the ladder part, and you can spend money out of your 401k no penalty, normal tax rate, as if you were retirement age.
tingletech 5y ago
$6000 is the annual limit for contributions There is no limit for conversions. See also back door roth and mega back door roth.

bsorbo 5y ago

Adding onto this, this article compares various approaches to getting money “early” out of a 401k/tIRA (Roth conversion ladder as said here, 72t SEPP’s, early withdrawal penalty), and has the surprising conclusion that even the “just pay the 10% penalty” comes out ahead of regular taxable contributions, at least in some situations. https://www.madfientist.com/how-to-access-retirement-funds-early/ https://www.madfientist.com/how-to-access-retirement-funds-e...

jokethrowaway 5y ago

Sure, but if you're paying taxes you're defeating the purpose of the post of minimising taxes.

stu2b50 5y ago
You're always going to pay taxes on 401k, even if you wait. The point is to contribute to it tax free while you're still working and have a high personal income. You do the Roth ladder when you've going into early retirement - your personal income will be low because you're no longer actively working. And because taxes are progressive you are minimizing taxes.