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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 peo

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
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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that tax isn't capital gains and pushes you into a higher tax bracket, as opposed to a lower tax bracket if you had withdrawn over time in smaller quantities.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.
      - SavantIdiot 5y ago
        So you are paying lump-sum taxes on X amount to store it in a Roth IRA for 5 years so that you get five years of tax-free growth in the Roth.
        stu2b50 5y ago
        No, you're doing it because you can withdraw contributions from a Roth IRA with no penalty. The Roth IRA merely exists as a vehicle to get money out of a 401k with no penalty. In this situation, there is no difference from if you were actually retirement age and withdrawing from your 401k. Same taxes, no penalty.
        SavantIdiot 5y ago
        The light just went on. Got it. Thanks for the explaining.

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.
    - SavantIdiot 5y ago
      So you are paying lump-sum taxes on X amount to store it in a Roth IRA for 5 years so that you get five years of tax-free growth in the Roth.
      - stu2b50 5y ago
        No, you're doing it because you can withdraw contributions from a Roth IRA with no penalty. The Roth IRA merely exists as a vehicle to get money out of a 401k with no penalty. In this situation, there is no difference from if you were actually retirement age and withdrawing from your 401k. Same taxes, no penalty.
        SavantIdiot 5y ago
        The light just went on. Got it. Thanks for the explaining.