You only need bonds as you are entering the time that you will live off your investments and don’t want to be in a position of selling stocks low. My strategy throughout my 20’s was to plow as much money into my Roth 401k and Roth IRA as possible due to the obvious benefits of no taxation in retirement; however, since the early retirement bug bit me in the past year when I found ERE and MMM (and now your blog today), I’m not so sure . The most significant tax-reform bill in decades has just been signed into law. I hope that is not the case, but if premiums continue to rise and there is no way to stop it, not sure it can survive? More and more, I’m beginning to think that a split between traditional and Roth is the way to go. The after-tax portion is taxed coming and going. Each week, financial experts Mindy … I was listening to one of your podcasts and reading the post in the roth ira ladder. What do you recommend I invest in? One question for you… Even if in early retirement, I plan to be in the 15% tax bracket and not pay taxes on capital gains, while I’m working (which I will be for the next 10 years), I’m in the 28% tax bracket. Could affect prices. I’m worried that the Traditional contributions would nullify the conversion somehow. Just reading this post now, hopefully you get notified – I was under the assumption that 457 plans were created for government or nonprofit employees only because they don’t get 401ks…how can it be fair for a person to double dip 401k/457? To skirt this, you would need to convert those existing IRAs back to 401k if your employee allows or any other mechanism. Now just check your email to confirm! Assuming 10% rate of return, that could mean as much as the amount of money invested for the 10-15 years while working and putting money into the traditional IRA. I assume still go with the traditional IRA and then convert to a Roth once our income drops below the Roth limit when we semi-retire? It’s too late for early retirement for me. Yes, but you can have both. Have you thought about this yet? Thanks for rewriting this. I am holding on of course to my receipts in case I need the cash reimbursement vs a medical bill. Conversions from a Traditional IRA to a Roth IRA are taxed as ordinary income so it’s beneficial to spread the conversion over a large timeframe. Does this change the strategy? You are exactly right with your interpretation. Hey, welcome! I work for a state university, and have access to a 457(b). Being the great software engineer that I am I strongly believe in re-use! However, an early retiree can comfortably live off of $30,000 per year, for example, and gradually convert $9,000 to their Roth IRA per year without having to pay any tax on their income or conversion.”. Now, I still think your traditional-to-Roth conversion strategy is great and probably worth the cost of being able to shelter a little less money from capital gains taxes. Looks like it could save me $500 in tax for 2017 tax year, with no implications at all for 2018 tax year. I would love to use Traditional, but my employer caps my tax-free contributions to 25% of my income. My plan is 70% stocks/15% REITs/15% bonds, assuming 2% average dividends for stocks, 3.5% average dividends for REITs and none for bonds, that’s an effective dividend percentage of less than 2%. I am self employed, and have an Individual 401(k), with a Roth option available. Contribute to pre-tax retirement accounts like 401(k)s, 403(b)s, Traditional IRAs, etc. If you didn’t have any other income coming in to fill the standard deduction and personal exemption, then continuing your conversions after 59.5 makes sense. When j first gor my job, They sold us on the Roth 401K option, so ive been putting just enough to get the employer match. in so it’s difficult to tell exactly what bracket you land in. I do max out on MY 401k & MY Roth IRA and for my wife a 5500$ for Traditional IRA. Quick question on this. Backdoor Roths can only be done if you do not own any other Traditional IRA accounts. Brandon walks us through advanced retirement account strategies you may have heard of, such as the Backdoor Roth, Roth Conversion Ladder, and the coveted Mega Backdoor Roth. Money saved for everyday living outside of a retirement account of any flavor (not an IRA, Roth, 401k, 403b, 457, etc). Great stuff here. If I make roughly 50K a year and is the head of household, what benefits do I get around tax time? I am currently twenty years old and my father wants me to talk to his investment adviser on starting investing early and I was wondering if you would recommend a Roth or Traditional IRA or would you go a different route for someone so young? I’ve got a question about about the withdrawals from the taxable account during the first 5 years. In the end, isn’t this just the same question we always face with Traditional vs Roth – what you think your income will be when you retire vs now, and subsequently what your taxable amount is/will be? Backdoor Roths, Mega Backdoor Roths, & Roth Conversion Ladders with The Mad Fientist | BP Money 162 Great job scoring the free higher ed! selling a Total Stock Market index fund and buying an S&P 500 index fund) so that you realize the loss but remain fully invested, Using the tax loss to reduce your taxable income, In tax years that you are in the 0% tax bracket for capital gains, you sell shares that have appreciated and pay tax on those gains (since you’re in the 0% bracket though, you actually pay nothing), Since you bought the investment back at a higher price, you’ll have a higher cost basis and will therefore have less gains to pay taxes on when you eventually sell the investment (or you’ll have a bigger loss to harvest next time you do some tax-loss harvesting). As for (1), if I remember correctly rolled over roths are not treated the same way as “original” roths when inherited. Hey, have you come across 457 plans. Thoughts on this type of mix? This is exactly what I have been doing since I stopped working in 2007 at age 54. Phil, ps. My wife and I work for state government (fairly relaxed lifestyle, 40.0-hour week, but hopelessly underpaid). Unsubscribe at any time. I’m thinking that by maxing it out every year I can take advantage of those tax-free gains for my old age retirement, but I’d be able to withdraw the principle to help get me through those bridge years before my ROTH Conversion Ladder Money is available. I’m 30 making $105k taxable income right now. Just going off of the numbers you gave me, if you max out your 401(k), that should take your Modified Adjusted Gross Income (MAGI) down to $70,500. After that I think the typical recommendation is do the Roth for the next $5500*2 and then go back to the 401k for any remaining contribution. Awesome post FI! Currently I have good insurance through my work for only $30/month, so I will have to do some research to figure out whether there is a good time for me to get an HSA. That $5,000 contribution they made in 2014 is just part of the amount they withdraw that year so it is being taxed at their average rate. If not, would you enter your overseas address on the State Tax form or your “old” address? I need this tax knowledge. If I’m understanding these previous comments that money would not be taxed at all when converting from traditional to Roth? My employer also contributes an annualized $1000 towards my maxed out HSA contributions. However, the traditional IRA seems better, and we already have one (also Vanguard target retirement index mix). It’s great that all the tax-avoidance strategies I’ve written about over the years (except for the Roth IRA Horse Race) have survived the new legislation. I’ve gone cross-eyed feeling like I’m just trial-and-erroring the numbers in my spreadsheet. It is my understanding that there is a 10% withdrawal penalty regardless of the amount for any funds taken from a 401 or traditional IRA before the age of 59 and a half. I suspect it could be a winning strategy for folks who have very small earnings early on and only moderate earnings in their early or mid career. I am hoping to implement this exact strategy as I get closer to being fully financial independent. I am new to Fi and late to the game (turning 52 in January). 8 Key Lessons from the Ultralearning Experiment 39:02. If you have everything converted into Roth accounts by 59.5, you’d have years before social security that you wouldn’t have any income to fill up the standard deduction and personal exemption space. The post is trying to show, however, that someone on the early FI track has an opportunity to use the years where they will have little or no other earned income to take any tax deferred money and gradually convert it in amounts less than or equal the standard deduction (plus additional deductions they may claim) and therefor pay minimal or no tax on it. Does someone know where my assistant could possibly access a sample MHA Dodd-Frank Certification copy to type on ? Even with her working, I’d still say Traditional is the way to go. We FIRE’d last year and now I’m looking to shift 100% of our rollover IRAs to ROTHs over the next 10 years for me and 20 years for my wife so that we have zero balance in our IRAs before we each hit 70. Our available tax advantaged space is almost 60% of our after tax income. :). I am thinking about one downside though: I am currently working and am lucky to be paid highly enough that I’ll likely hit the 401(k) contribution limit this year. Also, check out this article on HSAs Should I roll everything into a traditional IRA ASAP? Does that mean your taxable account needs to be significantly higher than your 401k and IRA to sustain? If AK is too cold, live in southern WA, and drive across to Oregon (no sales tax) for shopping. Should I worry about maxing out my tax sheltered accounts (and using the IRA ladder), or would I be better off using that money to get more real estate? I’ve been wondering the same. Thanks for the help! I.e. (Fantastic podcast this week, by the way.). I am just barely learning about all this so pardon my simplicity- Thank you so much – I love your blog!!! You are a marvel MF! We can always go with a catastrophic coverage for risk mitigation and pay $200. As I understand it, if you spend 330 days of the year outside of the US you are exempt. Please try again. I’m really glad to hear you’re enjoying the site. But you said your wife does and will work probably longer than you so how do you avoid her taxable income raising your joint income while you are performing these roth conversions? All of them could decrease and the healthcare credits would definitely decrease as I convert money from traditional to Roth. Thanks for your leadership in this community, and keep the great content coming. Lots to map out. I used to be in the boat of maxing out taxable accounts to fund early retirement. I would appreciate any feedback! Thanks! Do you propose doing this while you’re still working or after you’ve already stopped? I’d like to wait till 70 to apply for SS. I didn’t have a specific plan for retiring permanently when I left, but don’t see going back into the career world either. As Matt said, “I am not arguing against traditional IRA over Roth, only that the ‘average’ vs ‘marginal’ argument here is a red herring.” One should always look at the marginal effect of one’s actions to determine whether those actions will be favorable or unfavorable. JB, are you talking about Traditional/Roth IRAs or Traditional/Roth 401ks? So you hit FI you have 100K in your 401K, you then roll the entire balance over to a traditional IRA, immediately after you then take whatever amount allowable without getting taxed(about 10k from what i’ve read so far) and put this in a Roth IRA, repeat for 5 years. Would you happen to still have the spreadsheet you used for the chart? Never once did anyone mention converting our regular IRA’s to ROTH after leaving employment. Without a doubt one of your best articles! What Traditional IRA would you recommend? Although I’m FI, I’m not retired yet by choice. Luke, my $.02. Therefore, my $5,500 must go into a Roth IRA. Transfer your 401(k)/403(b) funds to a Traditional IRA, Roll the money from your Traditional IRA over into a Roth IRA (paying tax on the conversion), Withdraw the converted money, penalty free, Make contribution to a non-deductible Traditional IRA, Immediately roll that money over into a Roth IRA, In addition to your normal pre-tax 401(k) contributions, make additional after-tax contributions, Perform an in-service withdrawal and move your pre-tax contributions to a Traditional IRA and the after-tax contributions to a Roth IRA, Selling shares that have decreased in value, Buying simliar but not identical shares (e.g. As far as the 401k, I have an SCorp but no employees. Some things to consider; But I would have thought that it would still be worth it because I would be in a lower tax bracket than I am now by the time I get to perform the tIRA to Roth IRA conversions… (or not pay taxes at all). Today we’re joined by a friend of the BiggerPockets podcast network, Brandon “The Mad Fientist”. You never disappoint. That’s a great point, Pat. Depending on how you have things setup and your drawdown plan. Thanks Drew for the answer. Then, if you want it to be in a Roth account, you can convert it back to a Roth (backdoor Roth). In my trial and error I was finding somewhat of a sweet-spot between drawing down the account within 40 years and minimizing taxes when I took a very big withdrawal (maximum of 25% tax bracket) in the first few years, and then kept it below the 25% bracket for the later years. Personally, I’m happy to be getting a child tax credit for the first time ever (phaseout starts at $400,000 versus $110,000 in the past for married folks). Nice focus for this tax article, it definitely stands out as a unique and useful take on it. Mega Backdoor Roth article by the Mad Fientist; Post from Vishal from Everything about Education about Mega Backdoor Roth; The Wealthy Accountant; Books Mentioned in the Show: Hiking to Waterfalls in Virginia; Subscribe To The FI Weekly. You all compliment one another well in your approaches and styles. Thanks for this easy to read summary! Im so late to the game! In 2017 I made $210,000/gross and $193,000/net. Paying off debt would be a great way to use the extra money you save from investing in a pre-tax retirement account, especially if the interest rate on the loan is high. The money that is being taxed in the taxable account isn’t the money that is already there, or the money you withdraw, it is the future gains, distributions and interest. They did not change the thresholds for 15% LTCG, so you need to be aware of the discrepancy if you are maximizing. I just found it a few days ago but it’s really increasing my knowledge! I know I can put in and additional $30K or so as an employer profit sharing contribution, but that may not apply to a safe harbor plan, the CPA can tell you. I’m interested in how the new tax bill deals with long term capital gains and qualified dividend. It is a degenerate example of the traditional vs. Roth discussion trying to make a specific point about FI. Thank you for your links to the two posts. Of course this amount will change over time for inflation and back-and-forth about tax policy. I have the same question. Most early retirees live on a modest amount of income from tax-efficient sources like long-term capital gains and dividends (which are taxed at 0% when you’re in the 15% tax bracket or below). I’d be interested in some commentary on how this changes if the protagonist expects post-retirement income similar to or above the working career period income. We will be pushing our ordinary income in the form of Roth conversions up towards the top of the 12% bracket but by paying these taxes now, hopefully we will avoid a big 22% or even a 24% tax bracket should RMDs and SS hit at the same time down the road. I think the best way to decide on Roth vs Traditional is to try and make your taxable income for every year to be in the same tax bracket or as close to it as possible. am sure my question is answered somewhere among all the comments but wanted to ask it anyway. The idea is to manage the amount converted each year (think in the range of $12K to $24K depending on if you are married or not) relative to the current tax brackets and deductions to gradually trickle the money from the IRA to the Roth with minimal or no taxes. Looking forward to reading more from you in 2018! added in. Join over 100,000 others on the Mad Fientist email list to get access to exclusive content and software! Pair that with being a low income earner, roughly $50k a year, and I should be paying the taxes now so in retirement when my income may be higher and I might be living in a state with income tax, I wouldn’t have to pay those taxes when I withdraw. Right now I’ve got about $28k in a Traditional TSP, $13k in a Roth TSP, and $24k in a Roth IRA. I saw in another post you mentioned an interest in looking into property management, so I wonder if you have thought how this would impact your laddered conversions. Well, there are a few reasons this strategy only makes sense for early retirees…. We lose the IRA horse race but keep the rest. Hey Eric, yes, that would remove the intermediate step. The gist of the post is that someone on a traditional retirement track in the US never really has an opportunity to do that; their income rises through their career, then at traditional retirement age (65+) they are drawing a relatively significant pension or 401k withdrawals, and there is not much reason to convert the IRA money to Roth because there won’t be the benefit of decades of growth that will go untaxed. > Conversely, if you earn too much to get the Traditional IRA tax deductions, you’d also be better Is there a recommended HSA broker to transfer it to with low fees, etc? Mad Fientist you misunderstood Mark J’s problem here. Our Roth IRA is all Vanguard stock/bond index mix, so I’m not too worried about it’s volatility. newcomer to your site. I’m not worried about the capital gains exemptions as I need less than $12,000/year to keep going. The Roth conversion strategy will still be useful to you even if your wife is working but you just may need to pay more tax on the conversion than you would if she wasn’t working. http://jlcollinsnh.com/stock-series/, Sam, my $.02. I heard Congress wants to base upon income instead of tax brackets like before. Hi Biceps…sorry I’m only seeing this now. So if someone owned their own business and could set up an individual 401k via vanguard and funnel business and personal contributions to that (up to 18k limit for individual and 56k total max per year, according to the vanguard site : https://investor.vanguard.com/what-we-offer/small-business/individual-401k?Link=facet). So for a young widow, 50 years old, who has a life insurance payout to live on for at least 5 yrs…..She could convert her late husbands 401k to a roth without paying taxes…right? Right now I still want to make sure we have enough emergency funds while we build so I’m continuing our Roths, but in the future I believe I’ll open Traditional IRAs and fund those going forward. Thank you so much for what you do for others, and especially for young people like me. If so, you could start plugging in all your numbers to see what bracket you’ll be in and can then start making decisions based on your actual numbers. Great job making this super clear; however, there is one thing to look out for…. Obviously would then be higher for married filing jointly. You can retire early and take money out of your Trad IRA up to your standard deduction and all other deductions $23,000-ish. Someone on a traditional retirement path will likely have sources of taxable income (social security, pension, required minimum distributions from pretax retirement accounts) that will cause the Roth conversion to be taxed, and the benefit of putting it in the Roth at that point are minimal because the tax free growth will be short-lived. Also, I can change the parameters a little to get my rate paid on the withdrawal closer to my average rate. So, I was thinking earlier today about this – why couldn’t you move an additional 5k from the roth to the regular as for tax purposes, this move is considered regular income, then you would be buying your 5k worth of regular ira with roth money? It probably needs to be a question for your accountant or a CPA or fee-only advisor as to whether the benefit to you outweighs the cost. So I see, I am not the only one to have found your blog through MMM :-). 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