The Early Retirement Strategy you never heard about

Laddered Roth Conversions

Many prospective clients I meet with dream of early retirement, but there is one issue…

The majority of their liquid net worth (the money they would live off of) is tied up in accounts they cannot touch until they’re 60.

A Roth Conversion Ladder is one solution to this problem.

Here’s how it works:

Money sitting in a pretax account (401k/IRA) is moved (converted) into a Roth IRA.

Upon movement taxes are owed on the funds converted.

You move $100,000 from your pretax 401k into your Roth IRA.

Your taxable income increases by $100,000.

Assuming an effective tax rate of 25%, you’ll owe an additional $25,000 in taxes (roughly).

Once converted you can now reinvest funds and (or) freely take tax/penalty free distributions on the converted amount, with one caveat…

You’ll need to wait at least 5 years.

So if you’re 40 planning for retirement at 50, and intend on using this strategy to finance it (retirement), then some timing must be applied.

Specifically, each year you need to elect conversions for your anticipated income need 5 years out.

At age 45 you convert income for age 50

At age 46 you convert income for age 51

At age 47 you convert income for…

In doing so you build an income ladder (based on your conversion schedule) that will hopefully last a lifetime (or at least until you can get the rest of your money at 60).

Other considerations?

If you’ve made any contributions to your Roth IRA those distributions will be counted “first,” before the “converted” ones.

In the earlier example any distributions taken at 50 would include both your contributions and any conversions… this could impact how much you’d need to convert at 45.

As mentioned earlier you pay taxes on the conversion so it’s likely best to do these in “low-income” years (you lost your job, pursuing a full time MBA, off year for business… etc).

Cheers