Roth Conversion Ladder Explained

If you want to access the money in your 401k or IRA without paying the early withdrawal penalty, you can use the Roth conversion ladder. This is mostly for those interested in retiring early and have calculated they have already earned enough to retire for the rest of their lives. This is a relatively hard and rare thing to do but is facilitated by either very high earnings, very frugal spending habits of a combination of both. Watch to find out how this works and plan for your retirement!

How’s it going everybody this is beat the bush today i’m gonna talk about the roth conversion bladder and what the heck is it why do you need it now roth conversion ladder is basically a very interesting thing for someone looking to retire early so in the fire community financial independent retire early community people are interested in amassing a lot of net worth

And then retire officially retire which means that you do not earn any money and somehow before the retirement age they want to access the capital inside their 401k or ira so sometimes people call this a roth backdoor what this basically allows you to do is convert money in your retirement accounts which is pre-tax and then put this in your roth ira wait five years

And then you can withdraw it without paying the 10% penalty now a lot of times people would call this roth conversion bladder penalty free tax free now this tax-free almost seems like you can just some house make money away from your pre-tax money and then somehow take it out without paying any taxes all the way through this is not true when they say penalty free

Is well it’s penalty free after you wait five years when they see tax free it’s tax free when you take money out of it but not when you actually put it in when you do this roth conversion it basically relies on the fact that you are not working you’re actually retired you’re not doing any work at all and then you have amass all this wealth and you’re just trying to

Figure out the best way to spend it so what someone that is retiring early is trying to do is access that 401k or ira capital without paying a penalty so what you’re really doing is trying to withdraw this 401k or ira money at a minimal tax rate so when you do this conversion you’re actually still paying an income tax hit on this what is interesting here is that if

You are really not working at all you might be able to withdraw so little that the standard deduction of twelve thousand two hundred dollars or if you’re married a bit more this may actually completely cover your conversion amount therefore you’re paying zero dollars in taxes so i’ve created this example 401k roth and roth gains and how much cash you would have

For a tip call engineer i would say at the age of 34 you might have saved a million dollars maybe if you worked a lot try to ignore how much this person actually has an at what age because it’s gonna be different for everybody it might be that you’re 50 years old and you finally reach a million dollars in your 401k but just take this as a concept where i’m just

Trying to describe how this roth conversion ladder really works so at the age of 34 let’s say you almost have a million dollars in your 401k you got $40,000 in your roth contributions let’s say and i’m just gonna say no gains you’re really probably gonna have some kind of gains in there and then you have a hundred sixty thousand dollars of cash this is just the

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Beginning at the age of 35 you finally reach 1 million dollars and at age 35 you decided oh i am going to retire you stopped working completely at this age if your burn rate let’s say it’s $40,000 you’re gonna go through this $200,000 in about five years now this is the perfect amount and this is on purpose because this works out perfectly for the roth conversion

Ladder i want to illustrate what happens if you don’t have enough cash but you have plenty of money in your 401k but you want to access this cash in your 401k before your retirement age and you don’t want to pay any penalties but you see if you try to take 40 thousand dollars out of your 401k you have to pay taxes on it but i’m just gonna assume you made a little

Bit more gains in your 401k so it just works out perfectly maybe you would true like $45,000 $48,000 and you pay taxes on this and then after taxes you still have $40,000 exactly and you put that in your roth so really in your 401k you gained fifty thousand dollars let’s say due to market gains that’s why it’s staying the same it’s 1 million 1 million 1 million so

You made just enough to put forty thousand dollars of active after-tax money in your roth and then you go on and do it for the next year the next year the next year the next year and then you can see your cash over here it goes from 200 thousand 160 because you need $40,000 to live on and then it goes to 120 80 40 and then finally on your fifth year you have zero

Cash now this is not an ideal case because you probably want some cash to do something sometimes you have emergencies or something but i just want to illustrate that how you can quickly drain your cash if you don’t work at all and you’re taking $40,000 out every single year your roth gains over here i put this separately because you cannot really withdrawal this

Until you are 59 and a half so during this five year conversion ladder process you can see your roth is increasing by $40,000 every single year and then right on the fifth year you take out $40,000 to live on because you don’t have any cash anymore and then that year you’re still taking $50,000 out of your 401k putting into your roth you’re paying the taxes here

But at the same time that you’re putting in this $40,000 you’re also taking out that $40,000 that you contributed over here five years ago that’s why you can take it out without this ten percent penalty and then the year after that you do the same thing you’re still also sort of draining your 401k but not really because of market gains it stays at 1 million dollars

And then that same year you’re taking $40,000 out so through this ladder ink an keep on living even though you have zero cash you can still use $40,000 every single year at the age of 41 at the age of 42 and then this goes on and on until the age of 55 where you’re also taking $40,000 i’ll accept at this point you can let off a little bit on withdrawing from your

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401k hopefully it grows a little bit more each year and then you have a bunch of money in your roth account and hopefully you want to keep on withdrawing $40,000 away from this roth account and then you’re gonna keep on draining it draining it all the way up to your age fifty nine and a half where you probably end up with almost nothing left you’re only taking

Out whatever you contribute it and then the gains over here you left untouched and then when you reach 59 and a half you can go oh i can start taking this money out and you know you can tap into your 401k as well if you want to if you retire really really early i mean really retire you just throw up your hands and then go i’m not gonna work anymore because i have

I don’t know a million two million dollars saved up and you have to work it might get a little bit boring because most of time is just very boring if you’re not applying yourself if you’re just going vacationing for the rest of your life i feel like this is a very risky thing because then you have to rely on this 4% rule you’re not making any money at all and you

Are absolutely relying on only the money that you have left in your retirement accounts and you know you’re crossing your fingers that this 4% rule is going to pan out properly even though there’s all this unprecedented events going on the ever-increasing balance sheet of the united states to be really really secure instead what you should look to do as an early

Retirement person is to get a lot of passive income sources so even if you’re not working you’re not actually drawing down your retirement funds so this is a situation i personally am in right now because i can definitely kind of not work and then my youtube income will probably dry up so this is kind of like a semi retirement because i still have to you know produce

A little bit of videos in order to get you know keep the gravy train going in this census is a lot more secure than just completely relying on the money that you already make and just deciding you’re never gonna make any more money again for anybody that has any kind of income coming in like dividends or anything any amount that you’re trying to convert from your

Retirement account to a roth account it’s going to be tacked on top of whatever that you already earned so you’re going to be taxed at your marginal tax rate if you already earn twelve thousand dollars let’s say any amount on top of this it’s gonna be at that marginal tax rate of ten percent so suffice to say if you’re trying to convert let’s say a thousand dollars

You’re gonna pay a progressively higher and higher tax bracket so you are still gonna have to pay income taxes on this amount that you convert now what do they mean by this roth conversion ladder right because it’s a ladder it’s kind of like cv ladder because you convert it every single year and this roth conversion ladder is a five year thing so you start one year

One year later you convert some more one year a year later you convert some more so by the time five year comes you’re gonna be able to withdraw this money without that penalty and then when you’re later after that you’re gonna be able to withdraw another sum without penalty again cuz you had this ladder going on and then you can just keep this up until you reach


59 and a half now this actually only makes sense for people with a really large retirement account it needs to be so large that you can do this conversion all throughout your early retirement and by the time you hit retirement age you still have a sizeable chunk in your retirement account and then with this amount you can still retire for the rest of your life

Now there are finer points over here because with the roth ira when you take a tax it when you convert from a retirement account into the roth you have to pay income taxes during that year after taxes is going to be a slightly smaller amount within your roth ira account it can grow untaxed so any gains that you make within this investment account when you take it

Out of that roth ira account the portion that you gained let’s say it went from 10,000 to 20,000 dollars right so you gain another $10,000 this portion of $10,000 is tax-free now how does this factor in into the roth conversion ladder if you put in ten thousand dollars five years ago you can only withdraw $10,000 the games you cannot withdraw just yet until your

Retirement age so with all that said i have to emphasize that for a lot of people this roth conversion ladder is it just sounds like a unicorn thing it doesn’t apply to a lot of people unless you’re someone that has a huge retirement account pre-tax and you are willing to just completely stop working and not be productive at all which i feel like goes against what

I personally believe in order to live a fulfilling life i believe you do not live a fulfilling life if you somehow convert to a situation where just sitting on the beach all the time but i feel like for a lot of people who applies themselves during retirement right so it could be very well that you thought you’re going to not make any money once you retire if you

Apply yourself in the right way somehow somehow money is gonna come in anyway because you’re doing something that you love maybe you like woodworking a lot and then you make all kinds of beautiful stuff and you know somehow people are paying you for anyway and then all of sudden all this money comes in anyway and this is the ideal situation not everyone can apply

Themselves the same way of course so that’s what i think about the roth conversion ladder i mean it certainly doesn’t apply to me personally i would feel very uncomfortable if i just don’t earn any money and just kind of start drawing down the retirement account because you know i still have plenty of years to live if i just remain idle this is a very risky thing

To do because there’s all kinds of inflation going on that’s not under your control the best bet to hedge against inflation is to earn current day dollars thanks for watching this video everybody don’t forget to give me a like comment down below let me know if you’re gonna take advantage of this roth conversion ladder thing and as always don’t forget to push that

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Roth Conversion Ladder Explained By BeatTheBush

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