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163R | Roth IRA Conversion Ladder Case Study

An updated case study of the Roth IRA conversion ladder and a challenge for the community are some of the topics that Brad and Jonathan tackle.

$1,000 Challenge

Most personal finance advice starts with building your first $1,000 in savings. However, if you are struggling to get from paycheck to paycheck, you might feel like that isn’t an option for you. After all, if you have options, then you wouldn’t be living paycheck to paycheck.

Luckily, you can likely solve this dilemma with a little bit of creativity. Today, Jonathan walks through the thought process of building $1,000 in savings.

Sell Your Clutter

Recently, Jonathan has been taking advantage of the secondhand market as a seller. After going through his garage, he was able to sell some items. So far, he has been able to raise $550 just by selling these items that he no longer needed.

The things you buy, they weigh you down. And really we are buying them in many cases, a lot of people, to keep up with the Joneses. To have the nice house, the nice throw pillows, the nice lamp.

Take a closer look at your clutter. Pull out the higher value items and list them for sale. You should list them on places like Craigslist and Facebook Marketplace. You might be able to recoup some of your original purchase price.

Related: Best Selling Apps For Getting Rid Of Your Stuff

When you make your listings, make sure to include five or six pictures from multiple angles. Include a headline for the item that will let shoppers know exactly what it is. If you can find the listing for the original item on Amazon, then consider using that information in your posting.

If you don’t have the time to list these items, then consider giving them to your kids to sell as a side hustle. Make them a deal to sell the items and split the profits.

With any other items that are likely only worth a few dollars, you can host a decluttering garage sale. Although you might only get a dollar for each item, it can really add up.

Spend Less

After you start earning more through selling your clutter, consider starting a no spend challenge for 30 days. You can tackle this as a family to buy nothing that is not absolutely essential. Anytime that you forgo buying something with a free alternative, take that money you would have spent and put it into your $1,000 fund.

For example, if you save money by skipping Chipotle by making tacos at home, then take the savings and place it in your fund.

If you do need to spend money, for wants or needs, then try to be more intentional for 30 days. Try using a service like CamelCamelCamel to set up price watches on items that you want to buy. Generally, there is a wide range of sales prices but if you can catch the right sale then you stand to save a significant amount of money.

Related: Freedom Is Not Found At The Store: A Shopping Ban Experiment

Take The Challenge

Jonathan challenges our community to tackle the $1,000 for the month of February!

Let us know if you are going to take the challenge in the comments below or in the Facebook group. Share any creative ideas for how you will hit the $1,000 mark and what you will use the money for.

Do you accept the challenge?


Liz and Braden have completely transformed their life. From the voicemail they left in 136R to now, they have made significant changes in their life.

One thing that stood out in their story has Liz’s amazing ability to land scholarships. Many in our community would feel better about our financial independence journey if we knew that we could help our children land college scholarships. With that, we want to create a resource that will help our community learn more about landing college scholarships.

That’s the best thing about the entire FI community, the best ideas bubble to the top. And there are so many people out there doing incredible things.But we cant have them just in hundreds of different silos, right, where one little piece of information is here, one is there. If we can put it all together, we’ve got something really really powerful.

In the next months, we will work on building a framework for successful college scholarship applications. First, we will ask Liz to write a guest post that shares the framework of scholarship applications.

Once the article goes live, we want you to post your questions and feedback that could help expand the framework to other unique situations. If you have questions now, then let us know in the comments of 163’s show notes! We will gather your questions and bring Liz back for an entire episode of sifting through your questions and creating actionable content for the community.

Listen to the entire episode here.

Roth IRA Conversion Ladder Update

We have decided to update our Roth IRA Conversion Ladder. The point of this exercise is to help unlock the money that is typically trapped in your 401k until you turn 59.5 Luckily, there is a way to pull out those funds in a penalty-free, and largely tax-free, way.

The point of pulling out your 401k funds through this ladder is to avoid the penalty of withdrawing your money from a retirement vehicle before 59.5.

Listen to our first Roth IRA Conversion Ladder case study.

Case Study

Today, we will work through an example of a couple who wants to retire and:

  • are both 45 years old
  • two kids
  • has $1.5 million in their 401k–but doesn’t want to pay penalties to withdraw funds early
  • has $350,000 in a taxable investment account
  • $50,000 per year in expenses
  • will have an earned income of $0 after they retire

In order to pull off a Roth conversion ladder, you do need to have money to live off of during this process.

You will need to have at least five years’ worth of living expenses saved in your account. For our hypothetical couple, they have annual expenses of $50,000. So, they have more than enough to live off of for five years in their taxable account.

As a married couple filing jointly, they will have a standard deductible of $24,800. Plus, they have two children which allows them to claim two child tax credits. Practically, that means their first $60,000 in income is effectively tax-free!

When they choose to stop working and start the Roth Conversion ladder, they will need to be prepared to live off of their taxable investment funds for five years. The money they pull out of their taxable investment account will not affect their tax bracket.

For the first year, you convert as much as you can tax-free from your 401k into a Roth IRA that you own. For this couple, they will likely pull out $60,000. For the next five years, they will continue pulling money from their 401k to put into their Roth.

Once you pull the money out of the 401k, it will undergo a five-year seasoning process. In year six of this process, you’ll be able to pull out the funds that you converted in your first year.

You are converting and you get to choose the amount. This is not an all or nothing thing.

In fact, you don’t want to convert everything at once because that would create an extremely large taxable event. With the conversion process, you are controlling the size of the taxable event that you create. Each year, you can convert a manageable amount each year until all of the money is out of your 401k or you reach 59.5.

Take this opportunity to optimize your tax bracket!

Related: How And Why To Set Up A Roth IRA Conversion Ladder

Top 10 FI-Friendly Cities

We recently announced the 10 top domestic cities for FI. Check out the article for more information on these low-cost-of-living havens.

The Simple Startup

Our second and third book from ChooseFI publishing is now available! Rob built this interactive workbook centered around pulling out a student’s passions.

You can check out The Simple Startup here.

I don’t think that everyone that listens to this show and every child whose parents who listen to this show needs to become an entrepreneur but all of us should be thinking like one, should have developed that skill set, have flexed that muscle because it will change your world and it will be added to your talent stack.

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Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. American Express is a ChooseFI advertiser. Disclosures.
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