163R | Roth IRA Conversion Ladder Case Study

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 a $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. For example, Jonathan sold an exercise bike that was only used a few times for $150.

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 it to your kids 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 signifcant 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

With the dawn of 2020, 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

Mailbag With MK

Let's hear what is happening in the community.

Cities Of FI

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

We will have an international version coming soon!

Here are the top 10 cities of FI!

The Simple Startup

Our second and third book from ChooseFI publishing is now available for preorder! Rob built this interactive workbook centered around pulling out the 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.

The book will be available on February 10th. If you are interested in bulk ordering for your school, there is information on the book's website.

Everyday Courage

Take a minute to subscribe to Jillian's podcast today!

FI 101

The FI 101 course goes live on January 25th. Sign up for the free course today.

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23 thoughts on “163R | Roth IRA Conversion Ladder Case Study”

  1. Thank you for the Roth conversion ladder case study. I finally understand how it works for someone who doesn’t have existing Roth IRA accounts.

    Follow-up question… if we have Roth IRAs that have contributions that were made over 5 years ago (like 15 years ago) does the 5-yr seasoning period for the 401k-to-Roth conversion still apply? Isn’t it possible for us to do the conversion but also withdraw our older contributions penalty-free?

  2. Great episode guys! I appreciate the Roth conversion case study in particular. I’m living down that path right now, but it’s actually more of a rabbit hole in my (our) situation. (I’m 52 married with two kids, one of whom is off to college in a year and a half). On top of managing current spending needs while seeking to convert IRA’s to Roth, I’m also attempting to optimize ACA subsidies as well as manage MAGI low enough to qualify for some Pell Grant money for my daughter’s first year of college. It’s a multi-variable math problem-without having an actual formula to use to solve the problem. Your content is much appreciated and helpful. I’ve been on my FI path for many years, and have done many things “right”, by FIRE standards but I’d not found my “tribe” until your podcast-I found you almost at the beginning of CHOOSEFI. I’ve taken many new and very effective steps due to your program. Thanks much.
    (PS, I’d love to work with someone, or someones to create a calculator, massive spreadsheet, app or engine to assist in clarifying the above challenges for those who are a little behind me on my FIRE path. Let me know if I can be of any help or if you know anyone who’s interested in approaching this).
    Warm (FIRE) regards,

  3. Brad and Jonathan. I was listening to your episode 163 the Roth conversion ladder. Love the episode love the content. I just have one comment about the Roth conversion ladder and your withdrawal of contributions after 5 years of converting. In your assumption the married couple had been maxing out Roth IRAs for the past 10 years or so. Those contributions (originally put in as contributions not conversions from a traditional IRA) could add up to another year two of spending allowing them to begin living on Roth contributions earlier.

    • you know we actually assumed in the example that the money was going in taxable investments (not roth) but that’s a great point with this strategy in mind you could definitely fund a roth because those contributions (not the growth) would totally be accessible. Great Feedback!

  4. Thank you so much for bringing back the case studies. You guys have no idea how important they are for me and how much I look forward for episodes with numbers and actionable tips and estrategies like the Roth Conversion Ladder.
    I’ve never maxed out my 401k and only invested on my taxable acct because I didn’t want to have my money trapped until I’m 59/5 but now I’ll start maxing out because there is a way to unlock it. I just regret not doing it earlier as now I’ll never be a 401k millionaire.

  5. Scholarship/bursary hack:

    I got a free Masters degree.

    Caveats: I live in Canada, which often has lower-cost tuition. My 2-year clinical Masters program (including books) cost me $13,000 between 2006-2008.

    I come from a province that has a “brain drain”. We have just over one million people and often our professionals move to larger cities and more populated provinces. As such, there are certain medical professions in which it is hard to recruit qualified employees. The year I got into my graduate program, the health region in my area hadn’t been able to fill 40% of the positions I was being trained for; they sat empty for over a year. As such, the health region paid my tuition on the guarantee that I gave them three years of service upon graduation.

    I believe these programs exist in other areas, especially if you are willing to work rurally or in far North communities for a period of time.

  6. As I was listening to the $1,000 part, I started mentally going through my house to think about what I can sell. There’s not a whole lot, since I’m constantly weeding out, but there are definitely a few things I’m going to try to offload.

    For me, though, the most valuable part of this episode was the Roth conversion explanation. We covered the Mega Backdoor Roth last weekend at our local ChooseFi meetup, which was great. But I was still uncertain as to how to tackle this Roth conversion concept, so thanks for breaking it down and explaining it so well! Definitely worth sharing with the FI community!

  7. I’d like to know more about backdoor Roth IRA and the limits for contribute to a Tradicional IRA and be able to deduct it from income taxes. I did it and found out that if I earned more than 123k in 2019, which is the case, I cannot deduct anything. In this case I should have gone with Roth IRA, right? I’d greatly appreciate your help and I’d like to hear more on those peculiar cases nobody talks about.

  8. Love the topic of the Roth conversion ladder. I feel it is not discussed enough through the FI journeys, yet is critical to speeding up one’s process of getting there. I have created and managed my own Roth conversion ladder plan, if you will. I have been working over a decade on a slightly different rollout to essentially the same outcome. It is another option for folks to think about in planning to add a ROTH conversion ladder to their FI plan. I have been in sales most of my life, many years of high earnings, some years of low earnings. I have taken advantage of the low earning years by working with a knowledgeable accountant that outlines each October my estimated $ amount to roll into my ROTH. These rollover amounts come from my SEP or IRA savings to just below the ceiling of the lowest tax bracket i feel comfortable paying. Some years I can not rollover anything as my earnings are too high. Over the past 15 years of doing these rollovers when I can, I now have accumulated $500K at 53 in my Roth. This accumulation never would have reached this level if I had relied on simply maxing out the standard annual contributions. My plan is not to withdraw automatically every year the amount my cost of living total $(40,000), as the as the conversion ladder examples suggest. I plan to continue my part time work of my choice, withdraw what I need, when I need to supplement my costs to live. Most of my $500K total is ” seasoned” and would be well below a 3% withdrawal rate, permitting my lump sum to continue to grow. The reality is it will vary in the amount each year I would need. I have yet to pull any out, my part-time jobs do a great job of covering my cost of living. I am having a blast building this FI model while enjoying working less and playing more. I have found my personal balance and financial security in knowing this big, tax free safety net is below me. My goal is to rollover 100% of all retirement monies into the ROTH so that I will only pay taxes on S.Security income when the time comes. I hope this helps. I can answer questions if any have. I am a member of the fabulous Choose FI San Diego group.

  9. Is there any risk of all of a sudden IRS getting rid of this rule that allows for the ladder? This is my biggest concern in planning for my FIRE live.

  10. Hey J and B!!!

    I’m about 20 days into finding the FI community. Thanks for all this great info helping me on my path to FI.

    Let me briefly “unpack” this for ya!!

    I’m one of the few that still have a defined benefit pension plan that will provide an income stream for life in a number of scenarios, but will obviously count towards taxable income in each and every year. While great to have that income stream, this seems to reduce my ability to take advantage of a Roth conversion ladder. I also have a decent sized 401k. There is a lump sum option for the pension which would allow for rolling into a self directed IRA.

    What would you recommend?

    Thanks again

    PS. I’m 52, with some consumer debt, and a mortgage (3.375%). Hoping to be back to mortgage only by year-end 2020.

  11. I had a couple logistical questions about the process of doing the Roth conversation ladder.
    I am guessing there’s an assumption that if funds are coming directly from a 401k that plan would have to allow for in service distributions? For example, take $50,000 from 401k into a traditional IRA. Then convert to a Roth IRA.
    If the 401k does not allow in service distributions, would you have to rollover entire 401k to a traditional IRA, then convert? Using the case study, $1.5 mil in IRA, then convert $50k to Roth.
    If doing this process, how do you avoid the pro rata rule and having a balance in an IRA on 12/31 of the conversion year?
    Thanks for the clarification.

  12. Great Podcast and discussion on ROTH IRA conversion ladders. Just wanted to mention that there is away to take money out of your 401k before 59 1/2 without penalty by using a 72t withdrawal.


    Series of Substantially Equal Payments:

    You can begin taking distributions from your IRA or 401k without penalty at any age before 59 ½ by taking a 72t early distribution. It is named for the tax code which describes it and allows you to take a series of specified payments every year. The amount of these payments is based on a calculation involving your current age and the size of your retirement account. Visit the IRS’ website for more details.

    The catch is that once you start, you have to continue taking the periodic payments for five years, or until you reach age 59 ½, whichever is longer. Also, you will not be allowed to take more or less than the calculated distribution, even if you no longer need the money.

  13. Challenge accepted!
    Thanks for this fantastic episode! The Friday roundups have become somewhat of a ritual for the end of week commute home… Loved the humor surrounding garage sale cheapskates and jars full of quarters :). And the Roth IRA conversion ladder case study (on the podcast) was very well done and easy to follow… Being from Canada this is not directly applicable to us, but nonetheless the subject matter and examples were really nicely presented. Kudos!

    In early December we started selling our son’s old baby and toddler gear & toys in an effort to reclaim closet space creep and to get to see the garage floor again! (Not sure if anyone else has had the experience of baby stuff falling (ironically) from the top shelf of a closet onto your head multiple times in a row?) Anyway, we’re 1.5 months in and have been primarily using Facebook Marketplace to great success!

    I have to say that we were shocked at how easy baby gear is to sell. We’ve been able to sell almost everything (such as stroller, car seats, high chair, play yards, crib mattress, diaper genie, ice skates, outdoor play structures, etc.) with average selling time being less than 3 days and final sale price almost always at or above 50% of what we originally spent. We have found that current prices for the same items are often way higher than what we originally spent (and we also typically bought the items on sale) so we’re able to recoup most of what we originally spent quite easily. So far we’ve made $650 just selling the baby gear. Also we sold an old elliptical trainer for $200 so in total we’re at $850 and closing in on the $1,000 challenge!! And bonus there’s no more baby stuff falling on my head when I go into the closets.

    Sean W
    Toronto Canada

  14. Great Episode. I’m new to your podcast, but found in really informative. I had 2 follow up questions:
    If my husband and I are both over the income threshold for contributing to a ROTH, and getting a deduction for any IRA contribution, is there a reason to make a non-deductible contribution anyway? or are you better off just putting those funds in an investment acct earmarked for retirement?

    Second, I have a senior in HS. He has been accepted to Purdue’s school of Engineering and plans to study Biomedical Engineering. Unfortunately, he did not receive any Merit Scholarships from Purdue and we don’t qualify for Financial Aid. We’re looking at a 40-45k price tag. What outside scholarships might you recommend he apply to that are not needs based? He has 4.0 and scored really well on ACT. Not overly involved in activities at his HS.


  15. Loved the breakdown of the traditional 401k to Roth IRA conversion ladder. If I were to transfer Roth 401k dollars to a Roth IRA am I still subject to the 5 year “seasoning” period? Not a lot of easy to find content on the web on applying this strategy to a Roth 401k vice traditional 401k. I would think if I converted a
    Roth 401k to Roth IRA that I could pull out contributions before 59 1/2 with no 5 year wait as long as the Roth IRA account was open for 5 years or more. If this is the case, I think a point can be made that saving in the Roth 401k has advantages to the traditional 401k.

  16. I’ve been following ChooseFI for the last few months. However, after listening to Episode 158: The Frugal Engineer, I decided to go back to the beginning to see what I had missed, and I am so glad I did. The first few dozen episodes really helps build a foundation. I’ve been recommending this podcast to many of my friends and co-workers. I was really happy when you did a re-boot of the roth conversion ladder. When I first heard about it in Episodes 17 and 18, it completely blew my mind. I’ve been investing in both my Traditional and Roth 401k, but recently reallocated my funds to mainly traditional.

    I did have a question about the conversion ladder. I currently invest in several cash flowing rental properties, and I hope to keep these well into retirement (early retirement) to fund my living expenses. How would rental income factor into being able to implement the roth conversion ladder. I’m hoping to generate approximately $5,000 a month from rental income, so $60,000 a year. Would the roth conversion ladder work for me? Any advice you have would be greatly appreciate.

    Keep up the great work and thank you!

  17. Thanks! Another Great Episode.

    Can I use this strategy — with a twist: Can I put 6k into a traditional IRA to get the tax break, and then immediately (or after some xx amount of time) convert the trad IRA 6k into a Roth …so that I get the tax benefit of the traditional right away, but then convert for the long term tax benefit of the Roth? (very low-income earner here)


  18. Really appreciated this refresher episode! Question for you: I am planning to retire from the military with a pension that I estimate will yield 50K of income annually. Assuming my wife and I will have a kiddo or two at that point, would we need to rely on savings in taxable accounts to start the conversion ladder, or could we use my pension to fund our annual living expenses until we reach the 5 year mark? Up until now I have been contributing to a Roth account within my TSP thinking I’d have a higher tax bracket due to my pension. After listening to this episode, sounds like it would be possible to take advantage of the tax deductions and breaks to keep any traditional IRA conversions tax free? What do you think, should I switch my TSP contributions to traditional IRA?

    Thanks for all you do!

  19. Hello Jonathan and Brad,
    First of all, thank you for all the content you have put out there over the last few years. I have been listening to all your episodes and have leaned a lot.
    I have one thing to add to your great explanation on the ROTH conversion. Something I learnt myself the hard way by doing a conversion a couple years ago!
    You mentioned that the couple in question would have to have enough money in a non-IRA account to live on while they convert funds to their ROTH. I’d like to add that in this case if you are trying to stay below a certain tax threshold, you also have to be mindful of capital gains. If the 50K a year they need for 5 years to live on while the ROTH matures is invested in a brokerage account in let’s say VTSAX (and that’s not a stretch in our community), they are subject to capital gains tax when they cash these funds out.
    The capital gains are also part of their income and are taxable! If they are trying to keep their taxes at $0 they really need to have 5 years of expenses sitting basically in a checking account and not invested into anything that could generate capital gains when they sell. I think knowing our community that’s pretty unlikely, so if the money is invested, they need to be mindful of the taxes they will pay on the capital gains as part of the equation.
    Thanks again for another great episode and stay healthy!

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