017R | The Roth IRA Conversion Ladder | A Case Study

The Roth Conversion Ladder… Let's talk about what it looks like in a real world example

In Today’s Podcast we cover:

  • This is our 23rd episode and providing a home for the FIRE community
  • Thank you for our 50th review on Itunes (from Chad Carson!) – we plan to implement the voicemail feature on the website so we can use your input on the show
  • Episode with Brandon from the Mad Fientist
  • This podcast humanized Brandon and you got to hear his story
  • “Early retirees are such a different breed…I’m looking at this through the very focused lens of early retirement.”

The built-in benefits of financial independence aside from just the dollars and cents: College, health care, taxes

The Roth IRA Conversion Ladder

  • The Roth IRA conversion ladder is the key to early retirement and accessing your 401k/retirement funds and pay little to no taxes on the money
  • It was amazing how open and honest Brandon was: depression, ‘quarter-life crisis’, deprivation period
  • Brad went to a retreat over the past weekend for “designing the life you want to live into”
  • Quote from Keith: “I never dreamed past here.” Dream bigger and find what brings you joy and happiness in life
  • Money is not the end goal. It is a tool to let you live a better life
  • How Brandon tested the upper limits on their spending and how it impacted their happiness (and only a couple of thousand dollars per year)
  • Brad thinking differently: How could he spend a little more money to bring more joy to his life

Roth IRA conversion ladder step-by-step scenario:

  • 20 year old guy earns $60,000 per year, has $30,000 of expenses per year and is on a 20 year plan for FI. How does he take advantage of the Roth IRA conversion ladder to pay little to no tax and still fund his early retirement. The Key for the Roth IRA Conversion is to max out the 401K
  • Itunes reviews – thanks to the audience!
  • Question from the audience: Heather about what to do with her 401k after leaving her job. Should she leave it in her company’s 401k or roll it out to Vanguard and her own IRA?
  • Question from Bryan: How the 4% rule works on pulling out money from Roth, 401k, IRA, etc. and how to manage your tax liability in early retirement
  • When you reach FI, you aren’t going to sit back and do nothing when “retired”
  • Where ChooseFI is going: college hacking from Edmund Tee and Seonwoo Lee
  • Tax hack from an audience member: if you can’t itemize every year, consider putting all deductions (donations, state taxes, etc.) into every other tax year so you can itemize every other year and in the off year you get the standard deduction
  • Frugal hack of the week: Jonathan created a standing desk for his treadmill



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Links from the show:

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15 thoughts on “017R | The Roth IRA Conversion Ladder | A Case Study”

  1. Out of curiosity (and maybe I missed this or an idiotic question, so shame on me if so), can you contribute $5500/yr to your Roth IRA during the same year you’re converting money to your Roth IRA?…obviously, you would need at least $5500 of actual wage income and maintaining awareness of how this impacts your overall tax obligations.

  2. Can we see a picture of your treadmill hack? I have a folding table, but I”m not sure how to make it work as your specifying. But it’s a great idea!

  3. During the 5 years you live from your taxable account (while converting a Trad IRA), will you be in a higher tax bracket just from the interest / dividends / capital gains you have to pay on money pulled from the taxable account? In your example the taxable account was $500k.

  4. I appreciate the case study on the Roth conversion ladder, but I think you need to fix some of your basic assumptions if you are going to do these case studies. Being off by $100 here or there or using averages is fine, but you’re ignoring multiple major tax categories. On an income of $60,000, you won’t have $1000 in taxes no matter how well you shelter your income. You could *easily* get your federal income tax down to that level or lower, but you’re going to have around $4500 in FICA/Medicaid. On top of that, in most states you’ll have some amount of state/local income taxes. In PA, for example, you’ll pay 3.07%+1+% (>$2400) and there’s virtually no sheltering your way out of that with PA’s tax code. I don’t think it’s reasonable for you to discuss all state/local situations, but zero income tax is not common, so assuming a reasonable average would probably be better.

    So even in a state with no income tax, this person will not have $11000 to invest in taxable accounts. Best case it will be more like $6000, but more often would be $3-4000. That’s a huge difference.

    Basically, I guess my main point is: never forget FICA. It represents a substantial headwind to savings rate as a percent of gross. There’s not a lot you can do about it, but it has to be accounted for in setting expectations.

    • I agree with your assessment- I’m sure we will tackle some of these concepts again in future episodes and I will keep your thoughts in mind. The dilemma is always focusing on the concept without getting bogged down in the weeds. but you are absolutely correct to point that out

      Thanks for the feedback

      • Sure, I get making simplifying assumptions and staying out of the weeds. Fortunately (for simplicity…not fortunate for much else) SS/Medicaid taxes are so hard to avoid (HSA and earning over the cap for SS are the only ways I know of to get them below 7.65%), you can safely just take ~7.5% right off the top, and that will cover the vast majority of salaried employees. Take 15% and you’ve covered the self-employed.

  5. Yes, ignoring FICA isn’t just a “weed.” Its more like a very large tree. Many “simulations” talk about little income tax and completely ignore FICA. As a small business owner, I just get irked when I here these taxes not taken into account. This guy’s taxable savings would not even be half what they ascribe in this situation. His 11,000 to contribute to after tax accounts each year just dropped to more like 5000 depending on his income type (w-2, misc, etc and state tax situation). Huge difference 20 years later in what he has to live off of when pulling out income while doing ladder. What happens if he’s unlucky with sor risk in year 19-24. Might have to pick up some side gigs!

  6. Hey guys, love your podcasts. Another huge assumption here is Roth IRA will still be around. If FI uses this it’s important to be aware they could be stuck paying tax on all the Trad IRA and 401K money resulting in huge taxes especially once they start taking social security and those nasty RMDs. I believe on your podcast with the Wealthy Accountant, he too is concerned the ROTH may end at some point. Keep up the great job!!

  7. A little late here – just recently started listening. Thanks for the podcast!
    I heard a statement in the case study about the person getting 8% interest on their regular taxable savings of $11000 a year. I haven’t had luck even finding 2% on what I think of a a regular savings account. Even bonds, CDs, etc. are no more than 3% Am I missing an opportunity somewhere that 8% was used in the example?

  8. I never was too much into Roth IRAs until few years ago. I think it’s prudent to diversify and include Roth IRA in your retirement plan. Most of my retirement funds are in my company’s 401-K Vanguard ETFs.

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