Retire Early with a Roth IRA Conversion Ladder
How People Retire Early
Did you ever wonder how people really Retire early at age 45, 50, 55. Majority of the time they are F.I savvy. There is many tax advantage ways to save money and plan for your retirement. I only wish some of these lessons were taught to me when i was 18. $100 a month at age 18 to age 65 in a good mutual fund Roth Retirement account would make you a millionaire.
What is a Roth IRA?
A Roth IRA is a tax-advantaged, retirement savings account. Your contribution is funded with your take home money, that is after taxes were taken out. This does not lower your yearly taxable income like a tradition IRA or 401K retirement savings account. The secret in the sauce is the money grows TAX FREE, when you withdraw the funds, you do not pay taxes. ROTH IRA’s are commonly overlooked and become a great Tax differed investment vehicle. Created in 1997 and Named after William Roth, a Delaware Senator.
The Roth IRA Conversion Ladder
This is a great tool you can use to retire early. If your like me and dream to retire by age 50 then this is your ticket. To make this work you will need to contribute the maximum amount into your 401k. You will also need to save in a separate account 5 years of living expensive to get the maxim savings. Many people believe you should contribute to your Roth until near retirement for this rule.
Contributions to a Roth IRA and not tax deductible.
Distributions both investment earnings and contributions are tax free as long as you are at least 59 1/2 and you have had a Roth IRA for at least five years.
Under 59 1/2 You can pull out contributions you’ve made without paying penalty or taxes, but not earnings made.
Age 50 you’ve made it!! so you have a nice nest Egg in your 401K and you have 5 years of living expensive in the bank. Its time to Retire, first step convert your 401K into a Traditional IRA. This is easy to do I recommend Vanguard or Fidelity. You have no income so no taxes to pay. For the next 5 years you will be converting your Traditional IRA to your ROTH. This is extremely easy to do and takes about 10 seconds on my Fidelity account. You will want to convert 1 a year the amount you will need to live each year after your 5 year’s of living expensive is gone. By converting your Traditional IRA to a ROTH after you have quit working means you will only pay taxes that year on the amount you converted. If you converted 25’000 this means you will only pay taxes on that amount. This will also put you in the lowest tax bracket possible.
tax bracket rates 2019
12% $9526 to $38,700
24% $82,501 to $157,500