How to Access Retirement Funds Early

How To Access Retirement Funds Early

I’ve written a lot about the benefits of tax-advantaged accounts and why they are especially beneficial for people planning on retiring early.

I’ve even created a real-time experiment to prove that utilizing tax-advantaged accounts is the best way speed up your journey to financial independence.

What I haven’t done yet though is write a comprehensive post about all the ways you can access the money in retirement accounts prior to standard retirement age.

Today, I plan to fill in that missing piece of the puzzle and also determine which early-withdrawal method is best for early retirees.

Early-Withdrawal Penalty

The problem with tax-advantage accounts is that you could be forced to pay a 10% penalty when withdrawing your money before you turn 59 1/2 years old.

Since these accounts are for retirement (in the normal sense of the word), the penalty is the government’s way of discouraging you from spending the money early.

Luckily, there are loopholes you can exploit to get around the penalties so you can access this money during early retirement.

Standard Retirement is Part of Early Retirement

Before we dive into the various withdrawal methods though, it’s worth stating something obvious that people seem to miss.

Normal retirement is part of early retirement.

Here’s a highly-detailed diagram to help explain this even further:

Standard/Early Retirement

People have said to me that they aren’t contributing to their 401(k)s because they plan on retiring early. That’s insane! Even if you plan to retire early, you still need money to live on in your 60s, 70s, and beyond so why not pay for those years with tax-deferred (or potentially tax-free) money?

Everyone should utilize retirement accounts for standard-retirement-age spending but for people who think they’ll have more in their retirement accounts than they’d ever be able to use after they turn 60 and want to start accessing that money during early retirement, here are your options…

Roth Conversion Ladder

The first method for accessing tax-advantaged money early is the Roth IRA Conversion Ladder.

Here’s how it works…

  1. When you leave your job, immediately roll your 401(k)/403(b) into a Traditional IRA. Since all of these accounts are very similar, tax-wise, this conversion can be done immediately and there are no penalties or tax consequences to worry about.
  2. If you think you’ll need to access some of your retirement account money in five years, convert the amount you think you’ll need from your Traditional IRA to a Roth IRA. You will pay tax on the amount you convert so make sure you’re in a low tax bracket when performing the conversion and only convert as much as you need.
  3. Wait five years. While you’re waiting, you can do additional conversions so that you have money to access in years 6, 7, etc.
  4. After five years, you can take out the amount you converted without paying any additional penalties or taxes (you were taxed in Step #2 when you executed the Traditional-to-Roth conversion).

Here’s a sexy graphic I created that lays out the process:

Roth Conversion Ladder

I know people often try to explain these concepts on forums and elsewhere on the internet so here’s a direct link to this image, in case you want to share it:


The pros of this method are:

  • You can minimize your taxes because you can choose which years you do the conversion based on your income in those years. If your income is low enough, you could potentially execute tax-free conversions, which would mean you will never have to pay any tax on that money!
  • If you don’t need to use the money, you can leave the conversions in your Roth to grow tax free until you do need to use them.


  • You have to wait five years after executing the conversion to withdraw the money without penalty.
  • You pay tax on the conversion five years before you can use the money so you lose out on the tax-free growth that money could have provided.

72(t) Substantially Equal Periodic Payments (SEPP)

Another popular early-withdrawal method is 72(t) Substantially Equal Periodic Payments (SEPP).

Here’s how it works:

  1. When you leave your job, immediately roll your 401(k)/403(b) into a Traditional IRA.
  2. Determine how much you think you’ll want to withdraw from your retirement accounts every year until you turn 59.5
  3. Calculate the three possible withdrawal amounts (see this IRS document for more info) and pick the one that is closest to the number you decided in Step #2.
  4. Speak with a tax professional to ensure that your Step #3 calculation were correct.
  5. Withdraw (and pay tax on) that amount every year. Depending on the method you used to calculate the withdrawal amount, you may need to adjust the amount you withdraw every year.
  6. (Optional) If you find that you need to withdraw more money or you don’t need to withdraw as much, you can change the IRS method you use to calculate your withdrawals only once so make sure you’re happy with your change.
  7. Continue making the withdrawals for five year or until you turn 59.5 (whichever is longer). If you stop the withdrawals or if you withdraw the incorrect amount, you could face steep penalties so definitely don’t do that!

Here is another sweet graphic, depicting the SEPP 72(t) process:

Substantially Equal Periodic Payments (SEPP)

And here’s another handy link specifically for this image:


  • You pay tax on the withdrawal in the same year you spend the money so your money can grow tax-free for as long as possible.
  • You can start withdrawals immediately after early retirement so if you don’t have a lot of money in taxable accounts to hold you over, you can start tapping into your retirement accounts right away.


  • 72(t) distributions usually require help from a tax professional to set up correctly.
  • You must continue withdrawals until standard retirement age, whether you need the money or not.
  • You must continue withdrawals, whether it makes sense to or not (which means you could be forced to sell when the markets are down).
  • If you stop withdrawals or withdraw the incorrect amount, you could be forced to pay a penalty on all 72(t) distributions you’ve received, even in previous years.

Pay the Penalty

Another method I didn’t even consider until recently is to just pay the 10% early-withdrawal penalty and take money out of your retirement accounts whenever you need it.

Since I try to avoid penalties whenever possible, I never considered this as an option but Joshua Sheats from the Radical Personal Finance podcast brought this strategy to my attention recently.

One of his podcast listeners suggested that even if you plan to pay the 10% early-withdrawal penalty, it still makes sense to contribute to tax-advantaged accounts over ordinary taxable accounts.

This is quite a surprising conclusion so to see if the listener’s theory was correct, he ran some numbers (listen to this Radical Personal Finance podcast episode to hear him describe this in more detail).

He then asked me to run some of my own numbers to see if I reached the same conclusion and I did. My analysis is described below and was a big part of the reason I decided to write this post.

So simply taking money out of your retirement accounts early and paying the penalty is a viable option and has the following pros and cons:


  • No advanced planning is necessary
  • You can access the money immediately, whenever you need it, and you don’t have to pay tax in advance.


  • You have to pay a 10% early-withdrawal penalty, in addition to the taxes owed.


There are a few other ways you can avoid paying the 10% early-withdrawal penalty that are worth mentioning briefly.

For example, you can withdraw retirement account money early if you become disabled or if you use the money to pay for education expenses or for a first-time home purchase. None of those strategies are particularly useful for early-retirement planning though so I won’t elaborate on them here.

You are also able to use IRA funds to pay for medical expenses that exceed 10% of your gross income so if you aren’t lucky enough to have access to the Ultimate Retirement Account, you could potentially use your IRA to pay for medical expenses during early retirement (although you’ll still have to pay tax on the withdrawals whereas you wouldn’t with an HSA).


Now that we’ve described the various options, let’s see how they stack up against each other by running some numbers on a hypothetical early-retirement scenario.


Imagine a 30-year-old woman who plans to retire when she turns 40.

Once she retires, she won’t need to access the money in her retirement accounts from age 40 to 45 but she’s going to need to withdraw $9,000 of her money per year from the age of 45 through to when she turns 60.

She’s in the 25% tax bracket during her remaining 10 working years and will drop down to the 15% marginal tax bracket when she retires.

She has $18,000 of pre-tax money to contribute to an account every year during her career so lets see what her options are:

Scenario 1 – Taxable

The first scenario is she just contributes money to a taxable account. This is the easiest option and what most people would do if they knew they needed to access that money before standard retirement age.

Since she’ll be taxed on the money before she puts it into the taxable account, she’ll only be able to add $13,500 ($18,000 – 25% tax) to her investments every year. She will also be taxed on the growth of those funds at 15%, since the funds are in a taxable account.

When she reaches 45 years old, she just starts withdrawing $9,000 per year and she doesn’t have to pay any tax or penalties because she already paid tax on that money before she contributed to the taxable account.

Scenario 2 – Traditional

In scenario 2, she contributes $18,000 to her Traditional 401(k) every year. Since 401(k) contributions aren’t taxed up front, her full $18,000 can be invested.

When she turns 45 and needs to access $9,000 of that money every year, she has a few options:

Scenario 2(a) – Penalty

Her first option is to just start withdrawing $9,000 every year starting at age 45 and simply pay the 10% early-withdrawal penalty.

Scenario 2(b) – SEPP 72(t)

Her second option is to set up SEPP 72(t) distributions to withdraw $9,000 every year, starting on her 45th birthday, that continue until she turns 60.

Scenario 2(c) – Roth Conversion Ladder

Her final option is to build a Roth Conversion Ladder.

In this scenario, she immediately converts her 401(k) into a Traditional IRA when she leaves her job at 40 and converts $9,000 every year from her Traditional IRA to her Roth IRA. That will allow her to withdraw $9,000 every year from age 45 onwards.

She will stop the conversions at age 55, because she’ll be able to withdraw her money after she turns 60 penalty free anyway so no need to pay tax on that money five years earlier than necessary.

Scenario 3 – Roth

In Scenario 3, she decides to contribute to a Roth 401(k) instead. With a Roth, her money is taxed before it goes in so she’ll only be able to invest $13,500 every year but that money will grow tax free and she’ll be able to take those contributions out whenever she wants (since she already paid tax on that money).


Here’s a graph to show how the various scenarios play out:

Early Withdrawal Strategies Graph

If you’d like to download the spreadsheet that was used to compute these results, click here!

Let’s break things down into the various stages of her career and retirement…

After Working Period

It’s not surprising what each scenario looks like after the end of her working career.

Scenario 1 – Taxable $177,523
Scenario 2 – Traditional $248,696
Scenario 3 – Roth $186,522

Scenario 2 (Traditional) is the winner, based on total dollar amount, because no taxes were paid upfront so all of the money was invested and was able to grow tax free.

Scenario 3 (Roth) is slightly better off than Scenario 1 (Taxable) because although both were funded with after-tax money, the Roth was able to grow tax free.

After 5-Year Conversion/Waiting Period

After the five-year waiting period, where she doesn’t need to touch any of her retirement account money but is no longer working, the winners are Scenarios 2a and 2b. This is not surprising because the money in those accounts has been allowed to grow tax free without being touched.

Scenario 1 – Taxable $248,986
Scenario 2a – Traditional (Penalty) $348,809
Scenario 2b – Traditional (SEPP) $348,809
Scenario 2c – Traditional (Ladder) $339,676
Scenario 3 – Roth $261,607

You can see that the Roth Conversion Ladder scenario (Scenario 2c) is slightly less than the other Traditional scenarios. This is because when converting money from the Traditional IRA to the Roth IRA, taxes are paid on the conversion so some money and earnings potential is being lost to the government every year.

Final Totals

Once our fearless fientist turns 60 years old, she will have contributed exactly the same amount of pre-tax money and withdrawn the same amount every year in each of the scenarios. The only difference is the type of account she’s contributed to so that’s the only factor affecting the final balances in her accounts at age 60.

Here are the totals:

Scenario 1 – Taxable $469,799
Scenario 2a – Traditional (Penalty) $672,827
Scenario 2b – Traditional (SEPP) $706,892
Scenario 2c – Traditional (Ladder) $691,465
Scenario 3 – Roth $504,620

Wow, what a huge range of values!

It’s important to mention what types of accounts the money is in, since $1 in a Roth is more valuable than $1 in a Traditional IRA (because you won’t have to pay tax when you withdraw from the Roth).

Scenario 1 – Taxable $469,799 in a Taxable Account
Scenario 2a – Traditional (Penalty) $672,827 in a Traditional IRA
Scenario 2b – Traditional (SEPP) $706,892 in a Traditional IRA
Scenario 2c – Traditional (Ladder) $604,046 in a Traditional IRA and $87,419 in a Roth IRA
Scenario 3 – Roth $504,620 in a Roth IRA

It’s hard to see a clear winner though, since the money is scattered across different types of accounts that are treated differently tax-wise.

To help make it all clearer, let’s add another assumption to our hypothetical scenario…

Let’s assume that our now standard-age retiree wants an additional $45,000 to use every year and she’s going to fund it by withdrawing from these accounts. She’s not worried about when the money runs out, because she has other money to fund her essential expenses, but she’d obviously like for the money to last as long as possible.

So how long would each of these accounts last?

Here are the ages at which her accounts will be completely depleted in each of the scenarios:

Scenario 1 – Taxable 76
Scenario 2a – Traditional (Penalty) 86
Scenario 2b – Traditional (SEPP) 90
Scenario 2c – Traditional (Ladder) 90
Scenario 3 – Roth 79

Incredible! By contributing to a Traditional 401(k)/IRA and then doing either a Roth Conversion Ladder or SEPP 72(t) distributions, she could have almost 15 extra years of elevated income (when compared to simply investing in a taxable account)!

Surprising Conclusions

There are a few surprising conclusions here.

The first is that even if you don’t want to mess with things like Roth Conversion Ladders or SEPP distributions, it still makes sense to max out your pre-tax retirement accounts and then just pay the early-withdrawal penalty! The Penalty scenario (Scenario 2a) has over $200,000 more than the Taxable scenario (Scenario 1) by age 60 and will provide an additional decade of elevated income during standard retirement!

The second thing that surprised me was that it’s better to do SEPP 72(t) distributions instead of a Roth Conversion Ladder.

Since you have to pay tax on the conversion five years in advance of accessing the money in the Roth Conversion scenario, you lose out on tax-free growth that you don’t in the SEPP scenario. That’s why the SEPP scenario has $706,892 by age 60 whereas the Conversion Ladder scenario only has $691,465. This makes sense but it’s just not something I’ve thought about before.

My Plan

Obviously this hypothetical example is not perfect, because it assumes consistent growth with no fluctuation year-to-year, but how do these conclusions affect my own personal plan?

Luckily, I’ve taken full advantage of all the pre-tax accounts I’ve had available to me during my career, even when I didn’t think I could get that money out early, so I’ll continue utilizing my pre-tax accounts whenever possible.

The way I’ve always thought about it is, the government only gives you one shot to deduct a big chunk of your current year’s income by contributing to retirement accounts (i.e. you can’t change your mind in 2021 and say, “Hey, I’d actually like to contribute to my 2016 401(k) now so I can lower my 2016 taxes.”).

If you don’t take advantage now, you’ll lose the opportunity forever. That’s why I take advantage of every single tax break I have available to me now and will worry about decreasing my taxes later when I start the withdrawal process.

One thing this exercise has made me reconsider is the SEPP vs. Roth Conversion Ladder choice. I had planned to forgo SEPP 72(t) distributions during early retirement, due to the strict rules and administrative headaches associated with them, but if I know I’ll need to withdraw a set amount from my tax-advantaged accounts every year, it makes sense to set up SEPP because this exercise has shown that it is the most tax-efficient way of accessing retirement-account money early.

My early-retirement withdrawal plan will definitely still include strategic Roth Conversions though. Whenever my income is low enough to execute completely tax free Roth IRA conversions, I will do it. And if I realize I’m going to need more money or if I’m starting to worry about RMDs (Required Minimum Distributions), I’ll increase the size of my conversions, even if it means paying a little bit of tax.

Tip: ProjectionLab is great for planning and optimizing your Roth conversions!

What About You?

How about you? Did these calculations surprise you? Will they cause you to change your strategy? What’s your plan for accessing your retirement account funds early?

Let me know in the comments below!

Related Post

FI Laboratory
Chart Your Progress to Financial Independence!

Calculate your FI date and graph your progress to FIRE for free in the Mad Fientist's FI Laboratory!

271 comments for “How to Access Retirement Funds Early

  1. Dividend Growth Investor
    July 12, 2016 at 4:20 pm

    Thank you so much for writing this post Mad Fientist! Your work on taxes was very eye opening for me, when I first stumbled upon it in 2013. Thank you so much for generously sharing your research with us!

    • Steve @ Think Save Retire
      July 12, 2016 at 4:42 pm

      Mad FIentist provides one of the best analyses of tax-related topics in early retirement available as far as I’m concerned. :)

      • Ryland @ The Hidden Green
        July 12, 2016 at 6:13 pm

        Amen! This is amazing. The FI community appreciates all your work so much. Bravo!

    • Mark
      November 27, 2018 at 10:32 am

      MF, I love your articles. I recently retired early (42 yrs old). I actually pulled the trigger a few years earlier than I probably should have, but I had reached a breaking point in my career.
      Starting on the day I entered the taxable workforce (age 17) I had always planned to work “for the man” no more than 30 years. Built my first retirement spreadsheet that year, and updated it periodically as my life changed (college, career, major purchases, wife, kids).
      I’ve taken a year off work to do more math, update/renovate our home, get back into creative writing, help out some financially challenged family memberd, and other non-job related activities. But, I will need to reenter the workforce part time in the near future, or it is likely that my savings will be depleted to quickly to sustain us thru old age. Thankfully, my wife works part time, and we are living this year off equity from the sale of our previous home. Also thankfully, I can now afford to pick up just about any part time job that I could enjoy, rather than choosing based mostly on financial need/benefits.
      I will be paying the early withdrawal penalty to access about 40% of our living expenses from my traditional IRA. The remaining 60% will come from our part time jobs for about 10 more years. Should be able to fully retire at that point.
      Since our annual income is low enough, and our expenses (kids) are high enough, we will be in the lowest tax bracket. With the new tax law updates, our standard deduction is high enough that we may not pay any taxes at all. So, I plan to convert from my trad to my Roth IRA as much as possible without significantly altering my tax burden. This will get my conversion ladder moving in the right direction.
      I also looked into the SEPP quite a bit. While it wouldn’t have worked for us this year (I have no job income at all), it might be doable in subsequent years. The challenge is that the SEPP calculations use very conservative withdrawal rates mandated by the IRS. You can’t just pick any amount you want. If your best egg is not very large (say, $1M or more) the withdrawable amount is very limited…not sufficient for a family of 4 at all (not even a family of 2).
      Basically, the IRS limits the SEPP to such an extent that it is nearly impossible to deplete your nest egg (i.e. allows a risk tolerance of 0). I ran the numbers using a $500K account, the maximum withdrawal rate (120% of Federal mod-term rate – currently this totals 3.4%) that has been historically blessed (i.e. not prosecuted) by the IRS, and a reasonable investment return rate (8%) also afforded by the IRS. It gave me about $12K per year (again, insufficient for a family of 4 on its own). The SEPP plan is so conservative that you end up with more than $1M leftover when you die (mortality tables put me in my mid-80s). If your goal is to leave behind a charitable trust or big pile of cash for your kids, then it makes sense. But, if your goal is to raise your kids to be financially intelligent and self-sufficient, and you plan to use your retirement years to donate sweat-equity to your charitable interests instead of cash upon your death, then SEPP is not your friend.
      Yes, most early retirement forums say that 4% is the magic (safe) withdrawal rate, so 3.4% is not that much more conservative. But, Mustachians and Fientists are savvy enough to afford an easy 5%. And, that’s again assuming that you plan on your nest egg growing exponentially even after you start living off of it (i.e. leaving a huge pile of cash behind for someone after you depart this life). It’s important for people to understand the underlying assumptions that go into the math, and not just blindly accept advice or calculations from anyone. The SEPP is a great tax shield, but can you live off of its meager revenue?

      • secondcor521
        October 30, 2019 at 4:21 pm

        Mark, note that SEPPs can be stopped at age 59.5 or after 5 years, whichever is longer. No need to continue using them after that point, and in fact you can withdraw more once the SEPP has concluded.

      • Vince
        May 15, 2024 at 7:50 pm

        Reading this in May 2024 – Mark, how have your last 5 1/2 years gone? Did you reenter the workforce?

  2. Jim @ Route To Retire
    July 12, 2016 at 4:37 pm

    Thanks for this! I was aware of the first two methods, but, like you, had never even considered just paying the penalty. I don’t think that would work for me (that’s a lot of money to lose), but for some folks, that might make a lot of sense.

    Although the 72(t) method gets you your money faster, I kind of feel like the control is taken out of your hands in a way – you’re being forced to take the money out even if you don’t need it (although I guess you could reinvest it again if desired).

    My plan is to go with the Roth IRA Conversion Ladder when I quit the 9-5. However, those first five years are probably going to be a little tight so I’m working on building up a handful of rental properties before then to have another means of cash flow to carry us.

    — Jim

    • Blake
      July 12, 2016 at 8:29 pm

      To address the issue about 72(t) potentially forcing you to take more than you want, this post got me thinking “Hey, why not do a 72(t) with a lower fixed distribution and supplement it with a ladder and money from my taxable account as needed. I think Mad Fientist also alluded to this in the last paragraph in “My Plan”.

      So long as I am fairly certain I won’t have additional income generating activities later on this would work well. And I suppose if I do have income generating activities later, I have my one time to change the 72(t) distribution or just divert as much of my new income back into tax deferred accounts!

      • Huxley
        July 13, 2016 at 12:54 pm

        My thinking too. It seems like a good options is to set a “floor” value for 72(t) withdrawals, say 50% or 80% or so, of your expected spending. If expected expenses are relatively fixed and predictable (as far as these things go) there’s little disadvantage to have some income be 72(t). That way that is taken care of. Then supplement in other ways, preferably Roth conversion. But from this it seems even just paying the 10% penalty isn’t a horrible option either. I think that would be a nice, flexible way to do it. And if you take out too much you can always reinvest in taxable.

    • LehrCHAMP
      November 4, 2016 at 10:47 am

      You can always set up multiple IRA accounts and only perform SEPP withdrawals on what you need.

  3. Juan
    July 12, 2016 at 4:41 pm

    A monster post indeed! Thank you for sharing all these knowledge :)

  4. Steve @ Think Save Retire
    July 12, 2016 at 4:41 pm

    Super awesome post. We definitely plan on using the conversion ladder strategy, but had never considered just paying the penalty. Those numbers are interesting and definitely thought-provoking. Both my wife and I contribute 100% of our maximum allowance into our company-sponsored retirement accounts, so they will be ready and willing to help fund our lifestyle in the very near future.

  5. Mr Crazy Kicks
    July 12, 2016 at 4:42 pm

    Great analysis. I think the idea of paying the penalty is something that gets missed. Often times my friends are leery to put money in because they can not get it back out in an emergency. But if there is an actual emergency where you lose your job and drop a couple of tax brackets then you are still doing better with the 10% penalty than if you had paid a 30% tax in the first place – and you also have the loan option.

    Scenario 1 is a little harsh assuming %15 tax on fund growth. That might be fair unless she primarily invested in stocks. The capital gains rate would be 0% when she retires into a lower tax bracket.

  6. Joshua Sheats
    July 12, 2016 at 4:44 pm

    Good job detailing out all the numbers, Fientist! I love that we are able to give early retirees even more options to consider!

  7. Alan
    July 12, 2016 at 4:45 pm

    For those slightly older early retirees, you can also withdraw funds from a 401k without penalty beginning at age 55 if you retire from that company in or after the year you turn 55. If someone has been with a company for a while and reaches age 55 with a sufficient 401k balance, this is probably by far the easiest.

    • julia
      July 12, 2016 at 11:05 pm

      Thank you for that insight. I had 59½ stuck in my head for no penalty, but I see now that there is “a rule of 55” that would allow me to withdraw without penalty from a current 401K.

    • Markola
      July 12, 2016 at 11:45 pm

      +1. This is our plan for using our 403bs in a few years at age 55+ and, secondarily, we can just pay the 10% penalty on any smaller IRA withdrawals, if needed. Mad Fientist, thanks for pointing out that sometimes it just makes sense to keep it simple and pay the penalty.

    • Shane
      July 13, 2016 at 9:34 am

      It just has to stay in your company’s 401k until you turn 59 1/2 at which point you could then roll it into a Traditional IRA which would give you more investment options.

    • Ed D
      August 15, 2018 at 9:16 pm

      This is a really interesting point! Mad F, can you comment? I’m 51 now in my 29th year with my Company, I expect to have $1M in my 401K when I hit 55. Thoughts on getting out at 55??

    • Ricardo
      February 23, 2019 at 4:21 pm

      I’m almost in that situation, just off by a couple of years. Just got laid off after 17 years in the company, and I’m turning 53 this year.

      I have substantial amount when considering 401k + Traditional IRA + Pension. I suppose I should take my 401k + Pension and roll it over into the existing Traditional IRA, correct?

      Also, I plan on working part-time and continuing to contribute to the IRA (probably a SEP IRA?)

      I’m wondering which method would be best to use to start withdrawing early? Will the spreadsheet help me make a decision?

    • Julie
      January 21, 2021 at 3:55 pm

      Does the Rule of 55 apply to all 401k Plans?

      • Shirl
        April 27, 2021 at 1:29 pm

        It does, for 401K or 403B. If you retire from your job… this is from Forbes; The rule of 55 is an IRS guideline that allows you to avoid paying the 10% early withdrawal penalty on 401(k) and 403(b) retirement accounts if you leave your job during or after the calendar year you turn 55.

      • Keith K
        July 27, 2021 at 1:17 pm

        From “note that employers are not obliged to allow early withdrawals; and, if they do allow them, they may require that the entire amount be taken out in one lump-sum withdrawal. This could expose you to a higher income tax.”

        For example, one of my former employers required that you have 10 years of service in order to retire and take withdrawls at 55.”

        It is always worth checking your employers specific plan documentation.

      • Islandboy
        February 28, 2022 at 7:23 pm

        Yes, the Rule of 55 applies to all 401k plans, including Roth 401k.

        However, be mindful that this rule will only make you exempt from paying the early withdrawal fee. If you take a distribution from a Roth 401(k), before the age of 59 1/2, then the *earnings* will be taxed as ordinary income. There’s no way of getting around paying the income tax before the age of 59 1/2, and obviously this is not desirable when withdrawing from any Roth accounts.

        Also, I should point out that when taking a distribution from your 401(k), you cannot choose how to source the distribution. In other words, your plan will distribute from all sources, pro-rata. So it will contain a mixture of your contributions and your earnings. So like I said, be mindful if you have a Roth 401(k), and take distributions between the ages of 55 and 60, you will be liable to pay ordinary income tax on the *earnings* portion of your distributions.

        It gets even more complicated if, during your employment, you contributed a mix of pretax money and after tax money (i.e. Roth). I only mention this because if you’re like me and have contributed to your 401k with pre-tax dollars in some years, and in other years contributed with after-tax dollars (i.e. Roth). Then your distributions from the 401k account will contain a pro-rata mixture from 4 sources: pretax contributions, after-tax contributions (i.e. Roth), pretax earnings, and after-tax (i.e. Roth) earnings. If I did this, then I would be liable to pay ordinary income tax on the pre-tax contributions and earnings (obviously), but also on the after-tax earnings. So I will avoid the early 10% fee, but I sure don’t want to pay any income taxes on my Roth money.

        The solution to this problem is to rollover the after-tax monies into a Roth IRA. At this point, your 401(k) account has only pretax dollars left, and then you can take distributions as you wish, without the 10% early withdrawal fee , and you just pay ordinary income tax ( as you normally would on a traditional 401(k) account).
        Butttttttt, now that you have all your Roth 401(k) contributions (and earnings) in your Roth IRA account. And you can withdraw those contributions at any time, tax-free, and penalty free.

        • Michele
          June 1, 2024 at 8:57 am

          Thank you, this was extremely helpful. I hadn’t considered the Roth 401K early withdraw being taxed.

    • Mike
      October 6, 2022 at 5:38 am

      Ensure your company’s plan authorizes the Rule of 55. In my case it is a no.

  8. Dr. Beard
    July 12, 2016 at 4:48 pm

    If you have access to a 457, and the investment options aren’t horrible, why would you ever roll that into an IRA? You can access all that money immediately after separation from your employer no matter your age with no penalty.

    That’s my plan. My 457 will carry me through until at least 60.

    • Amy
      July 12, 2016 at 6:23 pm

      I was thinking the same thing when he mentioned rolling over 457 money.

      • Nick
        July 12, 2016 at 9:49 pm

        Yea he needs to revise it, the no penalty for 457 means it needs to be a whole different discussion.

        • Ed
          July 31, 2016 at 2:57 pm

          In fact, it is my understanding that if one rolls 457(b) funds into an IRA upon separation from employment one loses the penalty-free withdrawal benefit, so revision is indeed advised lest someone unaware of this does something that would negate this fantastic benefit of 457(b) plans.

          457(b)s are often ignored and seldom discussed plans, but governmental 457(b) seem to me the absolute best tool for early retirement. One could envision loading both either a 401(k) or 403(b) and a 457(b) while working, retire early, and then establish a Roth conversion ladder with 401(k) or 403(b) funds while living of 457(b) funds – which can be withdrawn at any age penalty free – for the 5 years that it takes for the Roth funds to become available tax free. I’m still looking into the best way (tax-wise) of tapping the 457(b) during those five years and beyond (preferential tax treatment of long term capital gains and dividends may not be available for 457(b) plans) – and some wisdom from the MF would be great in this regard – but a 457(b) does seem to offer unique opportunities to folks considering early retirement lucky enough to have access to this deferred compensation plan.

  9. Mark
    July 12, 2016 at 4:49 pm

    It you’re only retiring a few years before the penalty free age, you could also use the age 55 rule:

  10. The Olive Presser
    July 12, 2016 at 4:50 pm

    Hey, Mad Fientist.
    You should also note, that when you separate from an employer who offers a 457 plan, you can access that money without a 10% penalty. This was mentioned in your interview with the Millionaire Educator, and I’ve confirmed it with my employer’s 457 plan. In other words, you don’t need to do a ROTH ladder with 457 funds. You can simply withdraw them as you would from ROTH principle, which makes it a great account for early retirees!

    • GrOW
      July 12, 2016 at 8:19 pm

      While a bit unorthodox, consider this 457 scenario.

      You retire, or at least end your 457 eligible employment, and don’t need the money for five or more years. You could:

      1) Leave the money in the 457 growing tax deferred. You will pay taxes on all withdrawals in the future including gains earned during the 5+ years.

      2) Withdraw money now, pay taxes withdrawn amount, invest the money until you need it, withdraw money again, pay taxes on gains.

      3) Convert money now to a Roth IRA, pay taxes on the withdrawn amount, invest the money until you need it, withdraw money again but tax free including gains.

      With a large number of tax rate scenarios, it’s hard to say for sure one option will or won’t work for you, including option 3 Roth conversion.

  11. Ryan Langewisch
    July 12, 2016 at 4:55 pm

    Interesting, I had always thought of SEPP and Roth Conversion Ladders as an “either/or” situation, it never occurred to me that you could utilize both. The main concern I had with SEPP was the fact that I plan to be semi-retired and still earning income, and so I didn’t want to end up withdrawing money if I didn’t need it. That said, this makes me wonder if it makes sense to set up SEPP with a relatively small amount and then use Roth Conversions to dynamically cover the difference year by year. Great post!

    • JJ
      July 13, 2016 at 10:59 am

      The awkward part is that the conversions can’t be withdrawn for 5 years though. You’d have to carefully plan conversion amounts in advance that could cover a difference and not have you paying too much in tax on any given conversion year….

      • Dathan
        July 16, 2016 at 2:34 pm

        I’m with JJ here. I’ve been mostly looking at 72t or just paying the penalty for the simple fact that the majority of my money will be in pre tax accounts. So my only option for funding those 5 conversion years would be to work part time, which means id most likely still have to pay taxes. Might as well take the 10% penalty.

        Also a big key for us is to be able to live off of 40k or less during early retirement. That seems to be the number that has the most advantage for taxes, health ins, etc.

  12. Maggie
    July 12, 2016 at 4:55 pm

    This is really interesting. Question though – if you’re not in the 25% tax bracket during your earning years, but in the 15%, how does that affect the long term numbers? Does it?

    • The Olive Presser
      July 12, 2016 at 5:30 pm

      I’m in the 15% bracket. I haven’t run the long-term numbers, but it definitely affects one’s savings rate by several percentage points per year, about 76% w/out tax advantaged accounts (403b, 457, 401a, and IRA for me) and 79% with tax advantaged accounts. This savings differential will certainly affect the long-term growth of one’s investments because the additional savings will grow over time. Maybe the Mad Fientist can explain how this grows in greater detail.

      • Maggie
        July 13, 2016 at 10:11 am

        Thanks for the info, Greg!

    • Kristi
      July 12, 2016 at 7:27 pm

      I would also love for the Mad Fientist to answer this as well. We are in the 15% tax bracket and not even close to the 25% bracket. We are a single income family with 2 kids so we have the two child tax credits and extra deductions that help. We figured we would take advantage of being in this low of a bracket now. We are currently doing Roth 401K and Roth IRA for both of us. I’m definitely open to new ways of looking at this though.

      • Maggie
        July 13, 2016 at 10:12 am

        That’s our exact situation too, Kristi. :)

        • Hikory
          October 8, 2018 at 3:24 pm

          Yes. +1 this scenario

  13. Zed
    July 12, 2016 at 4:56 pm

    Another excellent post. I am 3-5 years from early retirement with almost all retirement savings in tax-deferred accounts. Your post is helpful except I am still looking for help covering my first 5 years of expenses…it may be the SEPP is the best option for me.

    I have two questions:

    1. Is it allowable to file married separately, while still doing a Roth conversion? For example, could my wife keep working, while I file an individual return with low income other than my conversion?

    2. Can you set up separate IRAs…one to provide the SEPP distribution for 5 years, and the other for Roth conversions during the same period? I don’t want to be locked into the SEPP later on because my conversion/withdrawal amounts will get hairy when my kids are in college.

    • Zed
      July 12, 2016 at 8:02 pm

      Cancel that first question. It sounds like there are not many scenarios where it would be tax-favorable to be married filing separately.

      Still curious on the second question…can you set the SEPP for a certain amount from one traditional IRA and run your Roth conversion on a separate traditional IRA? The SEPP distributions seem too small to be the only long term early retirement income for 20+ years, with no flexibility.

      • Yaacov
        July 12, 2016 at 11:38 pm

        The IRS looks at all your IRA’s for the year and checks what conversions/withdrawals were done. So you can even do it from the same account. But like the fientist said, 72t are worth running through a tax pro

      • secondcor521
        October 30, 2019 at 4:19 pm

        Regarding your second question, yes, you can.

        What you can also do is just have one big IRA and then split it into two IRAs – one for the SEPP and one for the Roth conversions – whenever you’re ready to start the SEPP.

        @Yaacov’s comment below is inaccurate. If you do the SEPP and the Roth conversions from the same account, the IRS will consider it as modifying the SEPP and you would be subject to penalties.

        It is also possible to have multiple SEPPs, as long as each is coming from its own IRA and the method followed with each SEPP stream is consistent. I doubt many people bother with that level of complexity.

    • Andrew
      July 12, 2016 at 8:50 pm

      to question 1: It depends. Make sure you run the numbers, but to help you get a quick sense of it, here’s a great infographic that was made by 538 in 2015.

  14. bikebum
    July 12, 2016 at 4:56 pm

    Great stuff, one comment: If you have a government 457(b), there is no early withdrawal penalty once you separate from your employer. Once you quit, you get full access to your money at any age!

  15. GordonsGecko
    July 12, 2016 at 5:00 pm

    Great post for those of us thinking…and re-thinking…and re-thinking of how best to approach the puzzle of early retirement.

  16. Cody
    July 12, 2016 at 5:04 pm

    My wife is eligible for a 403b and a 457. It seems to be the best of both worlds – invest pre-tax and withdraw penalty free at any age, just pay tax on the withdrawals. Are there any pitfalls to using a 457, especially to fund living expenses during the first 5 years of the Roth ladder? (And as long as it lasts after that.)

    • Jason
      July 13, 2016 at 11:49 am

      The 457 and 403b will likely have different investment options, so check those, but it’s unlikely that the 403b could have investment options that are better than not paying a withdrawal fee. My Oregon 457 actually offers lower-cost index funds than my 403b. Also, keep in mind that if you can manage it, your wife can max both a 457 AND a 403b every year, for a total of $36,000/yr of tax exempt investing. Max the 457 first, and if you can spare any more of her paycheck put it into the 403b. Hope that helps.

  17. Vicki@Make Smarter Decisions
    July 12, 2016 at 5:10 pm

    This is outstanding and the graphics rock (and yeah, they’re sexy too!) The timing of this is great. I just left full-time work and have funds in a 457 account (no penalty before 59.5) that I can now access when needed. My husband has funds in a 457 too. I also have funds in a traditional IRA and we were contemplating starting the SEPP or just paying the 10% penalty. We are working to fund the gap years until I can collect my pension in 5+ years (husband is retired). We are going to be in a higher tax bracket when I retire because of both of our pensions (and SS, rental income) – so it makes sense to get our money out now and use it to live and pay off rental properties for even more cash flow. Our situation is opposite of many so it has been hard to take action on. (We may make an interesting example for one of you to study!) This post helps to make sense of so many things. Thanks so much!

  18. Rick
    July 12, 2016 at 5:10 pm

    I’d like to see the comparison between those roth amounts compared to the traditional, with tax burden taken out of the traditional amount assuming your scenario of 45k disbursements per year. I’m betting the ROTH becomes a better choice once we factor in taxation on the other options.

    • DP
      April 23, 2017 at 9:44 am

      He compares these final numbers like everyone is broke and not paying any tax in retirement. The retires that I know are in the 28% tax bracket.
      If using 25% tax to the scenario 2C final numbers above, the purchasing power of 2C (Traditional ladder) only comes out ahead by $35,833 compared to scenario #3 (Roth).

      Scenario 2C:
      $604,046 – 25% tax = $453,034 + $87,419 (Roth portion of 2C) = $540,453 (purchasing power)

      Scenario #3 (Roth):
      $504,620 (purchasing power)

  19. Syed
    July 12, 2016 at 5:10 pm

    Very informative post. I expect and look forward to work until age 60 or so, which is slightly less than average for my profession, but this info is gold because I might have to stop work early for any number of reasons.

    I wholeheartedly agree with maxing out any tax advantaged accounts you can get. The government doesn’t give do overs and having too much money in retirement is not a bad problem.

  20. Fervent Finance
    July 12, 2016 at 5:20 pm

    Thanks MF! I listened to that podcast as well, but was too lazy (too far from FIRE) to actually sit down and do the math. I think the 72(t) option might be a lot of headache up front but be a lot easier on an annual basis than worrying about fitting in Roth conversions under tax brackets over the long term. I have years to figure this out, but this was a great read!

    • Fervent Finance
      July 12, 2016 at 5:29 pm

      I think you might of made one miscalculation in your excel. You’re taxing growth (the whole 7%) in the taxable account, when in reality only dividends would be taxed since you wouldn’t be selling until 45. The tax on growth should only come in to play when you start drawing down in early retirement. Or am I missing something? Thanks.

      • Ron
        July 12, 2016 at 6:49 pm

        That’s what I thought too. But, in looking at the model, he uses a lower tax rate “Tax on Growth” of 15% (vice the 25% marginal tax rate) for growth in the taxable account during the working time period. I think this lower tax rate is trying to account for only being taxed on dividends.

        It may be a little high, because 2% (dividend yield)/7% (growth assumption) * 25% (marginal tax rate) = ~7%. Changing that assumption kicks out the taxable account a few extra years (doesn’t materially change the conclusion based on the assumptions).

        However, it’s interesting that at lower growth rates, the difference in the longevity of the accounts pretty much disappears. At 5%, all the accounts are busting withing a few years of each other.

        • Fervent Finance
          July 13, 2016 at 8:34 am

          If you’re in the 25% marginal tax bracket, LTCG are taxed at 15%. But if you are in the 10% or 15% marginal tax bracket, they are taxed at 0%.

          • Chris
            April 22, 2017 at 8:08 pm

            Hi, I have also heard that LTCG is 0% in the 10% tax bracket but when I look at my 1040 it show it goes on line 9a and seems to be counted in with total income via my tax prep by my accountant. Is it credited back later somewhere else?

          • secondcor521
            October 30, 2019 at 4:24 pm

            @Chris, yes. Where the total tax is calculated (it used to be on line 44 or so in 2017 when you asked this question), there is a worksheet either in the instructions or on Schedule D where the alternative tax calculation is done. Your accountant should be able to provide you with a copy of that worksheet filled in for your particular return.

  21. Derek
    July 12, 2016 at 5:22 pm

    Yes on the penalty, especially if your company matches a substantial portion.

    My company matches 25% of contributions (e.g I put in $18k, they put in $4500), and I always tell co-workers who don’t like to contribute that you’d be better off contributing, getting the match, then just withdrawing it early if you really need it.

    Well done for bringing up that option.

  22. Chris
    July 12, 2016 at 5:27 pm

    One thing I’ve been wondering since you advocate HSA, is there a way to access an HSA for non-medical expenses before age 65 without an early withdrawal penalty? This concern has been the primary reason I have not contributed to one as of yet.

    • Dan
      July 12, 2016 at 7:21 pm

      I think the only way is if you pay medical bills out of pocket while you’re working, keep the receipts, and get delayed reimbursement later on. To me it is definitely still worth maxing out, especially if you’ve already maxed out your 401k because of the savings on fica taxes and HSA isn’t income restricted like a traditional ira is.

      • Chris
        July 13, 2016 at 11:59 am

        But if you have to pay a 10% early withdrawal penalty, it seems like that would negate the fica tax benefit. I understand using it for medical bills, but if I maxed out for 10 years (35k for a single guy in my 20s), and used none of it or close to none of it until age 60, I could easily have 100k there that could have helped me in early retirement income. Sure, using it as ‘old man money’ might work but I don’t think it’s deserving of the ‘Super IRA’ title Mad Fientist gives HSA, and many commenters on this blog have recommended maxing it out as higher priority than IRA or even 401k. I think a more deserving title is ‘Super IRA – if you have extremely high medical bills before age 65’, otherwise it’s ‘401k, with delayed withdrawal age, no way around early withdrawal penalty, and a small tax benefit’.

        • Huxley
          July 13, 2016 at 1:08 pm

          I’ll have access to and HSA next month, and I’m also unsure how “super” it really is. It don’t have any medical expenses now, and don’t plan too until I’m 70+. Assuming I’m right, the only benefits then for the HSA is for late-retirement, tax-free money? I mean that’s nothing to scoff at and a good deal, and I’ll probably max it out, but I don’t think that amazing..

          • Chris
            July 14, 2016 at 10:18 am

            Not even tax-free after 65 unless it’s for qualified medical expenses that you could probably get government assistance for anyway. According to the ‘How to Hack Your HSA’ article on this site, “withdrawals for qualified medical expenses will continue to be tax free but withdrawals for all other expenses will be taxed as income, just as Traditional IRA distributions are taxed”.

          • kwoo
            October 24, 2016 at 1:02 am

            Trust me, it’s super. Tax deferred growth is no joke. You would have to exhaust the account in fairly short order to outweigh the benefit. And it sounds like you grossly underestimate your likelihood of having medical bills in the next couple decades of your life. Although not typical, you could get to age 40 without ANY major medical or dental. Then consider the likelihood that any future spouse or dependents would also incur zero costs. Not saying you’ll be anywhere close to $100k, but it can add up to more than you think over time.

  23. Mr. Rightirement
    July 12, 2016 at 5:28 pm

    Great post. I had previously looked at the SEPP plan as more my emergency backup plan after I had exhausted all other options due to the potential complexity and rigidity vs. the Roth IRA ladder. Might have to reevaluate and rethink the order and size of withdrawals from my money buckets to keep my tax benefit/effort ratio high.

  24. Justin
    July 12, 2016 at 5:34 pm

    Interesting conclusions for sure! I didn’t realize simply paying the 10% early withdrawal penalty was superior to forgoing the deductions throughout one’s career or sticking with a Roth while working.

    I’m planning on going with the Roth IRA conversion ladder. Ultimate flexibility in when I take withdrawals and how much I have in AGI each year (able to choose between living on cash, taxable investments w/ high basis, penalty free 457 withdrawals, or Roth withdrawals and I get to decide how much I convert each year).

    72t SEPPs are too rigid for my tastes as a 30-something early retiree. In hindsight, I’m very glad I didn’t lock myself into SEPPs when I retired at 33 because I now have a decent little side hustle income from my blog, and I don’t really need a lot from my portfolio other than the dividends from my taxable account (which add to AGI whether I spend them or not!). As a result, my AGI is nice and low and I get fat ACA subsidies.

    I like the flexibility of a Roth conversion ladder much better. This way, if I ever decide to do something that pays later in life, I won’t be paying tax on SEPP withdrawals AND jumping up to a higher tax bracket with my earned income (or book royalties or freelancing fees, etc).

  25. Blake
    July 12, 2016 at 5:39 pm

    Sorry if this has already been discussed elsewhere, but why not do the SEPP and Roth conversion together? Like take out your set amount and whatever you don’t use, contribute to your Roth?

    • Roxanna
      July 12, 2016 at 8:59 pm

      Someone correct me if I’m wrong please. You can only contribute to a Roth if you have earned income. So if you use the SEPP and are not working in early retirement you can’t contribute the extra to a Roth. A conversion can be done regardless of earned income.

  26. Jeff G.
    July 12, 2016 at 5:46 pm

    When Comparing the Roth ladder to the SEPP. Wouldn’t an individuals tax situation come into play? For example: If the amount I converted was less than my total Tax deductions then I would effectively have zero income (I’d be living of of cap. gains, dividends, and interest). Therefore ROTH would be superior (it is more flexible in withdrawals) to SEPP if an individual met certain tax requirements.

    • Huxley
      July 13, 2016 at 1:10 pm

      Yes that’s right. But I don’t know how SEPP income is taxed? Is that also taxes after deductions etc? Would some of it in the 0% bracket?

      • kwoo
        October 24, 2016 at 12:33 am

        It’s taxed as regular income so yes, it could zero after deductions.

  27. Gwen @ Fiery Millennials
    July 12, 2016 at 6:12 pm

    Excellent post as always, Brandon. I’ll have to reference this when I get closer to pulling the trigger!

  28. FrugalProfessor
    July 12, 2016 at 6:30 pm

    Really great post. Thanks!

    Isn’t it awesome how there isn’t a precedent for early retirement best practices and that a bunch of random internet strangers are getting together to hack out an optimal solution? It cracks me up.

  29. Matt Warnert
    July 12, 2016 at 6:39 pm

    I love the graphics you include with the post they make it much easier to content and understand the point you are making. How do you make them?

  30. The Green Swan
    July 12, 2016 at 6:53 pm

    Great post Fientist! I’ve studied this before and then over time I seem to forget some of the details. Thanks for putting it all in one place!

    Correct me if I’m wrong, but one other important consideration to make is that you can withdraw contributions to your IRA penalty free but not the gains/growth in the account? And when completing the conversions from employer sponsored accounts to an IRA, the initial contributions to the employer account can be withdrawn penalty free but not the gains either?

    Thanks again!

    • kwoo
      October 24, 2016 at 12:32 am

      No, you’re confusing Roth IRA rules with traditional IRA rules.

  31. Ms Susty Themes
    July 12, 2016 at 7:09 pm

    Very interesting – thanks! I was feeling some regret about possibly over-funding my traditional retirement accounts while working, but this analysis indicates it probably was better than putting more in taxable or Roth options.

    I retired at 51 and had part-time income that meant Roth conversions didn’t quite make sense until now. But, I agree with Justin, and prefer the Roth Conversion ladder option, primarily because it allows the most flexibility to manage AGI each year, and therefore also manage ACA healthcare subsidies. My own upcoming decision is whether to convert some $ to Roth between 55-60 while still in a low tax bracket (even though it won’t provide earlier access to the money) mainly as a mechanism to reduce future RMDs and increase AGI flexibility by having a tax free account to access when helpful. I was leaning toward, for the next several years, converting just enough to stay below my tax thresholds, but your post has given me more to ponder before I decide. Thank you for sharing your work!

  32. Norm
    July 12, 2016 at 7:15 pm

    Not surprising. I did a ranking of all of the possible retirement accounts given a few different variables so that I could decide in what order to max out our accounts. Tax-deferred accounts make sense if you are in the 25% bracket now, but if you are in the 15% bracket now, it doesn’t make much of a difference if you assume you will still be in the 15% bracket in retirement. And notably, in a 15% bracket, a tax-deferred account with high fees does even worse than taking the tax now and putting it in a taxable account!

    I have a 457 account and plan on using the Roth ladder as well.

  33. Steve
    July 12, 2016 at 9:32 pm

    Great post!

    Another option for those of us still working is to use a mega backdoor Roth if our 401k permits after-tax contributions and in-service rollovers. This allows me to put in an additional 15-20k/year into a Roth, which will be available for withdrawal in five years. In essence, I am starting my 5-year Roth ladder early.

    During FIRE, ideally I’ll have access to (1) taxable account money and (2) backdoor/mega backdoor Roth contributions. My plan is to utilize SEPPs once this money is depleted. SEPPs will be easier to calculate when I’m closer to 59.5 so my risk of being trapped into suboptimal withdrawals will be reduced.

  34. Stacy Eddleton
    July 12, 2016 at 9:41 pm

    This is a great article. I’ve been following your other posts about withdrawing funds before retirement age but this condenses everything very nicely. This year I’m putting money in a traditional instead of a Roth— Better late than never. Countdown to early retirement t- 10 years!!

  35. Brent
    July 12, 2016 at 10:33 pm

    If she’s in the 15% tax bracket during retirement, is she not eligible for the 0% capital gains rate?
    This tax bracket is up 37,650 for singles and 75,300 for married couples.

    Lets assume she’s married and decides to give her and her spouse the median household salary of 53000, she could *easily* wind up paying state taxes. Perhaps not even that if she lives in a no income tax state like Florida.

    • Matt
      July 13, 2016 at 9:20 am

      My thoughts exactly.

  36. jlcollinsnh
    July 12, 2016 at 11:13 pm

    A couple of years back, when I needed to cover this topic in Part XX of my Stock Series, I knew better than to write it myself. I turned to the Mad Fientist for a guest post.

    And now this is linked there.

    Awesome work, as always, MF!

  37. Erin
    July 13, 2016 at 5:57 am

    Man, I love the numbers. My request for the spreadsheet used in this analysis is already in!

    My husband and I were just talking about this idea last week, so this presentation of data, however simplified, is perfect. Conceptually, we couldn’t see the value in exploiting tax-advantaged accounts because of our age (early 40s), our estimated working time remaining (~14 years), and access to a pension. There didn’t seem to be enough time to employ a Roth Conversion Ladder, and so we wondered if simply having taxable accounts as a cash cow would be better? I’d just begun to research how to run simulations in Excel to see how the numbers would perform, and then you give us this. Fantastic timing.

    The Mad Fientist giveth, and keeps on giving! (not unlike compounding interest…)

  38. EL @ MoneyWatch101
    July 13, 2016 at 8:21 am

    Hey good detailed post, and I heard the podcast with Joshua, it was a game changer as well as this post. Accessing my retirement money early has been on my mind for a few years now, and this post makes it easy to look at the options. Keep it up, as I’m sure the IRS will make changes later.

  39. Harry
    July 13, 2016 at 8:41 am

    Unless I am mistaken (and I hope others will correct me), the SEPP/72t method will not quite work as described above. The required annual withdrawal amount via SEPP is strictly defined by math – with age, account balance, withdrawal method (relatively minor impact), and assumed interest rate as the variables. Online 72t withdrawal calculators can help you model your situation.

    You cannot simply choose to arbitrarily withdraw $9,000/year from your account regardless of your age and balance. The amount is calculated for you (by a professional). The problem I have had with considering the 72t is that in order to come anywhere close to meeting annual living expenses, you would have to have a huge balance in the 401k and you would have to be old enough so that the numbers work out. If you have a huge balance and you’re TOO old, then the withdrawal amounts may be much larger than desirable [w.r.t. tax bracket] (and you’ll be close to retiring anyway). If you’re too young, the annual distributions will be calculated to be very small – probably too small to support you. For example, a 50-year old with $500,000 SEPP will be able to withdraw ~$15k to ~$20k. If you’re younger or have smaller balance, the annual withdrawal will obviously be smaller than this.

    The 72t was designed to permit people to make withdrawals over a long period of time – not to deplete an account on your timetable. The larger the annual withdrawal via SEPP, the more of your money is being tied up; i.e., you can’t use that money for a Roth Ladder too.

    In summary, the 72t is an option, but it is a complicated and inflexible option. As noted by Mad Fientist, mess up the withdrawal amount in one year, and it may be the worst financial mistake you ever make.

    My recommendation? Max out your 401k as Mad Fientist suggests. Plan to convert using Roth Ladder. Plan for income during 1st 5 years of Roth Ladder through one of following: Roth IRA/401k contributions, after-tax account contributions, after-tax contributions to 401k (if plan allows; some do) rolled over to Roth IRA, part-time work, or real-estate income.

    You probably won’t be able to ER by just maxing out 401k contributions ($18k/yr this year). ER generally requires saving a SUBSTANTIAL portion of your annual income (30% – 80%). So you should be able to use your earnings above the maximum amount you can save in tax-deferred accounts to prep for the 1st 5 years of Roth ladder.

    • jim
      July 14, 2016 at 10:07 pm

      If you are allowed to (I cannot find whether it is allowed or not on the IRS site), having multiple 72(t) plans going from separate IRA accounts may work. You could put $100,000 in one account to start this year and start getting the payments, and add separate 72(ts) with other IRAs as you get older. This would allow you to ramp up the payments and/or, or even if you do 4 $100,000 72(t) accounts at the same time, if you screw up one, you only pay the penalties on that one.

      • My Money Design
        July 24, 2016 at 8:53 am

        Through my own research and a phone call to Vanguard, you can break up your IRA into several smaller IRA’s if as one way to artificially adjust the size of your 72t distributions.

        The other benefit of doing this is that you won’t lock up your whole IRA. Remember that when you start taking 72t distributions, your IRA becomes “locked”. So an additional strategy like a backdoor Roth conversion won’t be possible unless you had several smaller IRA’s.

        Another way to adjust the size of your 72t distribution is to choose a lower interest rate for either the Amortized Over Life Expectancy method or Annuitized Over Life Expectancy method. Remember that the interest rate you choose can be ANY rate less than or equal to 120% of the Federal Mid-Term rate for either of the two months immediately preceding the month in which the distribution begins.

        • Nick
          July 25, 2016 at 1:57 pm

          Thank you My Money Design. This has been one of the most useful things I’ve read on the internet so far this year. Very simple idea with massive benefits. Go have yourself an ice cream, you made the world better for someone else just because you could.

          I really appreciate you sharing this.

          What we need now is for someone to build a tool that we put all the variables into with our target amount and it spits out the size IRA/options to pick for SEPP. The penalties if I get it wrong are very intimidating.

        • Jim
          July 25, 2016 at 3:23 pm

          Thanks for the research My Money Design! Glad to know that could work.

    • Chris
      October 16, 2017 at 12:49 pm

      With $500k balance you can take out $22k/yr using the amortization 72t method. Combine that with $27k/yr FERS annuity for VERA retirement (assuming the min of 25 yrs service and a tapped out GS13 salary, more or less depending on locality pay differences), and you’re looking at almost $50k/yr. Selling the home and investing the equity could provide the balance to carry some folks through age 59 1/2 by renting/leasing. Or use the equity to buy a small home outright. If you have $50k left over, invested at 7 percent hat will pay property taxes and home maintenance until age 59 1/2.

  40. Nathan
    July 13, 2016 at 9:30 am

    This is my first post, but I’ve been reading your blog for a long time. Along with MMM, jlcollinsnh, and a few others, my financial life has really improved. I’m 37 and hoping to reach FI in my early 50s. I’ve wondered whether you advice needs to be modified for those that will only be retiring a little bit early, or for those who won’t retire until “traditional” retirement age? With less time before mandatory minimum withdrawals in traditional IRAs, for the backdoor ROTH to work its magic, are there other things these folks need to consider? Thank you.

  41. Louise
    July 13, 2016 at 9:58 am

    Thanks for such great detail Mad Fientest. I did frown on these traditional IRA’s for penalizing you for taking out your own money for early retirement. Now I’ve got a reason to appreciate them now thanks to this information. I now know that we can still utilize them for early retirement, still grow your money and minimize taxes. Thanks for the research you provided in this post.

  42. Doug
    July 13, 2016 at 10:16 am

    I’m glad to see the “just pay the damn penalty” option getting the attention it deserves.

    When you move into a lower tax bracket in retirement due to a combination of no longer paying payroll taxes, no longer paying a mortgage, and only withdrawing what you need rather than what you can earn, the 10% extra tax can be easily offset.

    Pay the penalty is also by far the most flexible plan as there is no need to plan ahead at all. It’s nice knowing that even if you get in a pinch and need to take some money from your IRA, you will still be saving on taxes compared to your marginal rate when you were working!

    I made a post about this very subject on the MMM forums last June:

    • celo
      July 14, 2016 at 7:31 pm

      Madfientist, thanks for consolidating this all together here! Awesome article and research!

      Hi Doug,
      Thanks for linking to your post! Would you be able to help me understand what the 10% penalty actually is? I have been wondering if the 10% penalty is a non-refundable fee that is “donated” to the IRS or if the 10% penalty is simply an additional tax that I may be able to get back at the end of the year through tax deductions or credits. If it is simply an additional tax then assuming I will have no tax liability I will time my early withdrawals for the end of the year and get the penalties back as refunds within a few months!

      • Doug
        July 15, 2016 at 11:17 am


        The 10% is an “extra tax” according to the IRS. Unfortunately this is a flat tax and has nothing to do with income and cannot be offset in any way that I know of.

        However, if you are in a very low tax bracket, an additional 10% is not that bad considering you are paying zero on a lot of the money you are taking out, and 10% on another big chunk.

        • celo
          July 15, 2016 at 5:07 pm

          Thanks for taking the time to respond to my comment!
          I agree, 10% can be a small cost for the huge benefit of retiring early.

  43. Eric
    July 13, 2016 at 10:21 am

    Thank you! So great to have this all in one place.

    I think one other thing to consider is health insurance subsidies. If you are doing a Roth Ladder, you could make your income too high to qualify, significantly driving up your living expenses. I think this is where contributing to a Roth very early on (despite the fact it is taxed at your presumably higher income tax rate) could come in handy. The idea being you can access the contributions later on when needed to keep your income low, as when you pull your contributions out of the Roth, it doesn’t count as income, but when you rollover it does.

    I have this complicated spreadsheet that models this out over time with varying strategies to keep taxable income below around $60K (cutoff for a couple to get insurance subsidies in my state and also to keep capital gains taxed at 0)
    – SEPP for baseline income (which is actually kind of poor right now… mid term interest rates are at record lows…. hopefully they start rising before I start the SEPP in a couple years).
    – Drawing from taxable accounts or Roth Contributions
    – Income for a rental property (which is nice, because of depreciation you can get more cash than income)
    – Convert as much as possible from traditional to Roth, keeping below the income limit, so I have more contributions to pull out later once the taxable & original roth accounts dry up. You can also play around with doing this only once in awhile… sacrificing subsidies 1 year in order to build up roth contribution reserves, and then getting the advantages of lower income for the next few years.

    But now I have to re-do the math. Maybe just taking the 10% penalty later. The tax on the roth contributions I’m making right now is pretty brutal since I’m still working!

  44. Bernhard
    July 13, 2016 at 2:11 pm

    A great topic to cover and it’s great to cover in such a thorough way. However there is something that I don’t understand in this article. MadFientist writes about Roth IRA Conversion Ladder in the “Con” section:

    – “You pay tax on the conversion five years before you can use the money so you lose out on the tax-free growth that money could have provided.”

    This is actually not a problem, because the money will keep growing tax-free in the Roth in those five years. If your tax rate after those five years is identical you will still have the same after-tax value.

    1. Roth IRA Conversion Ladder:

    Portfolio Value: pv
    Convert to Roth and pay taxes at rate of t1%: Multiply by (1-t1%)
    Growth over n years at g% per year: Multiply with (1+g%)^n

    Portfolio Value at end: pv * (1-t1%) * (1+g%)^n

    2. Keep in IRA and take out after five years:

    Portfolio Value: pv
    Growth over n years at g% per year: Multiply with (1+g%)^n
    Withdraw money and pay taxes at rate of t2%: Multiply by (1-t2%)

    Portfolio Value at end: pv * (1+g%)^n * (1-t2%)

    If t1% = t2%, then the terms are identical. So as long as your tax rate is the same, you are NOT losing out on anything and it doesn’t matter, if you pay the tax five years earlier or not. In fact it might be advantageous, because if you pay the tax five years later, the taxed amount will be higher (by factor (1+g%)^n ) and that alone might bounce you into a higher tax bracket (if your returns are higher than the inflation adjustment of the tax brackets).

    With that in mind, I don’t follow the author’s conclusion that SEPP is more tax-efficient than Roth Conversion Ladder.

    In fact the “Final Totals” number don’t support the author’s conclusion either. When I compare scenarios 2b) and 2c) and discount the tIRA amounts with a tax rate of 25%, I reach the following equivalent after-tax amounts:

    Scenario 2b – Traditional (SEPP) $706,892 in a Traditional IRA

    After tax equivalent: $706,892 * (1-0.25) = $530,169

    Scenario 2c – Traditional (Ladder) $604,046 in a Traditional IRA and $87,419 in a Roth IRA

    After tax equivalent: $604,046 * (1-0.25) + $87,419= $540,453

    In this calculation the Ladder scenario actually looks even a little better than the SEPP scenario. I’m not sure, why and I don’t think it should be better, but I didn’t verify the account amounts.

    Of course, if you assume a lower marginal tax rate in retirement, then things would look very different and it would be advantageous to convert/withdraw the money at your lower tax rate. But that’s an altogether different consideration that the article doesn’t address.

    What (if anything) am I missing here that I’m coming to so different conclusions than the author?


    • James Luntz
      October 2, 2018 at 11:56 pm

      I had come up with the exact same thought and, therefore, the same question and searched in comments until I found if someone had already asked it. I agree they should be identical assuming the same marginal tax rate. I kept searching; Daren shows the math in a separate post down below.

  45. Farmer
    July 13, 2016 at 11:52 pm

    Great Analysis! My spouse had always said that we’d do the 10% penalty fee (plan C) if our other sources ran out before 60; those being a 457b plus HSA (plan A), and then any Roth contributions (plan B). This is targeted for ages 45-60. The post age 60 accounts would be very padded (hence why he didn’t mind paying penalty). This is very worthwhile for us to look at the SEPP and the penalties again to see if we can knock a year or two off!

  46. Karl
    July 14, 2016 at 9:44 am

    Always happy to see a post from the Mad Fientist and this one was well laid out!

    I have about 1/3 of my NW in a traditional IRA (rolled over from my 401(k) when I quit working). I don’t need the funds before traditional retirement age but I’ll do strategic conversions to my ROTH when my marginal tax rate is 15% or less in order to lower my RMDs later on. Unfortunately the Affordable Care Act tax subsidy complicates the plan :(

  47. Stefan - The Millennial Budget
    July 14, 2016 at 10:52 am

    These are surprising stats! I took a personal finance class last year during my senior year of college and was always told that we should contribute to a ROTH when we are younger so this contradicted everything I was taught. One thing that holds me back from a traditional contribution, at least in my first year of work, is that I am an international student so if I do not get a work Visa I will need to leave the country and it will not make sense to incur that 10% penalty. Got any thoughts on this?

  48. catfishwizard
    July 14, 2016 at 12:28 pm

    One thing that gets left out of a lot of these discussions is the different investment choices available in these scenarios.

    The investment choices in my 401K plan are HORRIBLE. The index funds have 1% expense ratios (my company recently changed providers…the old provider’s index funds “only” charged 0.75%.)

    I didn’t request a copy of the spreadsheet, but I’m sure the assumption here is that all the different accounts grow at the same rates. If you can get a Vanguard index fund with a 0.05% expense ratio in a self-directed ROTH IRA for example but have to pay 1% for a SSgA index fund in your 401K…the growth rate won’t be the same…even if the two accounts are ostensibly invested in the same thing.

    I don’t disagree with the conclusion, i.e. if you can defer the tax burden into the future, and then not have to pay it (or pay a substantially reduced amount) when it’s time to withdraw because of carefully planned sequencing…well then you will have a lot more money than you would otherwise.

    But I’m willing to bet the tax-deferred scenarios are a bit overstated for crappy 401K plans, which I suspect there are a lot of.

    Who knows…maybe I’m the only one?

    Thoroughly enjoyed the post though.

    • Nick
      July 25, 2016 at 1:50 pm

      The expense ratio on many funds in a 401k/403 rarely compete with the best you can get on your own, but for many retirees it still won’t be bad enough to outweigh the tax advantages, particularly if you are planning for a 7-12 year working/saving phase. Over 40 years it makes a huge difference, but the impact is negligible compared to the taxes you saved.

      Also, every time you change jobs you have a chance to roll over, and last I checked the average time at a job is ~5 years so even over a longer career, there’s periodic opportunities to get your money out of those unfortunate high expense 401k

  49. Done by Forty
    July 14, 2016 at 12:52 pm

    Such a detailed and well researched post. I suppose I shouldn’t be surprised: we Pittsburgh guys always create good work. :)

    My wife has been chasing a PhD for the better part of a decade, and I no longer can utilize a Traditional IRA due to income limits, so, unfortunately, our 401k accounts (just mine) and Traditional IRA accounts (just hers) are not as large as we’d like. I suppose our little HSA counts, too. We’re socking away money like crazy, but the majority of it is in taxable accounts. Sad face emoji.

    My initial assumption is that I might be better off simply accessing the taxable account money during early retirement, and seeing if the money in that ‘bucket’ can get us all the way to traditional retirement age. Assuming that’s possible, would that be the most efficient approach, tax-wise? (Along the way, if we can convert money to our Roths at $0 tax, of course, we’ll do that.)

  50. Lena
    July 14, 2016 at 1:32 pm

    Holy Cow! What an amazing post. Thank you for summing everything up so clearly. I had never heard of a SEPP but I might need to look into it. Am I right in thinking that there is no early withdraw penalty for taking funds from a Roth? If not, how do you access the money in your Roth (after you ladder it from your traditional IRA)?

    Thanks again for such a great post!

    • secondcor521
      October 30, 2019 at 4:43 pm

      There is no early withdrawal penalty when taking funds from the Roth as long as you are taking out contributions that you have made or conversions that are over 5 tax years old. If you take out more than that or sooner than that, then you will have the 10% penalty.

      The idea behind the Roth ladder is that you always are either taking out contributions or conversions that are more than 5 tax years old.

      The IRS considers withdrawals from a Roth to be taken from contributions first, then conversions on a FIFO basis, then earnings. In other words, they treat Roth withdrawals as nicely as they can.

  51. Ivan
    July 14, 2016 at 3:27 pm

    “Whenever my income is low enough to execute completely tax free Roth IRA conversions…”

    Can someone explain when will this ever be the case? Even if your income is as low as $16,600 a year your taxable income would still be $10,000 ($6,600 standard deduction) which means any withdrawals will fall into the 15% bracket. If you made less you would still fall into the 10% tax bracket. So when exactly can one fall into the 0% tax bracket?

    • Done by Forty
      July 14, 2016 at 5:03 pm

      So there are two sets of taxes: Federal Income Tax, and Capital Gains (in this case, long term). If you’re in the 10% or 15% marginal tax bracket for Federal Income Tax, then your tax on Capital Gains is 0%.

      For a married couple, the 15% marginal tax bracket goes pretty damn high: $75,300 in 2016 (which would also include a $12,600 standard deduction AND $8,100 in personal exemptions).

      Which means if your taxable income is anywhere in that 10% or 15% range, you owe $0 capital gains when you convert your funds to your Roth IRA.

      • Done by Forty
        July 14, 2016 at 5:05 pm
        • Ivan
          July 15, 2016 at 4:24 pm

          Ok so let me try to get this straight. (Apologies in advanced if I mess any of this up).

          If I were contributing $5,000 a year to a non-tax advantaged account. Let’s say that I invest in some stock and have 100 shares ($50 per share) and I made a 10% return in my first year. Those $500 are not taxed because as long as I do not sell my shares I havent actually made or lost any money. Now if I were to sell 1 share after the first year at $55 then those $5 in gains are short term gains and taxable as regular income. If instead I wait until year 2+ to sell my shares then it would be considered capital gains. Is all of this correct or have I misunderstood something?

          Also, assuming I now have money that is being generated and considered long term capital gains. Is the idea that as long as I stay within the 15% tax bracket then any money from long term capital gains is not considered regular income but is instead taxed at the long term capital gains tax of 0%?

          • Done by Forty
            July 18, 2016 at 12:37 pm

            You’ve basically got it: short term capital gains are taxed at your marginal tax bracket (so, basically treated like earned income). Long term capital gains are taxes at either 0% (if you’re either in the 10% or 15% tax bracket for your earned income) or at 15% if you’re in any higher tax bracket for marginal income. Of course, this is just what the tax laws of today state.

            As you can see, there’s an obvious incentive to take capital gains when your earned income is low, like in early retirement, rather than while you’re earning income and presumably might be in higher tax brackets already. Avoiding capital gains is no big deal for frugal people retiring early. The trick is being able to make your earned income low enough to avoid federal income tax altogether.

            Go Curry Cracker’s articles are really good at explaining strategies for the latter.

        • Ivan
          July 19, 2016 at 8:51 am

          Just another observation.

          So everyone here who is planning on taking advantage of the low or 0% tax on capital gains is not only maxing out their 401ks and IRAs but is also investing after tax dollars into investments that will later yield long term capital gains so that you can use those tax free?

          With it taking 18k to max out your 401k and 5.5k to max out your IRA, it sounds like this is putting low wage earners out of the hunt for early retirement.

      • secondcor521
        October 30, 2019 at 4:45 pm

        Done by Forty comments are inaccurate.

        Roth conversions are taxed as ordinary income, not capital gains. The only time they would be effectively in the zero percent bracket is if all income were less than the standard deduction ($24K-ish in 2019 for a couple MFJ), or if it were offset by tax credits, such as the child tax credit, the earned income tax credit, the retirement savings tax credit, the American opportunity tax credit, or similar.

    • Karl
      July 14, 2016 at 5:56 pm

      If you’re not working and have no earned income you can convert $10,300 per year tax-free (standard deduction plus personal exemption) using the 2015 figures. If one is retired or taking a break from working for a year it would be a good time to make a conversion (assuming no pension income).

      As you say, if you have earned income of $16,600 in a year you could not do a tax-free conversion.

  52. Steven
    July 14, 2016 at 10:11 pm

    Thanks for the article. One thing I might add would be while you are waiting for the 5 years to pass you can start taking your contributions from the Roth tax and penalty free. Then in 5 years start withdrawing the conversions. This way you have ladder income starting immediately. This is my plan while at the same time as all of this I will have a 72t from a separate 401k.

  53. Eric
    July 15, 2016 at 2:32 pm

    In the calculations for taking the penalty, you discuss the penalty of 10% as a con; but you are leaving out the calculation for paying taxes on that money as well. Are you making sure to include the taxes owed & the penalty in your calculations?

  54. Military Mustachian
    July 15, 2016 at 3:44 pm

    Yet another great post, thanks! I haven’t trolled too much through your other articles for similarly situationed folks, but as someone on active duty (Army) I am exempt from paying income taxes from my state of residence (Oregon) while I serve on active duty. When I retire from the military (10 years and counting) I will more than likely move to an area that has state taxes (Oregon, California, Colorado…maybe Washington). In addition, 70-80% of my income will be derived from my 20-year military retirement pension with the remainder coming exclusively from tax advantaged accounts. As it is I contribute both to the Roth/Traditional portions of my 401K equivalent (Thrift Savings Plan), but continue to contribute exclusively to Roth for my wife and I’s $5500 each outside of the TSP…so more like a 60%ROTH / 40%TRADITIONAL mix in total. Thoughts on if I should be getting more on the traditional bandwagon even with the likely additional state tax when I leave the military and begin a Roth conversion ladder? Your comments are much appreciated, thanks!

    • Jeff
      June 16, 2018 at 9:33 am

      Hello fellow military mustachian! I’m in roughly the same situation. About 10 years left in career, planning on doing 20 and living mostly off the pension. Right now I’m maxing Roth TSP and both wife and I’s Roth IRA’s and dumping the remainder into taxable. Just recently stumbled across the FI stuff and wondering if I should start to re-direct more into traditional. Not sure how to account for the pension in the equation. If I can just live off of pension/taxable and maybe some part time work until 59.5 without having to touch the TSP/IRA, is it better to keep everything in Roth? Let me know if you have found out anything additional. Thanks!

      • Dave
        March 5, 2019 at 8:14 pm

        TL;DR: For simplicity you’re better off going Roth TSP and Roth IRA as military due to the taxed advantaged nature of your pay.

        We won’t be in a better tax bracket than we are now since the military pension and future social security will be federally taxed (ignoring state taxes for now since those rules are a splattering across the Union). Gets hazy near the end as your pay may start to dip into a higher tax bracket depending on how much your wife makes. If you’re jumping into the 32+% bracket then traditional is better to save the ~10% in taxes and use it later instead when you’re retired back in the lower brackets. Then your Roth money continues to grow and you’re not required to take RMDs. I think you stop qualifying for Roth when you approach this level and the decision may be made for you. Hopefully if you’re on this page you already adjusted your SLR while stationed in a 0% income tax state to even further justify Roth versus traditional while active duty.

  55. Linda@Frugal Turtle
    July 16, 2016 at 1:37 pm

    This is really interesting! I always thought I would have to do the conversion ladder when I finally retired. Now I know it might be better if I just pay the penalty. Plus, it seems like the easier option!

  56. Daniel
    July 18, 2016 at 6:13 pm

    One thing I noticed in the spread sheet is that the $45k taken out of the taxable account isn’t being taxed in “Standard Retirement”. I think that is misleading, as to get 45K of income it would require selling shares, and incurring capital gains taxes. $45k is enough to put a single person in the taxable bracket, so 15% should be taken off. I reran the numbers that that pulls the Depleted Age of the Taxable account back down to 72. Not a huge change, and better targeting of tax brackets would fix this…. however…

    Isn’t the main point of the Roth conversion ladder to never pay taxes? Then why is she only converting 9,000 dollars a year, and why is she paying taxes on these? If she has other income that pushes her above 10,300 she shouldn’t be doing the ladder to start with. If she has no income (how is she living) she should be paying no taxes.

    And as a poster above said, there should be expenses inured by having a 401k plan. I tried looking up the average rate real fast, but didn’t see anything definitive, but it could be 0.5% – 1.5% per year. By using a Roth of Roth Ladder a portion of funds are sheltered from these fees.

    • Jeff
      October 18, 2017 at 12:35 am

      But the model does have her paying 15% per year on the growth every year from ages 30 to 40, which must assume that she churns her entire portfolio every year (plus a day, so that it is long term). This would reset her basis. Presumably she would do the same thing during the early retirement period (capital gain harvesting), again resetting her basis. So by the time she is withdrawing $45,000 a year, must of that would be a return of her investment basis, not capital gains, so it would not be taxed. (Also, with the standard deduction and personal exemption, $45,000 would still be in the 0% capital gains bracket, assuming no other income at all.

      But this way of doing things does make the taxable account look worse. Most prudent investors would no churn their entire account every year (plus a day), so would have to pay incremental taxes only on dividends and not on capital gains. That would leave them with more capital gains to pay later because of their reduced basis, but the higher balance should more than offset that.

      I agree with you that the whole model/assumption is hard to figure out. Why would someone need zero withdrawals to 45, then $9000 to 60, then $45,000 after 60? The model seems to be designed around a Roth ladder, rather than being designed to simulate a realistic trajectory of an early retirement.

  57. David
    July 18, 2016 at 6:52 pm

    Great post. You mention RMDs, but they are not accounted for in this analysis which stops at 60. My understanding is that Roths don’t count for RMDs, and don’t affect SS taxes, so would it not be better for your example person to have some (but not all) in Roth? What about if the example was a married couple with roughly twice the assetts? This does add a layer of complexity. I would be interested to see a follow-on post that went from 60-90 and the effect of RMDs and SS taxes. Love your site, have learned a great deal from it.

  58. FinanceSuperhero
    July 19, 2016 at 12:41 am

    This is the best article I have read in the past two months. Though I’ve been aware of these concepts for years, it was refreshing to see such clear examples with actual numbers. You’ve really challenged me to refine my long-term strategy (I just turned 30 last month).

    Your graphics belong in text books for high school personal finance courses. Very impressive work!

  59. Sean Merron
    July 19, 2016 at 2:45 pm

    Thanks for the post! I also think I’ll continue with my Roth ladder though because I may need to change withdrawal amounts throughout the years and take advantage of withdrawals against my taxable account along with tax loss harvesting so SEPP may lock me in too tight for minimal gains.

  60. Teri Cettina
    July 19, 2016 at 6:15 pm

    Question on the Roth conversion ladder and waiting 5 years: Say I want to convert a portion from my 401(k) to my Roth (wait), convert more $$ from 401 to Roth the next year (wait), and do it again.

    Each of those conversions now has to be left alone for 5 years before withdrawing. How do you keep each year’s conversion amount separate? Little mini accounts within your Roth? Or does your Roth provider keep track of the amounts?

    That part has always stumped me.

    • Ivan
      July 22, 2016 at 9:50 am

      I havent done this so I may be wrong but I believe it is more like a big pot of money you are building. If you converted 5k 5 years ago then 5k is what you can remove from the pot. If the second year you contributed 6k then when those 5 years are up you can now remove 6k from the pot and so on and so on.

    • FIREd at Forty
      July 25, 2016 at 1:32 am

      I had a similar question I asked my financial institution about funding my wife’s SEP-IRA. I asked them, how do you know which year these contributions are for? They said basically it was up to us to track the amounts and tax years for the contributions. So you may want to make notes on your annual statements in case you ever have some ‘splainin’ to do if the IRS come knocking.

      • MyMoneyDesign
        July 25, 2016 at 7:25 pm

        You can make a note yourself, or just refer back to your income tax records. Conversions will always get captured each year when you report them on your tax return.

  61. Darren
    July 26, 2016 at 6:02 pm

    Though I’m a bit late to the party, I think there are three important points missing from this discussion:

    1) Taxable accounts can still be somewhat tax efficient in the following way. Say you own VTI, Vanguard’s total market ETF. The only taxable part of its returns of late are its dividends at 2%. So, really, you are only taxed on that part of your gains. Under the assumptions of this exercise, the person gets 7% annualized growth. So, the taxable account would better be modeled as growing at 5 + 2*(1-.15) = 6.7%. This is much larger than the 7*(1-.15) = 5.95% used in the spreadsheet.

    2) The early withdrawal penalty reduces your AGI dollar for dollar. This would change the amount you can withdraw tax free or reduce the amount you need to withdraw. As it reduces your AGI instead of being itemized, this is an additional benefit as it makes more government services available and allows you to continue to take the standard deduction.

    3) It is claimed that the SEPP option has a “Pro” relative to the conversion ladder as it allows more time for tax free growth. This isn’t really true as multiplication commutes. Observe that if I have x dollars in a tax advantaged account that is growing at g percent and I will at some point pay t percent in taxes. Then, over T years I will have:

    x * (1+g)^T * (1-t) = x * (1-t) * (1+g)^T

    So it doesn’t matter if I pay taxes now or later, it will be the same amount of money in the end. The difference comes if the growth rate g is affected by taxes. But, this doesn’t come into play if we are comparing the conversion ladder to the SEPP option.



    • secondcor521
      October 30, 2019 at 4:49 pm

      “2) The early withdrawal penalty reduces your AGI dollar for dollar.”

      Nope. The early withdrawal penalty is a tax that is added to your total tax bill. It does not reduce your AGI.

  62. Scott
    July 26, 2016 at 11:59 pm

    One important consideration I want to bring up is that your 401k is protected from lawsuits in some(?all) states, while your IRA accounts are not. If you transfer all your 401K money to an IRA, you expose yourself to the potential loss of all your money if someone should successfully sue you. I think a wiser approach would be to transfer only the amount you could conceivably convert to a Roth IRA.

    • Bernhard
      July 27, 2016 at 2:19 pm


      You are correct, your 401(k) is protected by ERISA a federal law and thus applicable to all states. IRAs and Solo 401(k)s with only one participant are not protected by this law and state protection can be much weaker (e.g. in California). There is a 2005(?) federal bankruptcy law that I hear also applies to IRAs and would protect them in case of bankruptcy, but in non-bankruptcy cases, e.g. a legal judgement against you, you’d be back to state rules.

      In a prior search I cam across this web site, listing the IRA protection state-by-state:
      (Note that in California Roth IRAs apparently have no creditor protection whatsoever).

      Unfortunately with most 401(k)s you cannot do a partial IRA rollover, once you’ve left service. E.g. I have a Vanguard 401(k) from my old employer and it’s pretty much “Take all or nothing”. But perhaps some other companies have more employee friendly rules…

      Disclaimer: I’m not an investment or tax professional, so I’m not giving professional advice, just stating my layperson’s understanding of the situation.

  63. Larry
    July 30, 2016 at 12:15 pm

    Pension income and Roth ladder quesrion. My only taxable income next year will be an annual pension of $27k. My income tax filing status is married filing jointly. Would I be able to ladder IRA money to my Roth? If yes, how much?

    • Daniel
      July 31, 2016 at 11:08 am

      My understanding of things is (2016 values) Married Filing Jointly Standard Deduction ($12,600.00) + two Personal Exemption (2x $4,050.00) = 20,700 in tax free space. So you will be in the 10% bracket for the amount you are over (10% * (27,000-20,700) = $630. Any IRA funds you convert to a ROTH would be taxed at the same amount, until you hit the 15% bracket (12,600+2*4,050+18,550 = 39,250). So the total you can convert at “just” the 10% tax rate would be 39,250-27000 = 12,250. You would pay $1,855 in taxes, or 1,225 more than the 630 you are paying anyways. Then it would grow tax free in the ROTH. If you have any dependents or can itemize these limits can increase.

      Disclaimer, Not a tax professional of any sorts.

    • secondcor521
      October 30, 2019 at 4:52 pm

      You can convert as much money as you want from your traditional IRA to your Roth IRA. There are no income limits.

      The main consideration is that the amount converted creates taxable ordinary income, so you’d owe whatever income taxes were due on the amount converted each year.

  64. Bikeguy
    August 8, 2016 at 11:46 am

    Loved the analysis!

    Currently FI but still working.

    Don’t know whether anyone else made this comment, but the one scenario you left out is a Roth conversion when the market is really down. I stumbled upon this by mistake. Took a buyout in November of 2008. Didn’t start working again until June 2009. Decided to convert some traditional IRA money to take advantage of small income that year. Was delivered double bonus, as at the time of the conversion, the stocks were worth roughly 60% of what they were worth before and after the downturn. So, even though I paid 15%, it was more like 15% x 0.6, which is 9%. While not zero, I feel that when the next downturn occurs, people with a wife that spends like mine should consider it. I agree that if you think you can live on an income that generates a 0% tax bracket, this is not for you. I don’t see that in my future though.

  65. david s dollars
    August 8, 2016 at 2:32 pm

    great post, which strategy are you using to access your funds early ?

  66. JC
    August 18, 2016 at 11:33 am

    I love your tax avoidance primers. One thing I think you could take into account is that some people donate considerable amounts to non-profits over the course of their life. Optimizing the tax treatment of those donations (for example by giving to donor advised trusts during high income years), particularly when done in concert with an overall tax avoidance strategy, has alot of potential.

  67. Stomper
    August 19, 2016 at 8:00 am

    Here is another situation that allows one to avoid the 10% penalty: The distribution is made after you have separated from service with your employer and that separation from service occurred in or after the year in which you reached age 55,

    I turn 55 this year and have enough F-you money with an employer that I plan on deploying this option…after my 3 week vacation next month.

  68. Keith W Cumbie
    September 13, 2016 at 10:57 am

    How can you realistically do a 72(t) and Conversion Ladder simultaneously when 72(t) requires you have a traditional IRA and the conversion ladder, to be most effective, requires you to have no traditional IRA after the conversion. My apologies if this has been asked or I am missing something obvious.

  69. Dan Nice
    September 15, 2016 at 4:35 pm

    I didn’t see this mentioned. What does you income need to be below to convert a Traditional IRA to Roth tax free?

    • Daniel
      October 18, 2016 at 5:38 pm

      My understanding of things is (2016 values) Married Filing Jointly Standard Deduction ($12,600.00) + two Personal Exemption (2x $4,050.00) = 20,700 in tax free space. Then it would grow tax free in the ROTH. If you have any dependents or can itemize these limits can increase.

      Disclaimer, Not a tax professional of any sorts.

  70. Acastus
    September 20, 2016 at 11:26 pm

    The IRS web site says that in addition to waiting 5 years, you need to be age 59.5 to have a qualified withdrawal, i.e. tax free money. There are a couple special cases, like tuition, high medical, and 1st house that qualify the withdrawal. Otherwise, the withdrawal needs to meet a 72(t).

    I asked my CFA about 72(t), and she says it is easy to make a mistake and have all the money become taxable plus 10% penalty. Go slow and careful if you use this route. Pay someone to review your plan. Also, if you are retiring early, 72(t) withdrawals need to continue for 5 year or until you reach 59.5, which ever is later.


    • Acastus
      November 30, 2016 at 11:59 am

      I did a little more homework, and you can withdraw the original contributions from a Roth at any time. Traditional to Roth conversions count as Roth contributions, so you can use that money, too. Sweet.

      • secondcor521
        October 30, 2019 at 4:58 pm

        Nope. Roth conversions do not count as Roth contributions. Take a look at the 2018 Form 8606, particularly lines 22 and line 24.

      • Uncle B
        April 18, 2022 at 7:43 am

        Not quite. You can withdraw contributions at any time, but if you are under 59 1/2 (or meet one of the exceptions to the 10% penalty), you have to wait five years to withdraw your conversion basis tax-free.

        Roth original contributions and Roth conversions are both free from regular income tax at your marginal rate (see 2021 Form 8606, lines 22-25), regardless of when they were done. You already paid that tax either when you earned the money or when you converted it. But distributions from Roth conversions are subject to the 10% early withdrawal penalty if the conversion occurred within the past five years. See the section about recaptures under the instructions for 2021 Form 5329, Line 1. Your basis in Roth contributions is never subject to this penalty.

        Early distribution of any earnings, the amount exceeding your basis in both contributions and conversions, will be subject to both regular income tax and the 10% penalty.

    • Justin
      May 16, 2019 at 11:31 am

      Adding some clarity – to a GREAT but somewhat mis-communicated strategy:
      *If a Roth account is 5 years old (or older) – contributions can be withdrawn wo/penalty (and tax-free)
      *Earnings will be taxed

      Age 59 and under.
      You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

      Withdrawals from a Roth IRA you’ve had less than five years.

      If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:

      You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
      You use the withdrawal to pay for qualified education expenses.
      You’re at least age 59½.
      You become disabled or pass away.
      You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
      The distribution is made in substantially equal periodic payments.1
      Withdrawals from a Roth IRA you’ve had more than five years.

      If you’re under age 59½ and your Roth IRA has been open five years or more,1 your earnings will not be subject to taxes if you meet one of the following conditions:

      You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
      You’re at least age 59½.
      You become disabled or pass away.
      You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
      The distribution is made in substantially equal periodic payments.1

    • secondcor521
      October 30, 2019 at 4:57 pm

      This is inaccurate. You can make completely tax free and penalty free withdrawals from a Roth IRA of conversions as long as the conversions were more than 5 tax-years ago. You do not need to be under age 59.5 or use an SEPP to do this.

      Read the instructions for Form 8606 very carefully, especially the part in Part III which relates to Roth withdrawals and basis (line 24 on the 2018 Form 8606).

  71. Dave Man
    October 16, 2016 at 11:16 pm

    Awesome post! Thanks for the through analysis! My understanding is that you are able to withdraw the principle without a penalty from your Roth account at any age. That could also be another strategy to consider when retiring early.

  72. Eli
    December 10, 2016 at 11:05 am

    In researching the 10% early withdrawal penalty I came across a nasty surprise: certain states add an additional penalty on top of the 10% Federal tax. For example, California adds a 2.5% state tax early withdrawal penalty, so it ends up being 12.5%, plus the normal income tax on the withdrawal… pretty substantial and makes me less inclined to use this approach (at least while living in California).

  73. Hulgar1
    January 7, 2017 at 11:51 am

    Nice article showing options most never consider. My guess is that is it complicated and calculations vary wildly between individuals based on tax rates and amounts needed/withdrawn at various ages. I retired a few years back as a chemist at age 56 and have no plans to touch the 401k for years; we have other income that keeps us in higher brackets already. Understand it is a self made good problem to have, but it affects the calculations.

    In our case we are doing the ROTH conversion ladder. Wife and I both have substantial 401ks (she was also a chemist) so the plan is to convert as much via the 401k -IRA-ROTH path by age 70 when I’ll take SS and forced minimum distributions from the 401ks.

    We are off-setting the current conversion taxes from IRA-ROTH using donated appreciated stock to gain the write up value, which so far is more than what we invested in the stocks originally. So far and are converting and with no net out of pocket for taxes. By the time we hit 70 the ROTHs should have significant values and the 401ks dramatically smaller. The ROTHs will compound from there as we still likely will not need the money and more for charity and inheritances.

  74. Mrs. Picky Pincher
    January 11, 2017 at 3:56 pm

    I’ve been wondering about this a lot lately. It’s great that I want to retire at 35, but that does mean I’ll have a few decades where I can’t traditionally touch retirement funds. This is great info!

    I started off with a Roth IRA since it was a little less complex. However, I do want to start maxing out those contributions so I can have time on my side once I retire.

  75. Luke
    January 11, 2017 at 6:16 pm

    So I only recently came across your content and I’m bummed about that. Very in-depth info. Love it.

    With that being said, I’d like throw a wrinkle into this conversation. The more and more I’ve thought about this the closer I’ve come to the conclusion that more people should be utilizing a combination of pre-tax, HSA, and taxable savings while accumulating assets. All of that with a mind towards a Roth conversion strategy immediately upon retirement.

    Here’s a hypothetical (shortened/simplified version). John Doe makes $75k/yr. and is able to save 15% ($11,250). Let’s also say he is 25 years old and wants to retire at 60 with plans to take Social Security at 70 but wants to completely replace his net income, which is likely about 70% of his $75k ($52,500). We’ll ignore inflation for the sake of simplicity. Let’s also say his employee matches 50 cents on dollar on first 6% and thus has contributions of $6,750 per year. He saves $3,400 in his HSA (let’s round that to 4.5%). He has another 4.5% to save. He could go back and put in that $3,375 into the pre-tax account and save 25% (ignoring state income taxes), so it effectively only reduced his income by $2,531. Or he could save in a Roth (everyone knows the rationale there so I’ll spare you some time in explaining that). Or, he could save in a taxable account. This would “cost” him the full $3,375.

    Let’s further say he expects the same returns in each account of 5% (Real) during accumulation plus 4% during retirement.

    So he gets to retirement with (ignoring taxes for the moment), age 60:

    Pre-tax: $609,620
    HSA (let’s say he “accumulated” $70k of ex post facto medical expenses – average of $2k/yr): $307,089
    Taxable: $304,831 (basis of $118,125)

    Now, his first year of retirement he can cover completely with his HSA tax-free, due to prior unreimbursed medical expenses. He could also “reset” the basis (this is admittedly much more difficult in practice vs conceptually) on roughly $48k (25% threshold plus personal exemption plus standard deduction) of LTCG at a 0% rate. All this for a $0 tax bill.

    Age 61:

    Pre-tax: $634,004
    HSA: $264,772
    Taxable: $317,024 (basis of $170,625)

    He draws his remaining “free” ex post facto HSA dollars of $17,500. With a remaining income need of $35k, which he draws off of LTCG, while also capturing an additional 0% LTCG on $13k of taxable assets. Again, a $0 tax bill.

    Age 62:

    Pre-tax: $659,364
    HSA: $257,162
    Taxable: $293,304 (basis of $183,625)

    He draws nearly his entire income need off of 0% LTCG (again, roughly $48k threshold) while drawing roughly $4,500 off of basis. $0 tax bill.

    Age 63:

    Pre-tax: $685,738
    HSA: $267,448
    Taxable: $250,436 (basis of $179,125)

    Does same as above. $0 tax bill.

    Age 64:

    Pre-tax: $713,167
    HSA: $278,145
    Taxable: $205,853 (basis of $174,625)

    Draws $31,228 off of 0% LTCG, $21,272 off of basis, and converts $16,722 from pre-tax to Roth at the 15% rate for an effective tax rate of 4.79%; his first tax bill in retirement.

    Age 65:

    Pre-tax: $724,302
    Roth: $17,390
    HSA: $289,270
    Taxable: $159,487 (all basis)

    Here he draws roughly $4,500 from HSA tax-free (roughly the amount of Medicare premiums) and $48k from basis while also converting $48k to Roth to stay in the 15% bracket. Effective tax rate of 9.95%.

    Age 66:

    Pre-tax: $703,354
    Roth: $68,005
    HSA: $296,160
    Taxable: $115,946 (all basis)

    Does the same as above.

    Age 67:

    Pre-tax: $681,568
    Roth: $120,645
    HSA: $303,326
    Taxable: $70,663 (all basis)

    Same as above.

    Age 68:

    Pre-tax: $658,910
    Roth: $175,390
    HSA: $310,779
    Taxable: $23,569 (all basis)

    Here John Doe draws $4,500 from HSA, all of the remaining taxable funds plus $24,431 from HSA (as non-medical) and converts $23,569 to Roth.

    Age 69:

    Pre-tax: $660,754
    Roth: $206,917
    HSA: $293,121
    Taxable: $0

    Here he draws $4,500 from HSA tax free and the remainder from HSA (non-medical). He is still in the 15% bracket this whole time.

    Now, at age 70:

    Pre-tax: $687,184
    Roth: $215,193
    HSA: $250,245
    Social Security of roughly (pure ballpark figure): $39,600/yr. (85% of which will be taxable)

    $39,600 + $4,500 tax-free HSA + $8,400 from HSA (non-medical) or pre-tax and converts $5,940 to Roth.

    Near lock to be under the 25% tax bracket for nearly all of retirement while converting a massive amount of pre-tax to Roth at very low rates. Much of because of the ability to draw off of 0% LTCG rates and basis of taxable account(s).

    ***Admittedly there are tons of variables to make this scenario unplausible: taxation of dividends in taxable account should/when they occur, tax law changes, income changes, income need changes, variability of investment returns, etc. However, I guess my point is that perhaps many people are overlooking taxable savings…

    Also, I’m sorry that this was such a long post/comment. I didn’t intend it to be when I first started writing it.

  76. Dan
    January 18, 2017 at 2:05 pm

    What does someone do who has unlimited deferral potential? I have a 409a and a 401k plan. Right now I defer just enough to eliminare the 25% federal bracket, but could do more. I invest the rest in a taxable account. Should I only do tax deferred instead? Knowing that I’ll retire early and pay the 10% penalty?

  77. James
    March 21, 2017 at 2:47 pm

    Don’t you have to be 50 years old in order to set up a 72t withdrawal ? Great article!

    • secondcor521
      October 30, 2019 at 5:00 pm

      @James, no, you can start a 72t at any age.

      However, in order to avoid penalties, you need to continue the 72t for 5 years or until age 59.5, whichever is longer.

      So if you start a 772t when aged 35, you’d need to continue it for about 25 years, which is a long time.

  78. Key
    April 13, 2017 at 9:59 am

    Great article. I do have a couple of questions: with more and more companies offering Roth 401K options,would it ever make since to utilize those while making a salary that places you in the 25% tax bracket? Then, upon passing 100K or so, then switching to a pre-tax 401k? More info, 24 years old, no CC or student loan debt, salary 74K USD, net worth only about 60K.

  79. Julie
    June 17, 2017 at 12:20 pm

    Could you lay out the details of combating the required minimum distributions by using the Roth conversion ladder?

    • secondcor521
      October 30, 2019 at 5:04 pm

      @Julie, any amounts converted to Roth will reduce the size of the traditional IRA, which means that the RMDs (which are based on the person’s age and traditional IRA balance) will be somewhat smaller than they would otherwise.

      Personally I have a spreadsheet that tries to figure out how big my traditional IRA will be at age 70.5 when RMDs start. From that, I can figure out what my RMD will be. From my RMD and projected Social Security, I can figure out what my tax bracket will be.

      My current plan is to convert as much now each year to raise my tax rate now to just below what it would be at age 70.5. That will “even out” my tax bill over time and presumably have me paying a relative minimum in taxes.

  80. Brian
    July 7, 2017 at 4:21 pm

    You mentioned you plan might include Roth Conversions (when your tax bracket is 0) and SEPP. Can you legally make both of these happen? Would it require having two seperate 401k accounts?


    • secondcor521
      October 30, 2019 at 5:05 pm

      It would be two separate traditional IRA accounts – one for the conversions and one for the SEPP. Perfectly legal as long as the two accounts and two methods are not intermingled in any way.

  81. 220volt
    July 15, 2017 at 6:36 pm

    Great, great post. I have a question about my mom. She is 65 and retired this year from her employer. She only has 30k in her 401k but how would Roth Conversion ladder work when you are already retired? When don’t you have to wait until 59 1/2.
    She moves all 401k into Traditional IRA. But what then? Does she still have to build up the 5-year ladder, even though she is 65 years old? I know she will have to pay taxes somewhere, but I am not 100% sure when and how much.

    Thanks in advance,

    • Daniel
      September 26, 2017 at 10:49 am

      I’m not tax professional but I’ll try to help.

      “How would Roth Conversion ladder work when you are already retired?”
      -You generally need to be retired to do the Roth Conversions because in the year you do them they count as income. Doing this when working increases your reported income and therefor taxes, and because of progressive tax brackets the hit is bigger. People prefer to do it after they retire because they don’t have other income and are therefor in a low or zero tax bracket.

      “When don’t you have to wait until 59 1/2?”
      -You have to wait until retirement age to make penalty free withdraws from a 401k or IRA. You do NOT have to wait to withdraw your original contributions from a Roth account (but do for any earnings). The Roth conversion ladder relies on a piece of the tax code that says if you make a conversion and then wait 5 years, what you converted can be treated as a contribution, and therefor withdrawn at anytime, penalty free. And since this is a Roth, tax free.

      “But what then? Does she still have to build up the 5-year ladder, even though she is 65 years old?”
      She does not need to do a Roth ladder to avoid the penalty. But it would help her avoid taxes. Whatever she converts each year counts as income and she pays taxes on it that year. Depending on other income (SS, Pension), she may or may not have room to convert any tax free. But by spreading it out over several years, she at least can avoid the worst high tax brackets. This assumes that when she converts she doesn’t need the money now.

      If she is comfortable living on her SS/Pension. Then you can figure out how much headroom she has until the next tax bracket, and convert that much each year without undue tax consequences. Then after a few years all the money will be converted from traditional to Roth, and after 5 years each conversion will be fully accessible tax free in case of emergency.

      And I don’t want to imply that you have to wait 5 years. There are rules in place if you did a conversion and then need that money 2 years later, I’m just not sure what they are, but i’m sure there are tax and penalties.

  82. Kelly
    July 16, 2017 at 2:50 pm

    Hi Madfientist,
    This was so indepth and wonderful. My situation is I am currently 37 I am hoping to be fi by 50 or 55. I currently max out my 401k and my hsa and I make a tiny contribution to a traditional ira. I also am building a dividend portfolio in a taxable account that I am hoping will help in early retirement. Learning about dividend investing has been such a joy but now I am curious would it be better if I stopped contributing to the dividend portfolio and use the funds max out my traditional ira? Ideally my goal would be to have enough funds for both.
    Additionally then would it be wise to start a really small Roth conversion ladder now like maybe under 5 grand a year? I would withdraw it much later than 5 years but starting now maybe I could fare better in taxes and not upset my bracket? I am earning a decent typical salary but I’ve gotten my tax bracket to 15% by maxing out that 401k and hsa.
    By the way your article about hsa’s MIND BLOWING! I had a lovely time reading that.
    Thank you.

  83. Gloria
    July 18, 2017 at 3:57 pm

    I find reading this treasure trove gives me renewed hope as I try to get through the rat race. Thank you for this information. For these calculations, is it assumed that she starts at age 30 for FI? I’m sorry if I missed it.

  84. Matthew Smith
    August 21, 2017 at 12:49 am

    This is a very helpful article! I do have one question though: Is this method guaranteed to work for all accounts? I am a government employee and have a TSP account. I was reading through the forms for the account and it says, “If 5 years have passed since January 1 of the calendar year when you made your first Roth contribution AND (this is in bold) you have reached age 59 1/2, the entire Roth portion of your account will be paid out tax-free.”

    This requirement to be 59 1/2 for the TSP contradicts what I have seen in this article and several others explaining the Roth conversion ladder. Does anyone have any knowledge on this? Thanks!

  85. Dave
    September 3, 2017 at 8:42 am

    Thanks for another great article!

    Can someone please help me understand this paragraph from Scenario 1?

    “Since she’ll be taxed on the money before she puts it into the taxable account, she’ll only be able to add $13,500 ($18,000 – 25% tax) to her investments every year. She will also be taxed on the growth of those funds at 15%, since the funds are in a taxable account.”

    -Why would the growth of her investments be taxed at 15%? Assuming she isn’t selling anything in her saving years?
    -Why would her entire $18000 be taxed at the marginal rate of 25% instead of using her effective tax rate which would be much lower?


    • Daniel
      September 26, 2017 at 10:57 am

      “Why would her entire $18000 be taxed at the marginal rate of 25% instead of using her effective tax rate which would be much lower?”
      Because we are talking about marginal money. She has a choice of how she is going to save her last 18,000. If you chooses to avoid taxes, it is 0% taxes, but if she takes the money and puts it somewhere taxable, it is marginal tax rate.

      “Why would the growth of her investments be taxed at 15%? Assuming she isn’t selling anything in her saving years?”
      Not sure, sorry. Could just be an oversimplification of the spread sheet.

  86. Alberto
    September 10, 2017 at 8:00 am

    Excellent article. Well written and requires some thought on how to apply it correctly.

    My question goes more towards Step 1. To what types of investments do we convert our 401K (Typically limited investments) to an IRA Traditional or Roth (Unlimited choices)?

    We use based on age and risk a more conservative 60/40 to 50/50 allocation? ETFs have cheaper fees but some mutual funds are better balanced.

  87. Tim
    September 10, 2017 at 9:35 pm

    Awesome post!! I’ve always considered the “just pay the penalty” idea to take advantage of these $$$ but wondered what the FI consensus may be. I’m relatively new to the FI concept but and have started working on a plan to be FI in 5-7 years from now. I’m loving the posts on how to tap these accounts earlier than designed because that would have to be part of the plan likely. Keep up the great work!

  88. Dave
    September 19, 2017 at 11:57 am

    Given these are all very long term strategies, what weight (if any) do you think we should place on the risk that the tax law changes between today and age 60?

    E.g. what if the tax penalty on early withdrawals was increased (or eliminated!), or what about tax bracket changes today and in early/late retirement?

    Which of these strategies seems like it would be the most robust to unforeseen changes of this nature?

  89. Kyle
    September 22, 2017 at 2:08 am

    Long time reader and a huge fan of your various ideas. A follow up since Mad Fientist you’ve also gone through graduate school. I’m currently an experienced professional with funds in my IRA and Roth IRA attending my postgraduate program full-time.

    Does it make sense to leverage the no late penalty fee rule on IRA withdrawal for higher education to increase the amount for the IRA to Roth Conversion Ladder? Or is this not necessarily applicable since the only limit to the current conversion is the Roth contribution limit?

    Thanks in advance! Extremely grateful for all your advice so far!

  90. Rebecca
    September 23, 2017 at 7:22 am

    Love this post! So here’s an idea I’m toying with: if retirement accounts are maxed out, given your findings that taking the 10% penalty is better than a regular taxable account, what about putting excess funds into a 529 plan and using it as an additional retirement account, with the expectation of paying the penalty? Is there a reason this would be a bad idea that I’m overlooking?

  91. Chris
    October 16, 2017 at 12:34 pm

    The problem with scenario 1 is assuming that all of it is taxed at 25 percent. That’s not how tax brackets work. In reality, only someone who is already fully in the 25 percent tax bracket while contributing $18k/yr to tax deferred accounts would then pay 25 percent tax on that $18k if switching to a Roth. I think you’ve unfairly penalized the Roth here. Most of us gov’t workers are mostly, if not all, in the 15 percent tax bracket after deducting mortgage interest, property tax, and charitable contributions. I dunno. Maybe. Personally I would run the numbers with a lower or mixed tax rate. After all, this discussion is really all a bout taxes at the end of the day.

  92. David Egan
    November 19, 2017 at 8:31 am

    Great post,

    Maybe someone can answer a question I have. Are the $9k withdrawals every year in the example representative of $9k after tax dollars in ALL scenarios? Example, when she pulls “$9k” from the traditional SEPP or the traditional “penalty” scenario, is that $9k after tax or pre tax dollars? I hope it’s after-tax as that would make the comparison more valid IMO, if not, than your really only getting $7/8k in spendable cash as compared to a full $9k from the strait up ROTH option.

    “Her first option is to just start withdrawing $9,000 every year starting at age 45 and simply pay the 10% early-withdrawal penalty.” – Does that statement mean she is pulling out something more than $9k to get an adjusted $9k to spend after taxes and the penalty are incurred? Or is she really dealing with ~$7k now to spend?

    I just want to make sure were apples to apples here.

    • Garrett
      February 16, 2018 at 11:28 am

      I took a look at his spreadsheet with all of the underlying math. When calculating withdrawals, it uses the amount necessary to end up with $9,000 after taxes and penalties. For example,

      Taxable – $9,000 is withdrawn because the tax rate is 0% on her long term capital gains
      Traditional (penalty) – $12,000 is withdrawn. Withdrawals from traditional retirement accounts are ordinary income and are subject to her 15% tax rate plus a 10% penalty, so 9000/(1 – .15 – .1) = 12000.
      Traditional (72t) – $10588.24 is withdrawn. Subject to 15% tax rate but no penalty, 9000/(1 – .15) = ~10588.24. I don’t think you can actually choose exactly how much you withdraw with this approach, but let’s disregard that for now.
      Traditional -> Roth – Same amount as Traditional(72t)
      Roth – $9,000 withdrawn

      So even though you need to pull more money out of a pre-tax account than a Roth or a taxable account to maintain the same $9,000, you still end up ahead with the pre-tax account.

  93. Naomi Bjerk
    December 21, 2017 at 10:12 am

    I’m very interested to hear how your strategy will change as a result of the new tax law that seems to disallow this kind of recharacterization.

    • secondcor521
      October 30, 2019 at 5:10 pm

      Traditional to Roth conversions are still allowed.

      Recharacterizations of conversions were eliminated with the new tax law (the Tax Cut and Jobs Act).

      The practical effect of this is that for people doing Roth conversion ladders, they need to be very sure that they want to convert $X, since it can’t be undone. In practice, this is not really an issue, since people doing Roth ladders are probably well aware of the amount they want to convert each year. Also, they can change the amounts from year to year as circumstances change.

  94. Gasem
    December 28, 2017 at 3:28 pm

    1. I made enough money that I was phased out of pre-tax advantaged accounts. I was able to contribute to tIRA’s post tax however, so when that money comes out the post tax portion comes out tax free.

    2. I saved a lot into a post tax brokerage acct which holds stocks. Stocks are purchased in individual tax lots so even though you may own $1,000,000 of VTI which you have purchased over say 20 years, that is really 20 different tax lots of VTI. This means when the market goes south generally some percentage of those 20 lots become losses. You can sell the lots at a loss, and reinvest the proceeds into a similar but not the same vehicle in this case say SPY instead of VTI. You then book your capital loss. Over the course of 30 years of investing I booked several $100K’s in LT cap loss.

    The advantage of this is when you go to sell the appreciated stock you can mix the LTcap loss and pay no tax. In addition given the new tax law as long as you keep your income below the 12% level you pay 0% cap gain. If you go over the 12% level you pay 15% on the portion over the 12% cap, and if you have LTcap loss you can apply that to the 15% amount returning you to 0%. So this is like having a Roth without the Roth wrapper and you can pull out the money whenever you want, leaving tax advantaged accounts to continue growing unmolested. It’s not that hard to develop a post tax portfolio that is tax efficient in terms of dividends etc. I’ve used this technique to sell a few 100K of stock and turn it into cash tax free, and then live tax free on the cash for several years while I maximally Roth convert tIRA to Roth. My goal is to convert as much as possible as cheaply as possible until RMD and SS hit.

    Taxable mixed with tax loss harvesting makes taxable accts much more valuable than your treatment predicts because they can be used as zero cost money while other tax advantaged accounts continue to grow tax advantaged. It’s a little more complicated than simple formulaic treatments but all modern brokerages allow you access to your tax lot basis and so the needed data to mine the losses.

  95. Lin
    January 26, 2018 at 11:10 am

    Hi, is there any reason not to perform the Roth Conversion as soon as you are on a low tax bracket?

    • Karen
      June 24, 2019 at 7:47 pm

      No, there isn’t. AND you don’t have to convert your entire traditional IRA at once. You can convert only as much as you want to– maybe enough to bring your taxable income up to the threshold of reaching a higher tax bracket.

  96. Joseph
    February 9, 2018 at 4:38 pm

    So…I already have a Roth IRA and have been maxing it out for the past 5-6 years. I’m planning to leverage the SEPP or Roth conversion ladder method for early retirement in about 10 years when I hit FI, not sure yet. My stay at home wife is somewhat eager to have a career when our kids are older, right around that same FI date (when we’re about 40), and that may play into our strategy, having some income to tie us over during the ladder conversion 5 years. But because I have a Roth IRA already, is the Ladder method still available to me? Not sure if I can “convert” my traditional IRA to a Roth IRA as stated since I don’t have a traditional account and I do have a Roth already.

    The reason I have a Roth is because I feel that, despite seeking FI, I may be in a higher tax bracket in retirement. After maxing out my HSA and 401k and taking a few other exemptions/deductions, I had just under $18,000 taxable income this year which is fairly typical for me, and I’m planning spending around $30,000 in retirement (today’s dollars) when I will have fewer dependents and thus fewer deductions. Is that a valid excuse for a Roth or should I start funding a Traditional this year?

  97. 02nz
    March 3, 2018 at 10:00 pm

    “She will stop the conversions at age 55, because she’ll be able to withdraw her money after she turns 60 penalty free anyway so no need to pay tax on that money five years earlier than necessary.” That would be a big missed opportunity – she should actually continue Roth conversions, because every year she can fill up her standard deduction ($12000 if single) and low tax brackets (10% and 12%, so another $38070 – these are 2018 numbers). If, as in your example, she’s only converting $9,000 a year, she could continue doing that and end up paying no income tax at all on this money. Even if she doesn’t need the money, it would be to her advantage to do the Roth conversion. If she leaves the money in the traditional IRA, it would of course leave a bigger balance in that account, which will lead to 1) generally higher taxes when she withdraws them later, particularly when she hits 70.5 and RMDs become a factor; 2) higher taxes on Social Security benefits, once she starts collecting those. Think of the $12000 deduction and low tax brackets as a one-time opportunity each year, which should not go unused.

  98. Brian
    April 2, 2018 at 10:39 pm

    Excellent summary of the implications of each RE tax strategy. Also thanks for sharing the spreadsheet! I was digging around in it this evening.

    One thing to note – if you will be a higher tax bracket in retirement the Roth looks like it might actually win in longevity. At 24% and 25% the Roth wins out by about 2 years. At 22% it loses to 72t by about 2 years. Note that the current tax brackets are set to revert in 2026 (I believe) so you’re likely to get bumped if you don’t retire in the next 8 years. I’m relatively certain I will be in the 25% (reverted) tax bracket bracket by the time I retire/RE, so I’ll likely keep it clean and stick with a Roth. However, if you’re close to the 15% bracket, definitely worth looking at the other options.

    2018-2026 Brackets
    Single Married File Joint
    12% $9,525-$38,700 $19,050-$77,400
    22% $38,700-$82,500 $77,400-$165,000
    24% $82,500-$157,500 $165,000-$315,000

    Pre 2018 (Likely Post 2026) Brackets
    Single Married File Joint
    15% $9,525-$38,700 $19,050-$77,400
    25% $38,700-$93,700 $77,400-$156,150
    28% $93,700-$195,450 $156,150-$237,950

  99. Joe
    May 15, 2018 at 2:19 am

    I have a question about the Roth Conversion Ladder:

    On the description for this strategy, step 4, it says: “After five years, you can take out the amount you converted without paying any additional penalties or taxes (you were taxed in Step #2 when you executed the Traditional-to-Roth conversion).”

    Now, looking at Fidelity’s Roth IRA product, I see the following on their footnotes:
    “A distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied AND one of the following conditions is met: age 59½, death, disability, qualified first time home purchase.”

    The keyword there is “AND”, which I interpret as both conditions having to be met. My understanding of all this is that if I retire at age 35, transferred from 401K to a standard IRA, and converted, say $25K to Roth, I will not be able to withdraw from the Roth account when I’m 40 years old (5 years later) without additional taxes and/or penalties. This assuming I’m not disabled, planning to buy a home, or deceased.

    Am I missing something? Is my interpretation of the strategy wrong? If so, how can I withdraw money from the Roth account at age 40 without additional taxes and/or penalties as described in the article?

    • Karen
      June 24, 2019 at 7:55 pm

      There’s a distinction between your Roth Contributions (which the trad-IRA to roth-IRA conversions are considered to be after the 5-yr waiting period) and the earnings on the account, which doesn’t seem to be explained well on the Fidelity site. You can take out your contributions to a roth-IRA at ANY time after the account has been established for 5 years– it doesn’t matter your age. You can withdraw any of the money in the roth-IRA account, including the earnings, after 5 years AND age 59.5. BUT, to reiterate, you can take out your contributions (and your conversions after the $ has been in the roth for 5 years– since at that point it’s considered an “already-taxed” contribution) any time after the account has been open for 5 years.

  100. DJ
    May 16, 2018 at 5:39 pm

    Think a taxable account is better then a Roth now that you pay zero capital gains if your income is under ~77k?

  101. Daniel Johnson
    June 8, 2018 at 2:31 pm

    This is such an amazing article. Thank you for putting this together you making financial freedom so much more achievable.

  102. Roberto
    June 30, 2018 at 10:26 pm

    Question for you all

    I have an employer 401k, with some roth contributions.
    I am already past the 5 year period on the roth contributions within the 401k.
    I was told I am not allowed to withdraw anything until I leave employer.

    I am not able to understand if when I leave, I can just take all of the roth funds from the 401k (i.e. roll it to myself)
    or if I now have to roll it to IRA Roth (and then wait another 5 years)

    Did anyone go through this?

    • Roberta J Rosenblum
      September 8, 2018 at 1:42 am

      Roberto,. Open a Roth IRA (at Vanguard or similar with $100 or whatever the minimum is). If you leave your employer, you can rollover your Roth 401k into the Vanguard Roth IRA. As long as that Vanguard ITA has been open for at least five years, you can withdraw your contributions tax free.

  103. Michael
    July 13, 2018 at 7:03 pm

    Question: If I earn $120,000 for 5 years while contributing to my 401k, then get laid off, convert 401k to Roth IRA, what is my current income tax if I was to do an early withdrawal? I currently make no money. Is it the income bracket I was in when making the money? Or my income bracket currently (or for the last financial year)? I’m trying to see if I get laid off, would that be a good time (no income) to do an early withdrawal and just take the 10% penalty.

    • Karen
      June 24, 2019 at 8:01 pm

      First, I’m not sure you can rollover a trad-401k to a roth-IRA directly, or if you have to roll it over into a trad-IRA (which would not be taxable if done correctly) first and then convert it to a roth-IRA. That said, any conversion from a trad-IRA to a roth-IRA will be considered income in the year of the conversion and is taxed according to your total taxable income that year. What you earned in previous years when you made the original contributions has absolutely no bearing on the tax rate you pay when you do the conversion.

  104. Chris
    July 25, 2018 at 4:57 pm

    I’m looking for someone to validate my substantiation of a Roth Conversion Method to Avoid Additional Tax on Early Distributions from IRAs and Certain Other Retirement Plans–it looked nicer in the format I had it in, in PDF but this will do.

    I put it together because while there are plenty of sites that espouse that the Roth Conversion can be done–I’ve found few that completely go through the applicable IRS rules and point out the explicit versus inferred traceability.

    I’ve also seen where brokerages–apparently Fidelity and Schwab err on the side of caution, when there is an implied “loophole” probably for liability purposes. Never having gone through it yet with one of them, I would be interested to know if the way that they report either the conversion or the distribution on IRS forms makes it difficult to execute a Roth Conversion Ladder.


    There is a 10% additional tax on early distributions from IRAs and qualified retirement plans. This tax is in addition to the regular income tax that results from including the distribution in income. There are numerous sources on the Internet that assert that additional tax is unavoidable on early distributions from a traditional IRA and qualified retirement accounts such as a 401(k), but it is avoidable with a Roth conversion or through rollover contribution to a Roth from these accounts, respectively. However, these sources are light on logical basis for what some might call a tax “loophole,” and I’m one of those people that doesn’t assume that it’s valid to do something just because lots of others have, especially as pertains to taxes and the IRS. I also prefer traceability back to sources that are responsible for implementation of policy. This paper attempts to validate and provide traceability for this Roth conversion method.

    Disclaimer: This paper was done to support my own tax decisions. I am not a tax professional, nor do I have a license to provide tax advice.

    IRS Publication 590-B (Distributions from Individual Retirement Arrangements (IRAs) identifies the rules that substantiate this assertion. By its nature, this reference is intended to identify what you “may” need to do and what you “must” do, not what you don’t have to do. Since it is not obligated to provide closed form logic, some inferences must be made.

    Age 59½ Rule
    Generally, if you are under age 59½, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59½ are called early distributions.

    The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.


    Restriction #1: You must convert funds from a traditional IRA or rollover a tax-deferred qualified retirement plan to a Roth.

    Note: No such “loophole” exists for a traditional IRA (as identified by the Age 59½ Rule). Similarly, it does not exist for a 401(k) (referencing the “Tax on early distributions” section of Although there are exceptions to both, for purposes of this paper these are assumed to not be applicable.

    Additional Tax on Early Distributions
    If you receive a distribution that isn’t a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.

    An early distribution from a Roth is not a qualified distribution ( which means that if certain restrictions are not met, the additional tax must be paid. It implies that if the restrictions are met, than the additional tax will not need to be paid.

    Distributions of conversion and certain rollover contributions within 5-year period.
    If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions.

    Restriction #2: You must wait 5 years from the first day of the tax year of the Roth conversion or rollover, otherwise you “may” have to pay it.

    You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount).

    Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.

    You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions.

    Note: It is implied by the first statement of this section that these rules necessitating payment of the additional tax are only applicable if it is within the 5-year period. Otherwise, there would be no need for a 5-year period or a separate section on “Distributions of conversion and certain rollover contributions within 5-year period” because these rules are redundant with those in the section on “Other early distributions.”

    A separate 5-year period applies to each conversion and rollover.

    The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and isn’t necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions? , earlier.

    For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2017, and makes a regular contribution for 2016 on the same date, the 5-year period for the conversion begins January 1, 2017, while the 5-year period for the regular contribution begins on January 1, 2016.

    Restriction #3: You must wait the 5-year period for each conversion or rollover contribution.

    Note: The example illustrates that only the 5-year period starting with the first day of the tax year that the conversion or rollover contribution actual occurs in matters for purposes of determining whether the additional tax applies.

    Other early distributions.
    Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that aren’t qualified distributions.

    Note: It is implied that distributions of conversion and certain rollover contributions outside of the 5-year period are not addressed within the section for “Other early distributions.” Otherwise there would be no need for a separate section for “Distributions of conversion and certain rollover contributions within 5-year period” since the only other thing addressed by this separate section is the 5-year period, which would be irrelevant if the conditions for the additional tax are the same within and beyond this period.

    Representing this as a Boolean logic expression:

    if (distribution is early)
    if (distribution is of conversion or certain rollover contributions)
    if (distribution is within 5-year period of conversion or rollover contribution)
    if (exception applies)
    You don’t have to pay additional tax on this distribution
    else /* exception doesn’t apply */
    You do have to pay additional tax on this distribution
    else /* distribution is outside of 5-year period */
    You don’t have to pay additional tax on this distribution
    else /* Other early distributions */
    if (exception applies)
    You don’t have to pay additional tax on this distribution
    else /* exception doesn’t apply */
    You do have to pay additional tax on this distribution

  105. julia
    August 15, 2018 at 3:22 pm

    Why is the Roth 401K worth less than the Traditional 401K at the start of this person’s retirement? Wouldn’t this person be contributing the same amount each year regardless if it’s a traditional or roth 401k?

    • Roberta J Rosenblum
      September 8, 2018 at 1:35 am

      Julia, I believe it’s because you paid taxes on the Roth and not on the Trad even though the account balances are equal.

    • Karen
      June 24, 2019 at 8:06 pm

      I believe the logic is that if you have x amount to invest for retirement in any given year, that full amount (x) can be invested in a trad-401k or trad-IRA. If you want to invest in a roth-IRA, the amount that actually gets invested has to be reduced by the amount of taxes you have to pay. So, if you’re paying 12% in tax, then you’re only left with 88% of x to actually contribute to the roth-IRA. It’s a way of comparing apples to apples, since you end up paying taxes on traditional accounts when you withdraw the money.

  106. Chris
    September 11, 2018 at 1:14 pm

    Hey Mad FIentist, not to gush but really awesome life changing stuff on this website and respective websites in your podcast and FI community in general. Quick question; for a Roth conversion, doesn’t the 59.5 age rule still apply? Was reading and I am able to discern where they discuss the distribution from a conversion, but don’t we also have to meet the age requirement? Heaps thanks!


  107. Jon
    September 26, 2018 at 11:37 am

    This is a great article… one thing extra though that would be interesting to include in the analysis is for those with 401k / 403b’s that dont have great investment options or have to hold company matched funds in stock or such that will have lower average returns than an index fund in your roth or taxable accounts.

  108. Joe
    October 17, 2018 at 6:47 am

    Awesome article! I’ve read it multiple times now! I do have one question though. You say “You can see that the Roth Conversion Ladder scenario (Scenario 2c) is slightly less than the other Traditional scenarios. This is because when converting money from the Traditional IRA to the Roth IRA, taxes are paid on the conversion so some money and earnings potential is being lost to the government every year.”.

    However, don’t you pay the tax separately (i.e. With outside funds, not out of funds within you IRA)? So in theory, shouldn’t the account value for option 2c be the same as 2b and 2a, you’ve just paid additional taxes with outside funds? I just want to make sure I’m not required to pay taxes out of my IRA account when I do the conversion, and in the process shrink that awesome tax saving vehicle! Thanks for all you do for the FI world!!!

  109. Max
    October 17, 2018 at 12:56 pm

    This article is part of my financial independence bible. I didn’t think that I’d have an opportunity to put most of this edumacation to work for a few years, but decided to take a mini-retirement and now I can. Plus, I was burnt out and really needed the break from the daily grind to regain my footing. My complete guide to how I organized personal finances to put it into action (using many of your insights for inspiration): Having low income is a mind-bending transition but I think it’s good practice for the real thing. Thanks for helping me change my lifestyle for the better!

  110. ken
    October 21, 2018 at 6:56 pm

    Thanks for the article. However, I am puzzled by the ladder strategy. According to other blog, the Roth IRA contribution can be withdrawn anytime without penalty or taxes, only the earnings are subject to penalty or even taxes unless certain criteria are met. So if We just leave the money in Traditional IRA until we need it, then convert it to Roth IRA (pay tax in the process) and withdraw it right away. It should maximize the withdraw (no early tax, no penalty, no withdraw tax). What do you think?

    • Karen
      June 24, 2019 at 8:09 pm

      A roth conversion isn’t considered a contribution for the purpose of withdrawing with penalty or taxes until after the converted money has been sitting in the roth-IRA for 5 years– hence the the 5-year ladder approach. This is the case even though you pay taxes on the money the year it’s converted.

  111. Jon
    October 23, 2018 at 12:26 am

    I found the blog recently and I’m a big fan so far! I haven’t seen this specific question answered yet in the archives/comments, so if you did, please just point me in the right direction.

    I’m about 50% towards reaching my FI number, so I’ve been spending most of my time focusing on the withdrawal phase. Before I heard about the Roth IRA Ladder, I was focusing alot on after tax, so my assets are about 1/3 each pre-tax, roth, and after tax.

    Now I’m trying to figure out how to get my money out while minimizing taxes. I’ve heard you mention paying no taxes ever, however I’m not following. I understand the Roth IRA conversion withdrawal with 0% (same as Roth Contributions), however I’m not understanding how the conversion from a 401k is a non-taxable event for amounts over the standard deduction of $24k (plus the child tax credit).

    I’m MFJ with 2 kids and think I’ll need about $70k of income (no judgement). I expect to be able to have ~10 years of conversions with 2 kids. Best I can figure that means I’ll pay $1,140 in taxes each conversion year (plus any non-qualified dividends while I draw down my taxable portfolio). That’s based on $5,140 in taxes minus the 2 child tax credits. Plus I’m not sure if my dividends / capital gains will push me into the 15% tax bracket for some amount of withdrawals.

    I know that’s not a huge amount of tax, but I just wanted to confirm, as it will slightly affect the FI number and drawdown rate.

  112. Amanda
    December 1, 2018 at 12:07 pm

    How does FICA affect these calculations?

    If you are FI, then you (I think) pay extra FICA tax, since you don’t have an employer picking up about half of it. So, do you consider the extra tax (~7%) you will be paying into FICA post-FI when making assumptions about higher and lower tax rates?

    • Karen
      June 24, 2019 at 8:15 pm

      It doesn’t.

      FICA is only paid on earned income, and is already paid on the income that is contributed to 401k plans and IRAs. While traditional contributions are tax-deferred, that’s income tax deferral; you still pay FICA in the year the money was earned.

      Distributions from retirement accounts and from taxable investments are not subject to FICA (unless you’re investing as a self-employment) because they’re not earned income. The extra FICA tax you’re thinking about is the self-employment tax (where you pay your employee half and the employer half) that would be required if you were earning income as a self-employed individual.

  113. Randy
    February 22, 2019 at 2:49 pm

    I read this post two years ago and it has totally influenced my thinking/saving/investing. I had struggled with how to tap my significant 401(k) early. When I started a new job two years ago, it was a no-brainer to move my 401(k) balance to a traditional IRA. At 44 years old, I now have a clear path for how I want to use 72(t) sometime in the next 4-5 years.
    However, I’d love to get your opinion and ideas on this additional item. My clear path is easy to see for me and my spouse to reach FIRE. But I also have three kids that will enter college ranging from 8-12 years from now and I want to help them through at least a four year public system. If I am taking SEPP, that will complicate the flexibility I have for showing income while applying for need-based financial aid. I know this is a controversial topic, but I’m wondering if you have thoughts on this. Many will say I shouldn’t manipulate when I take income for the purpose of financial aid. Too bad. I follow the laws when they are against me and I will follow the laws when they are for me.
    Obviously, I will be talking to a tax advisor soon, but thought this might be an interesting topic for you. Thanks!!

    • secondcor521
      October 30, 2019 at 5:24 pm


      I’m in a similar situation.

      You may want to consider building up a regular taxable account to live on during the years your kids are in college. Normally, a taxable account would count against you on FAFSA. However, there is something called a Simplified Needs Test – if you qualify, then your assets are completely ignored for FAFSA purposes.

      This requires a low AGI as well as some other criteria. If you’re living on a taxable account, you’ll have some capital gains. You can also do some small Roth conversions and/or SEPPs and still probably keep your AGI low enough, unless you live in a HCOL area. Although it may be hard for you with your kids spread several years apart.

      You might also consider delaying the SEPP until after your kids are nearly done with college.

      Remember that the tax years used for FAFSA purposes are two years before the actual college years. So for example, FAFSA-related aid this school year (2020/2021) is based on the 2018 tax returns. You have to plan ahead a bit.

      There are some more competitive schools that use something called CSS Profile, which is a completely separate aid process with different rules. All my kids are going to FAFSA schools, thankfully, so I’m not familiar with those rules. I do know that they differ materially from the FAFSA rules.

  114. Jeff
    February 22, 2019 at 8:00 pm

    Is a Simple IRA eligible for the Roth conversion ladder?

  115. Lisa
    February 28, 2019 at 5:33 pm

    If you just opt to take withdraw early and get hit with the penalty, .. you’ll still have to pay taxes on that withdrawal, right? Isn’t that a double hit? 10% Penalty and then 12%, 22% tax hit depending upon your bracket?

    • Karen
      June 24, 2019 at 8:17 pm

      Yes. You have to pay the normal income tax rates depending on your income bracket and then the 10% penalty.

  116. Nate Dirks
    March 1, 2019 at 9:24 am

    For someone just starting the FI journey in 2019 and at least 10 years until reaching 25X, what would you say to that person about the Roth conversion ladder even being available within the tax code at that time? It’d be a pretty big mistake to max out my Trad IRA and then not be able to convert that to Roth to use when I could just be maxing out Roth now.

  117. Cathy Ackerson
    March 23, 2019 at 3:07 pm

    I have a Roth IRA but the past couple of years, I could not contribute to Roth so I contributed after-tax dollars to a traditional IRA, so I’ve already paid taxes on all the contributions that went in for 2017 and 2018. I may be able to again utilize a Roth (my job situation may change this year as I’m in a commission type role). When should I convert to Roth? Now before April? Or should I wait until closer to retirement?

    • Karen
      June 24, 2019 at 8:24 pm

      If you find yourself in a favorable tax bracket for any given year, it’s generally a good opportunity to convert enough from your trad-IRA to a roth-IRA to keep you in that tax bracket. The longer a money has to sit in a roth-IRA where the earnings will never be taxed, the better.

      One HUGE caveat– if you get your health insurance through the healthcare marketplace, you need to be aware that making a roth conversion will increase your AGI which will likely reduce or possibly eliminate your subsidies which can be a significant issue given that they can be worth thousands of dollars. This is particularly painful if you’re getting subsidies and a conversion increases your AGI to over 400% of the federal poverty line (FPL) because you’ll end up falling over the subsidy-cliff and having to repay every single penny of the potentially thousands of dollars of subisidies.

  118. david
    April 6, 2019 at 9:32 am

    One common piece of advice given to career military personnel is to maximize Roth retirement investments (Roth IRA, and Roth TSP) due to the fact that they will usually received generous retirement pay. If anyone here has the mad fientist advice tailored for retired ( or soon to be retired) military personnel, please let me know.

  119. Sean
    April 15, 2019 at 5:09 pm

    What is not covered here is how your taxable income affects you in terms of medical/dental and social security tax. I am not doing the math to compare yet, but in simple terms if you look at the rules for medicare/medicade cost if you show now income you pay very little for it. If you show an income you pay for it in earnest or need to get private medical which is very pricey depending on what you feel you need. Further, let’s say you made enough to get the max on social security (around 34k). If you were taking out an additional 66K to live on pretax and your family was living on 100K (a lot for most I know), you now have a tax rate on all that income for 100K. If it was roth you’d only be taxed on the 34K as it is all you’d need to report. Perhaps we need an analysis that includes these considerations? Does it change the game? If you make enough in retirement does the tax liability suggest roth again? Also, social security is calculated based on your 5 peak earning years I think. Doesn’t this suggest you want to do your conversions, if any to push up box 1 5x to maximize your social security check? Things to think on.

  120. Ibrain
    May 15, 2019 at 8:25 am

    All of this analysis are very valuable however it all goes to waste if your a non American working in the US who will move back to the original country. All taxation is different for an NRA. Could you please post something for us in this case and how this complicates things? Thanks

  121. Ac
    May 22, 2019 at 4:55 pm

    I was so glad to stumble across this article – I always felt that two of the biggest myths in personal finance were 1) you should never borrow from your 401k; and 2) you should never withdraw from your 401k. I’ve been seeing more articles realizing that in many cases borrowing is ok now (or at least not always the bad decision they used to create as a sound byte, but this is the first I’ve seen (and that ran the numbers!) showing that just paying the penalty is not the end of humanity. I’ve always said, with the company match, it’s like a tax deferred gift – and even though no one loves a 10% penalty, in a way its kind of house money you are paying with and not quite as bad as it seems…

  122. Ty
    July 4, 2019 at 8:19 pm

    Hey Mad Fientist! Great article. Thoroughly enjoy your stuff and how you take the time to use some slick graphics.

    Big followup question: in your Roth Conversion Ladder graphic, it has a man retiring, converting funds over, but unable to access those funds for 5 years, doing the same each year… so what is he living off of for those 5 years since he just left his job?

    Thank you for your help!

    • secondcor521
      October 30, 2019 at 5:29 pm

      @Ty, that’s listed in the article as one of the cons of a Roth ladder.

      He can live off regular savings, a taxable account, side gigs, or Roth contributions without paying any tax penalties. He would have to pay capital gains taxes on any gains realized from the taxable account, and ordinary income taxes (and possibly FICA / self employment taxes) on the side gig income.

      It’d be smart of the person to have five years of accessible living expenses figured out before he leaves his job. ;-)

  123. CR
    August 17, 2019 at 10:31 am

    Thanks so much for the article! What would be great to hear is how a pension will change the analysis, using a TSP vs IRA, and RMD considerations. Together we earn $230k/yr. and have 3 hrs until we FIRE at ages 48 and 50. A few years back we split our contributions and I go ROTH TSP and he goes traditional TSP – our thinking was to hedge the uncertainty of future tax rates and access to funds without penalty in the early retirement years before FERS kicks in at ages 60 and 62 and SS at 62, which together we estimate will be roughly $48k-62k/yr depending upon how good SS holds up. Minus the $24k standard married deduction equals $24k-38k taxable income for just those 2 income sources once we reach that age. What I don’t know how to figure is we have about $80k in private REITs, and about $550k of our TSP is traditional (vs $115k in ROTH TSP). I assume the $160k of Monies we have in muni bonds and ROTH IRAs will be able to be drawn out tax free, correct? Should we keep splitting our contributions – mine to ROTH and his to traditional? In our early years before age 60 should we spend traditional with penalty and save the TSP ROTH and ROTH IRA tax benefit until later? (We originally planned to spend them first because there’s no penalty). How do we figure how RMDs will affect our future taxes? We’re trying to do the analysis but are stuck. Thanks for your ideas!

  124. Kelly
    August 30, 2019 at 7:39 pm

    I would love to see the totals equalized to account for the fact that a 401k dollar is worth less due to taxes. Shown below with the 401k at 85% of value.
    Scenario 1 – Taxable $469,799 $469,799
    Scenario 2a – Traditional (Penalty) $672,827 $571901
    Scenario 2b – Traditional (SEPP) $706,892 $600,858
    Scenario 2c – Traditional (Ladder) $691,465 $587,745
    Scenario 3 – Roth $504,620 $504,620

  125. Brett
    September 25, 2019 at 8:26 pm

    How is this Roth conversion procedure impacted by someone who has no Traditional IRA because their household income is higher than the range that (in 2019) qualifies for a tax deduction on a Traditional IRA contribution? (Above $123,000)
    Or how is this Roth conversion impacted if you’re converting a Traditional IRA that ultimately was post-tax, due to aforementioned?

    • secondcor521
      October 30, 2019 at 5:37 pm


      If a person has that high of an income, they probably have access to a workplace retirement savings account (such as a 401(k) or similar). Those retirement accounts can usually be rolled over without tax consequences into a traditional IRA when the employee separates from service. Thus the person can end up with a traditional IRA shortly after they leave their job.

      If a person has made post-tax contributions to their traditional IRA and they do a Roth conversion, they will only pay ordinary income tax on the pro-rated amount of their contribution that was before-tax; the after-tax portion can be moved over without any income taxes due. This pro-rata calculation is done in Part I of Form 8606 – see lines 11 and 17 in particular (line numbers refer to 2018 version of Form 8606). So a person like you’re talking about would have a proportionately smaller tax bill due at the time of conversion.

      The converted amount would be removable without penalty five tax years later, just like a regular Roth conversion ladder from a completely pre-tax traditional IRA.

      • John
        December 26, 2019 at 1:47 pm

        in addition to what you have said, the person will have to pay penalty on the earnings while the money was sitting in Roth IRA.

  126. dizzy
    November 7, 2019 at 7:45 pm

    Very interesting! This is getting closer to the info I’m looking for.
    I am just getting started investing (lived paycheck to paycheck my whole life until recently); I changed careers and finally have the chance to start saving.

    The one thing I’m having a hard time to understand is how having a student loan figures in- I have PAYE and it’s looking like it still makes sense to invest anything other than the minimum required payment now (assuming I will be at $40k income this year, pretax and pre-any contributions, subtracting healthcare bc I’m self-employed, etc). If I do Roth-conversion ladder will it still make sense (to use it to pay the taxes on amount that is forgiven, which will be 6 figures). That will be counted as income so withdrawing it that year it would be taxed? Or not, I get confused here. Right now I have it set as Roth, but have the ability to change it to trad IRA or a SEP-IRA. Still having a hard time to understand best way, maybe I just need to captain crunch all the numbers….

  127. Christopher B
    November 18, 2019 at 3:45 pm

    In 2018 did the Tax Cuts and Jobs Act (Pub. L. No. 115-97) block the IRA conversion ladder?


    Can I recharacterize a rollover or conversion to a Roth IRA?
    Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

  128. Ayla
    December 18, 2019 at 12:19 pm

    This is a great article thanks for publishing. The is one thing I don’t quite understand is the hypothetical situation. Here’s the part of the article that I’m having a hard time with:
    “Once she retires, she won’t need to access the money in her retirement accounts from age 40 to 45 but she’s going to need to withdraw $9,000 of her money per year from the age of 45 through to when she turns 60.”

    What does she do for money from 40-45 are we assuming she gets a part time gig or has some other stash of money that isn’t accounted for here? Then from 45-60 besides the $9K she takes out, what other sources of money is she using to pay for food and housing? I assume she has a very low cost lifestyle but $9k seems pretty extreme.

    • JR
      April 16, 2020 at 10:50 am

      Hi Ayla,

      I read through this article and have the same question as you. Not to take anything away from this article, because it’s awesome, but I don’t understand what this woman will do financially from the age of 40 to 45. Her only two options are taking money from her Roth IRA or her non-retirement investment account.

      I also feel that this scenario is misleading in that the author states the woman can contribute up to $13,500 per year to her Roth IRA. That’s not possible. In 2019 the max amount allowed is $6,000/annually. So, by the age of 40 this woman will have $60,000 accessible in her Roth IRA; she can only access her contributions at that age without penalty. She’ll have $12,000 to live on annually…

      However, if during her 10-year employment she contributed $13,500 annually to a non-retirement investment account, she’d have nearly $183,000 accumulated by the age of 40, assuming a 6% ROI and dollar cost averaging through monthly investments. She’d also have access to all this money whenever she wants since there’s no minimum age requirement. If she only pulls her non-retirement account from 40-45, then she could withdraw roughly $36,600 per year ($183,000/5 years) without incurring any taxes.
      Maybe I’m missing something?

  129. John
    December 26, 2019 at 1:44 pm


    Great Article, I small suggestion though.

    In the article above, under section “Roth Conversion Ladder”

    Please include a line that One will have to pay penalty for the earnings for the amount sitting for 5 years in the Roth IRA.

  130. Jeff D
    January 28, 2020 at 2:17 pm

    Question with the Roth Conversion Ladder. Can you open a Roth account with a small amount of money 5 years before you plan to start the Roth conversion ladder? Will the conversion ladder money be immediately available for use? Or does each yearly converted money amount have to sit in the account 5 years?
    Not that this matters for me, I am over 60 and I am doing a yearly conversion from 401K to a Roth account in the amount that keeps me just under the 12% tax bracket. As you would know, there is the window of opportunity for this before you collect social security and RMDs. The Roth account is the money I plan for my Daughter’s inheritance. Thus I have that invested more in a stock index with the longer time window; the time window should allow the 12% marginal rate of tax paid in the conversion to be recouped.
    Thanks for the interesting Blog

    • Jenny C
      February 1, 2020 at 9:31 am

      Jeff D,
      This is the exact question that I was just researching and hoping to ask the Mad Fientist about. But he doesn’t look to be replying to questions here. This is what I found after reading a bunch on comments from another article online from 2019. The comment referenced the Internal Revenue code Section 408A(d)(2)(B):

      “Distributions within non-exclusion period. A payment or distribution from a Roth IRA shall not be treated as a qualified distribution under subparagraph (A) if such payment or distribution is made within the 5-taxable year period beginning with the first taxable year for which the individual made a contribution to “a” Roth IRA ( or such individual’s spouse made a contribution to a Roth IRA) established for such individual.”

      The comment continues and says that “Multiple legal sources council that the use of “a” instead of THE indicates the clock starts with the initial funding of ANY Roth IRA account, not the opening/funding of EACH account. There are not multiple timers.”

      For me personally, I have had a ROTH account open for many years now, so was hoping that any conversions I make for 2020 and ongoing would be accessible prior to the 5-year waiting period of the newly converted money. Looks like I’ll be having to check out the IRS Code to confirm.

      • crash746069
        April 19, 2022 at 7:28 am

        There are two separate 5-year rules for Roth IRAs. Even if you have had the Roth account for decades, early withdrawals of conversions are still subject to the 10% penalty if the conversion occurred less than five years ago. See the instructions for Form 5329, especially the part about recapture of Roth conversions.

  131. Efren
    March 31, 2020 at 7:03 pm

    Over the last decade, I have contributed after tax to traditional IRA. Now I want to convert it to Roth IRA. is appreciation considered capital gains or income since I already paid tax on the contribution. If it is so, can I use capital loss from other taxable account against the capital gains from the conversion. thank you

  132. JR
    April 15, 2020 at 11:42 am

    First, this article is awesome! There’s tons of helpful information and it’s great to see the pros and cons of different options. However, I think a very important detail may have been omitted in the Comparison Scenario and it might lead some people down the wrong path. To recap:

    “Imagine a 30-year-old woman who plans to retire when she turns 40. Once she retires, she won’t need to access the money in her retirement accounts from age 40 to 45”

    If she doesn’t need access to her retirement accounts until the age of 45 then then what income will this woman live on from the age of 40 to 45? The only possible answers are either i) Roth IRA contributions (a retirement account) or ii) contributions and/or investment returns from a non-retirement account. As of 2019, the max contribution someone can make to a Roth IRA is $6,000/annually. I’m not sure why the author notes this woman could contribute $13,500/annually to her Roth, that’s more than double the allowed amount. So, the real scenario is this: If she maxes out her Roth contributions each year from the age of 30-40, she’ll have $60,000, not $186,522, of accessible funds to draw from without penalty (i.e., contributions only) by the age of 40. It’s very important to note that she’ll only have access to the Roth contributions without penalty before the age of 59.5. However, there is no limit on the amount of money someone can contribute to a non-retirement investment account. So, assuming this woman invests $13,500/annually to a non-retirement account, she’ll have ($13,500 * 10) = $135,000 + investment returns, which we’ll assume to be 6% annually during this woman’s 10-year employment, for a total of $182,782 of accessible funds at the age of 40. Assuming her only income is from this account, she can withdraw up to $39,375 per year from this account per without paying a dime on long-term capital gains taxes, with no penalties.

    Maybe I’m missing something here, but I’d love some feedback on this! Thanks.

  133. Connor
    June 16, 2020 at 7:41 pm

    Good write-up on early withdrawal options, including pros and cons.

    There’s a problem in your analysis reviewing Traditional vs Roth 401K investment options which is skewing the results. The assumption that the woman has $18,000 of pre-tax money to contribute to an account every year during her career is setting up your analysis to grossly favor the 401K without good reason. Contribution limits are the same for both account options. If you review $18K in contributions to BOTH 401K and Roth 401K accounts, your results would be vastly different. The woman’s taxable income and net income would vary depending on which option is chosen, however these factors aren’t part of any analysis in the article, only retirement savings is. The article also doesn’t mention option of withdrawing contributions made to a Roth before 59.5, which can be made penalty-free and immediately.

  134. Logan
    June 24, 2020 at 8:47 am

    Great article! Would you still recommend this in my situation:

    26yo engineer making $91k/yr, working on professional engineering license and planning to start company sponsored master’s degree next year.

    Wife (26yo) is in her final year of medical school (no debt due to immigration status and parents paying due to lack of gov financial assistance). Will do 3-9 years of residency/cardiology fellowships at ~$50-60k/yr. Once she’s a cardiologist at $300-400+k/yr (or possibly settle as hospitalist at ~$180k/yr with only 3 yrs residency), we’ll be in extremely high tax brackets with limited Roth potential. We would mainly utilize Pre-Tax contributions here.

    Right now, I’m maxing a family HSA ($7100), Roth 401k, Roth IRA, and trying to max a Megabackdoor Roth IRA (maxing or close to maxing paycheck iving off $50k taxable investments). Since I was unemployed from a previous job for a few months due to COVID (currently battling for unemployment insurance) my Pre-Tax income this year will be about $70k, with very little, if not anything in the 22% tax bracket (due to bulked charity donations, education tax credits, HSA, health insurance premiums, and tax loss harvesting).

    I’m also paying up to 5% Mississippi state tax but our goal is to move back to Tennessee after medical training where there is currently no state income tax.

    Should I use Pre-Tax contributions for any money in the 22%+ bracket or keep doing Roth contributions for everything? I’d like to retire ASAP but we will likely do lots of Christian missionary work in the future and a high income will be very supportive of this. As such, I don’t know when we’d actually retire; if this happens late the Roth conversion ladder might not be so beneficial.

  135. ThePoorEngineer
    September 29, 2020 at 11:57 pm

    Lots of useful info. Thank you. I m so late to the game. Got laid off this year and startrd a nee job. Can i roll over my 401k from previous employer to a traditional 401k? I fall under 24% tax bracket.

  136. Rugy
    October 11, 2020 at 3:12 pm

    Would the standard deduction still apply on 72(t) Substantially Equal Periodic Payments (SEPP) income? So that as long as SEPP payments are less that the standard deduction the SEPP payments would technically be tax free?

    • Charon
      August 17, 2021 at 12:22 pm

      If this is your only income, then yes. But you’d then have to be living on a taxable account with no capital gains, or on a Roth. And the point of this post is, don’t do that.

  137. Rugy
    October 11, 2020 at 3:15 pm

    If I am married, can I still do the Roth conversion ladder by filing Married Filing Separately? I want to retire early, but I feel my spouse will want to keep working. If my spouse keeps working and we file jointly, I will not be able to convert my IRA to Roth status tax free, as my spouse’s income will be above the standard deduction.

    • Charon
      August 17, 2021 at 12:20 pm

      Keep in mind that this will raise the taxes paid by your spouse (because their tax brackets will be shifted down). And you’ll be limited to very small conversion amounts, to stay in the 0% bracket. And your spouse will not be able to contribute to a Roth IRA (married filing separately has awful rules for Roth contributions).

      So actually crunch the numbers before committing to this strategy. I suspect it does not make sense.

  138. nice Joy
    October 26, 2020 at 10:25 pm

    Using the care act I can get out 180000 without the 10% penalty. My tax bracket is 22 %. So I will be paying around 35000 in tax for over 3 years. does it make sense ?. I am 44 now. planning to retire at 55 or at least go part-time at that time. when I retire I can keep my tax bracket at 15%. at age 55. Any recommendations?

  139. Jo
    November 9, 2020 at 8:39 am

    I may have missed it but what about the rule of 55 for use of your current employer 401k? If you leave or are let go from your job after age 55 you can withdrawal from that account w/o 10%penalty according to current tax law. This does not apply to rolled or other investment accounts. While I plan to have 5 year of lining expenses plus an emergency fund at time of fire. This is one of my back-up plans if needing money prior to 59.5.

    The tax code has a blurb as well. Thoughts? This is my back-up to Roth conversion.

  140. Lu Halverson
    November 28, 2020 at 12:10 pm

    Can I do the roth conversion ladder with money from a tiaa-cref aftertax account?

    • Charon
      August 17, 2021 at 12:11 pm

      You can Roth convert a traditional IRA to a Roth IRA. It doesn’t matter where the money is held. But if you have a 403(b) or something like that, you’ll need to roll it over to an IRA before converting.

  141. Brian
    February 3, 2021 at 1:38 pm

    Let’s say I have a bunch of $ in my taxable brokerage account… I had the pleasure of a 0% LTCG bracket during working years and retirement. I was smart and picked an ETF with both qualified dividends and a low turn-over ratio. I also dutifully did tax gain harvesting to hedge my bets against a higher LTCG bracket or changes in the tax law. I was taxed on contributions, but wouldn’t I be ahead on my distributions in early retirement? Would this almost be better than a Roth IRA since I have full control over how/when I use all of the $$?

  142. Sandi
    February 25, 2021 at 9:49 pm

    There’s also another possibility for early penalty free withdrawals from retirement accounts. If someone else mentioned it, I didn’t see it because there are so many comments. If you had a 401k at your last place of employment, you can make whatever withdrawals you want from it, and only it, penalty free before 59 1/2, as long as you don’t get another job!
    This method was the only practical way for us, and it was our early-retirement saver.

    • Christine
      October 19, 2021 at 9:23 am

      As long as you are at least 55 when you quit or retire and it only applies to the 401K or 403B from that employer so you’d want to roll over any funds from a previous employer if you also wanted to access those without a penalty tax. And you can get another job, just not with the same employer which would reactivate your plan.

  143. Will
    March 31, 2021 at 3:10 pm

    When you do the ROTH conversion can you access just the principle early, or the principal and the gains? (after 5 years)

    • Charon
      August 17, 2021 at 12:08 pm

      Principal only.

  144. Jason
    May 14, 2021 at 9:43 am

    @Sandi – I believe you are referring to “the rule of 55” which only applies if you are between 55 and 59.5 when you left your last job (I believe 50 to 59.5 for specific public safety positions like firefighters)……..

  145. Kara
    June 22, 2021 at 3:15 pm

    You look at these accounts in isolation but is there a way to figure out which combo of accounts could be optimal based on my retirement age? E.g. 80% in 401k and 20% taxable brokerage to retire at 40? Thanks

  146. Heather
    June 30, 2021 at 1:11 pm

    This is great information. I recently read that an annuity is another vehicle to avoid early withdrawals penalties. I haven’t found anything that runs the numbers. My thought is you’re probably better off paying the penalty rather than giving up control of your money and locking into low interest rates. Have you looked into the numbers on this option?

  147. Charon
    August 17, 2021 at 12:06 pm

    I realize I’m years late to the party, but Mad Fientist, I wanted to remind you of your own writing on the 72(t) option: “You must continue withdrawals, whether it makes sense to or not (which means you could be forced to sell when the markets are down).”

    You acknowledge that your model isn’t perfect because “it assumes consistent growth with no fluctuation year-to-year”, but then ignore that and conclude “it makes sense to set up SEPP because this exercise has shown that it is the most tax-efficient way of accessing retirement-account money early”.

    Your exercise explicitly ignores the biggest weakness of SEPP, which is that you can’t respond to market conditions (and thus can’t use any variable withdrawal strategy). You can’t use your exercise to conclude SEPP is better.

    To perhaps make this more obvious, note that a model like you’ve used will always conclude that a highly leveraged 100% stock portfolio is superior to any other asset allocation – because you’re ignoring that the market ever goes down.

  148. Scott
    October 7, 2021 at 1:26 pm

    You can get money out of your 401k even if your company does not allow it and avoid the 10% penalty. If you are married, you can have a lawyer create a Qualified Domestic Relations Order (QDRO). It is usually used to split assets in a separation or divorce, but you can do it without separation or divorce. I had all my 401k moved to my spouse. When she withdraws it from the account that was set up for her by Fidelity there is no 10% early withdrawal penalty. Of course you still have to pay income tax on it. I now have complete control of the money and invest in apartment deals. Real Estate makes money 5 ways: 1. creates passive income 2. the income (if done correctly) is tax free 3. Can create equity immediately if bought undervalued and rehab it 4. The asset value can be increased by running it correctly (apartments are valued like a business, not based on comps) 5. The loan balance is being paid down by the income from the rents.

  149. Justin M
    October 19, 2021 at 11:16 am

    Hello MF,

    This was a great culmination of strategies regarding early retirement. I learned several good things; will give me confidence to go into 401k heavier to not be burdened waiting for 59.5. You can also add the option about 55 year old withdrawals from current employers 401k option if you update.

    My wife and I can live off the money necessary to stay in the 12% tax bracket. It’s close some years but I see it improving in coming years (ie house is purchased, newer cars purchased, etc). I came to the conclusion recently towards end of each tax year rather than paying 22% income tax on say the last 5K I make, it might as well go into 401K. Even if next year I needed access to the 5K I could get it at the price I paid as long as I am in the 12% tax bracket, even if I don’t qualify for hardship. Too avoid market fluctuations a capital preservation account may be used in most 401k as a safe savings account.

    Thanks again

  150. Brittany
    May 26, 2022 at 9:27 pm

    Looking for guidance. This article was very educational, thank you.

    I’ll be honest I don’t know my tax bracket. File single (no kids). Lost corp job during COVID, managed to work part time. Make only $25-$30k annually.

    I have a traditional 401k from pervious corp job. It’s about $37k.

    I thinking of just taking it out now with penalty to help me out financially.

    Curious if this would impact my tax bracket in future or later contributing back into a 401k.

    Open to feedback. Thanks!

  151. Alex
    March 21, 2023 at 12:06 pm

    I am curious of the details on paying taxes for these conversions. Can you share details on your or another person’s experience? I found that when I converted money late in the calendar year (December), and paid the IRS from my checking account at the same time (December), my tax return showed a small Failure to Pay Penalty. Is this because the IRS wants me to make Quarterly Estimated Payments, even though I didn’t withdraw funds until December? If anyone has gone through the process and would be willing to share their experiences, either the same or different, that would be much appreciated!

  152. Ken
    March 31, 2023 at 3:03 am

    How do these Roth conversions work in practice as it relates to actually filing taxes when it’s time to pull out? In our case we had 2 years where we had no income from employment, so I filled up most of the standard deduction with IRA>Roth conversions. When I pull the funds out after 5 years what do I need to do with my tax return for that year so that I don’t pay taxes or early penalty since we’re far from retirement age? Or will my broker automatically know that the converted funds have sat for 5+ years and therefore need not be taxed/penalized?

  153. K
    October 19, 2023 at 5:56 pm

    Hi! Great post and very helpful. My question for your scenario analysis is the amount the Roth 401K can invest vs the pre-tax (standard). Why did you only allocate $13,500 for Roth as maximum limits are the same in both options. I understand the roth has to pay tax, but ultimately the same amount goes in if you are maxing, right? Apologizes if I am missing something that is obvious.

  154. NoName
    November 4, 2023 at 3:16 pm

    There is mistake in the model with the different scenarios that has a HUGE impact on the results.

    The model assumes the same withdrawal amount from both Traditional and Roth accounts. Traditional scenarios have to withdraw MORE to end up with $9000 since they’ll have to pay taxes on withdrawals.

    In effect the Traditional scenarios are cheating by being more frugal.

  155. John
    February 10, 2024 at 12:26 pm

    Two significant advantages of the Roth IRA Conversion Ladder over the SEPP approach that focus on tax efficiency and investment growth potential: Specifically, the ability to pay conversion taxes from outside the retirement account preserves the full amount for growth within the Roth IRA. Additionally, any growth on the converted amount in the Roth IRA grows tax-free and can be withdrawn tax-free in retirement, enhancing the tax efficiency and growth potential of retirement savings.

  156. Sunal Mittal
    June 2, 2024 at 12:43 pm

    Hi Mad F, I have a very basic question that came up from the initial part of your blog. When you say convert 401k money to Roth IRA and then withdraw in 5 years, I still have to be 59.5 years old to withdraw the earnings part right? And I assume I can withdraw only the contributions at any point without 5 year or 59.5 yr age restrictions.

Leave a Reply

Your email address will not be published. Required fields are marked *