The 5 year rule with Roth Ira

You know those people on the internet that do FIRE, which means Financial Independence Retire Early ( well this one of the rules that those people use in order to retire early an avoid a 10% penalty and crazy taxes )

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1. Roth IRA Limitations
– Roth is limited to $6000 a year in contributions
– This means in order to retire it’s going to take a while
– And the only way to take that money out tax-free ( gains ) is going to be through a payment schedule ( also known as a SEPP plan )

However, you can use the Conversion to Hack this:
– If my goal is to retire In let’s say 20 years with $1,000,000 by invest hopefully a minimum of 50% of my income
– I would have to invest almost $1454
– This means with the Roth i would be limited to much

However, theirs is a solution:
– I cant max out my Roth ira
– And then invest the rest of the money into a 401k and then if I have money put into a taxable account ( but again the goal is to maximize tax-free growth and gains over a long period of time )

The Problem:
– If I take that money out of the 401k before 59 I will have to pay a penalty of 10% plus pay taxes
– So here is where the Conversion Ladder Comes into play
– Once I’m done working at that employer ( I can convert my 401k into a traditional iRa tax-free penalty-free ) – then I convert some of that money into a Roth ira and pay the taxes but let it grow tax-free

But: if I take out before 5 years, you’ll pay a penalty of 10% plus taxes on gains

2. SO here is the Strategy
– Let’s say I have a $1M that I moved into my Traditional Ira after i left my employer or while being there, depending on their policies obviously
– Quick math shows that I put in 390k(19,500 a year) over 20 years and I have gains of 610k ( which means if I get taxed on the income tax rate, taking that much money out means I will be taxed at the max, and I probably don’t have 30% of that money lying around to pay without having to sell some investments )
– SO this best iDea is to Role it over slowly

Here is How:
– I don’t know about you, but I only need 48k to live on an annual basis
– This means I can take out rollover 48k a year over the next 20 years potentially
– And remember you have to wait 5 years after your roll over it to roth to actually use it, each time you make roll over an amount, they all have a 5-year clock

3. Would I do this
– Honestly, it’s a big sacrifice to pay that much money in taxes every year
– But my mom focus while working towards in those 20 years of investing for retirement
– Would be also making sure my house is paid off, and my car is paid for in cash

So that way,
– I have a lot of extra money to put towards the taxes no problem
– And still enjoy my quality of life

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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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