Stocks — Part XX: Early Retirement Withdrawal Strategies and Roth Conversion Ladders from a Mad Fientist


Albert Einstein in fine form

I like smart people.

People who can make me sit back and think, Mmmm. I never thought of that. Or I never thought of that in quite that way.

In most fields where I have a lay interest, physics or anthropology or evolution or psychology for example, this is not all that hard to do. My knowledge level is modest and my learning curve in the early stages.

With investing, not so much.

I’ve been working thru my understanding of money, how to think about it and how to use it for decades. You’d be hard pressed to think of a mistake I haven’t made. When I read the arguments against the validity of index investing, for instance, it is my own voice I hear in my head.

So it is not often these days I find a writer who truly expands my financial horizons. Someone so clear and insightful that when we disagree I find myself re-evaluating my thinking. But what a thrill when I do.

If you are a regular here, you may well already be familiar with The Mad Fientist. So impressed have I been, that I’ve fallen into the habit of routinely referring to his ideas and linking to his posts. I have even on occasion, and it is hard to fully express how rare this is for me, submitted my draft posts to him for peer review.

The most notable of these was my rant: Should you avoid your company’s 401k plan?

Offended deeply by the egregious fees many 401k plans have begun to charge, I dearly wanted to be able to tell you to simply skip these plans. Doing so would have appealed to my sense of justice and my appreciation of simplicity. But the facts lead to a different conclusion and at my request in Addendum I MF laid out the case for the value 401k plans provide even with their ugly fees. He was, of course, correct.

In many ways, that addendum was the precursor to this Guest Post.

Some of the more frequent questions I’ve been getting of late relate to how best, exactly, to begin pulling the 4% once retirement is reached. A major concern, especially for those retiring well before age 59.5, is how to access all those tax advantaged accounts without penalty. MF has it figured out and shares it right now, right here.

(I‘ll also be writing have written more on Pulling the 4% in the future.)

If you are not already a MF reader, consider this a taste. For those serious about investing, my guess is you’ll shortly be as big a fan as I.

And if as you read his stuff you find an idea or two that conflicts with my own, it just might be possible he is the one who is right.

So now…

From the Mad Fientist:


Taxable vs. Tax-Advantaged

For investors, there is a recurring debate over whether to invest in taxable accounts or tax-advantaged accounts and how much to allocate between the two.

Taxable accounts are great because you can access your money at any time and you don’t have to worry about the government charging you any fees to do so.

Tax-advantaged accounts, on the other hand, allow you to reduce your taxes, thereby allowing you to invest more, but there are rules that govern how you access your money (for more info on the various types of “buckets”, check out Jim’s excellent post here).

Obviously, if you plan on retiring early, you’ll need to have access to a certain amount of money prior to standard retirement age so the debate is particularly heated within early retirement circles.

I’d say though, that not only is there a clear winner in this debate, it is even clearer for those aspiring to retire early. Winner: Tax-advantaged.

Tax-Advantaged Accounts

The main reason tax-advantaged accounts are usually best is because they allow you to put more of your money to work for longer. By investing the money you save on income tax, you can dramatically increase your savings rate and build up your FU money quicker.

Over on my site, I wrote an article titled Retire Even Earlier Without Earning More or Spending Less and in that post, I compared two different scenarios (see graph from the post below).

In the first scenario, a person who starts with nothing, makes $60K per year, spends $16,800 per year ($1,400 per month) and invests the rest in a taxable account is able to retire in just under 11 years (assuming a 5% real rate of return).

In the second scenario, I used exactly the same numbers but rather than only invest in taxable accounts, the person instead maxes out his tax-advantaged accounts (i.e. IRA, 401(k) with 5% employer match, and HSA) and invests what’s left in a taxable account.

This one minor, seemingly insignificant change results in shaving over two years off of his working career! That means, without earning any more, spending any less, or taking on any additional risk, he was able to reduce an already short working career by nearly 20%!

Retire Earlier Without Earning More or Spending Less

In this chart…

  • The dark green line represents the first scenario, using taxable accounts only.
  • The bars represent the second scenario, using maxed-out retirement accounts (the light green portion) and taxable accounts (the dark green portion).
  • The dashed red line represents how much he needs to be financially independent.

By utilizing his tax-advantaged accounts, he is able to reduce his taxable income from $60k to under $34k and therefore reduce his federal income tax burden by over $5,000 per year. As you can see in the graph, the additional tax savings that he is able to invest every year, when combined with the employer 5% 401(k) match, really adds up!

Now while it’s obviously beneficial to utilize tax-advantaged accounts, you may be wondering how you can access the money you contribute to the accounts before the standard 59.5 retirement age without being penalized.

Roth IRA Conversion Ladder

The best strategy, in my opinion, is to build a Roth IRA Conversion Ladder.

Here’s how it works…

Assume our example early retiree maxed out all of his tax-advantaged accounts during his working career and now has large amount of money in his 401(k) and Traditional IRA when he retires early at age 39.

Once he quits his job, the first step to accessing this money early is to move the 401(k) funds into his Traditional IRA. This step is the easy part and according to Vanguard, the rollover can be set up in about 20-30 minutes (although it may take 2-3 weeks to be processed).

After rolling over his 401(k) to his Traditional IRA, he can now start building a Roth conversion ladder.

The IRS rules state that you are able to convert a Traditional IRA to a Roth IRA, as long as you pay ordinary income tax on the conversion. It’s possible though, due to a low amount of income during early retirement, that he won’t have to pay any tax at all on the conversion. If the conversions are tax free, that means he will have avoided paying any tax on the money (tax-free contributions to 401(k)/Traditional IRA, tax-free growth within the retirement accounts, tax-free conversion from 401(k)/Traditional IRA to a Roth IRA, and tax-free distributions from the Roth)!

Assume for this scenario that he is confortable paying a few hundred dollars in tax each year for the conversion so he decides to convert $12,800 each year to cover over 75% of his $16,800 worth of annual expenses during early retirement.

Once the money has been converted into a Roth IRA, the converted amount is then available for withdrawal, tax and penalty free, five years after the conversion date (the earnings on those investments, however, need to remain invested until standard retirement age).

To build up his $12,800 conversion ladder, he moves $12,800 from his Traditional IRA to his Roth IRA every year. After the fifth year, he is then able to withdraw $12,800 per year from the account. Assuming he continues to convert $12,800 every year, he will be able to withdraw $12,800 from his Roth IRA, tax and penalty free, every year for the rest of his life.

It should be noted that since he won’t be able to access his retirement account money during the five years he is building up the conversion ladder, he’ll need enough in his taxable accounts to sustain himself for those years. Luckily, he ends up with over $100,000 in his taxable account (see the age 39 dark green taxable bar in the 1st chart) in this example scenario so he’ll be able to live off of that money until he is able to access the funds in his Roth IRA.

Here’s a graph to illustrate what the Roth IRA in this example would look like when building up the conversion ladder:

Roth IRA Conversion Ladder

Since you can build as big or as small of a conversion ladder as you want, you could potentially fund the majority of your early retirement using this strategy.

Substantially Equal Periodic Payments*

While the Roth IRA Conversion Ladder strategy is the method I plan on using to access my retirement account money before standard retirement age, there is another method that is worth mentioning.

It is possible to withdraw money from an IRA before standard retirement age, without penalty, by setting up a withdrawal schedule of Substantially Equal Periodic Payments (SEPP).

There are different ways you can calculate your periodic payments but the general idea is that you are able to withdraw a small percentage of your overall IRA balance every month, quarter, or year.

The downside to this strategy is that you would need to continue the periodic payments for five years or until you turn 59.5, whichever is later. If, for some reason, you stop your disbursements before the time restriction is up, you would be responsible for paying a 10% penalty on all of your periodic payments.

For more information on this strategy, check out the IRS FAQ on the topic.

I won’t be utilizing this method because 1) it seems much more complicated than the conversion ladder strategy and would likely make tax time even less fun than it already is, 2) I don’t want to be forced to withdraw money from my IRA in years when I don’t need to, and 3) the conversion ladder strategy is more than sufficient on its own to get early access to retirement-account money so there is no reason to complicate things with another method.


Obviously each person’s situation is unique so you should run your own numbers before making any changes to your contributions.

For many people though, utilizing tax-advantaged retirement accounts could allow you to supercharge your savings rate by drastically reducing the amount of money you pay in taxes.

Since many early retirees will likely have a low amount of earned income over a larger portion of their adult lives (i.e. the years after retiring), it is possible to access the money in tax-advantaged accounts early without paying any penalties or taxes at all, making this strategy particularly useful for future early retirees wanting to achieve financial independence sooner.

The Mad Fientist writes about financial independence, early retirement, tax avoidance, travel hacking, and geographical arbitrage over at

Still More

July 12, 2016 The Mad Fientist an expanding version of these concepts with some surprising new conclusions. You can check it out here:  How to Access Retirement Funds Early

Here are three more related Mad Fientist posts:

Traditional IRA vs. Roth IRA – The Best Choice for Early Retirement

 The Guinea Pig Update The Mad Fientist demonstrates theory put in to action

Roth IRA Horse Race How to supercharge your conversion ladder

jlcollinsnh again…

As I said at the very beginning, I like smart people. And the readers here certainly qualify as is reflected in both the calibre of their questions and of their answers. But I also know many blog readers tend to skip the comments section. That is a mistake around here:

*Addendum #1: Rule 72(t) and Substantially Equal Periodic Payments (SEPP)

In the comments below reader Lucas has provided several detailed responses to some questions posed. Taken together they almost are a post on this subject themselves. Well worth a read if you are considering this option.

Also in the comments below from reader arisadam74 is a link to this useful 72T calculator

Addendum #2: Roth Withdrawal Rules Summarized

Reader TLV also added to the SEPP conversation in the comments. In addition he/she provided a nice explanation of the Roth withdrawal rules ending with this:

So, to summarize:
*Tax free: contributions any time, conversions after 5 years from conversion, earnings after 5 years from opening Roth IRA AND over 59 1/2.
*10% tax: Conversions within 5 years from conversion
*Income tax: Earnings before 59 1/2 but due to 72(t), education, or medical; earnings after 59 1/2 but within 5 years of opening Roth IRA
*Income tax + 10%: Earnings before 59 1/2 and not meeting any other exceptions.

 Addendum #3: Retirement Withdrawal Strategies by my pal Darrow is an excellent overview of some of the options and he includes his personal approach.

Addendum #4: Curious as to what your taxes might look like in retirement? While everybody’s situation will vary, here are two excellent posts from my pal Jeremy detailing his own tax strategy as he travels the world as an early retiree: Never pay taxes again and his actual 2013 tax return.

Addendum #5: I find this is a very useful calculator for my personal tax planning: Taxcaster

Addendum #6: More on 401(k), 403(b), TSP, IRA and Roth



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Important Resources

  • Talent Stacker is a resource that I learned about through my work with Jonathan and Brad at ChooseFI, and first heard about Salesforce as a career option in an episode where they featured Bradley Rice on the Podcast. In that episode, Bradley shared how he reached FI quickly thanks to his huge paychecks and discipline in keeping his expenses low. Jonathan teamed up with Bradley to build Talent Stacker, and they have helped more than 1,000 students from all walks of life complete the program and land jobs like clockwork, earning double or even triple their old salaries using a Salesforce certification to break into a no-code tech career.
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  • Empower is a free tool to manage and evaluate your investments. With great visuals you can track your net worth, asset allocation, and portfolio performance, including costs. At a glance you'll see what's working and what you might want to change. Here's my full review.
  • Betterment is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
  • Tuft & Needle (T&N) helps me sleep at night. They are a very cool company with a great product. Here’s my review of what we are currently sleeping on: Our Walnut Frame and Mint Mattress.


  1. Nancy says

    Seems that the main argument is: “The main reason tax-advantaged accounts are usually best is because they allow you to put more of your money to work for longer. By investing the money you save on income tax, you can dramatically increase your savings rate….”

    Is this referring to the interest or dividends that are growing not-taxed?

    I think most people think about it like this: they have x amount of dollars to invest, and they can put it in a taxable account or in a tax-advantaged account. Or they can invest in a Roth IRA & pay taxes upfront or in a Trad IRA & not pay taxes upfront & get a tax break. They don’t anticipate the tax they’ll save by putting it in a tax-advantaged account (or the Trad IRA) and then add that amount to what they invest….

    So what does this mean: “By investing the money you save on income tax….”?


    • FloridaStache says

      Nancy, it simply means that by investing in tax advantaged accounts you are freeing up more of your available capital to invest- you are (theoretically) able to invest the money that you otherwise would have spent on taxes, adding to the total amount you can invest without increasing your earning or reducing your spending.

    • Mad Fientist says

      Hi Nancy,

      While the interest/dividends do grow tax free in tax-advantaged accounts, the statement you quoted is referring to the upfront tax savings (as FloridaStache correctly described).

      I understand when you say that many people don’t plan for the tax savings (and therefore don’t invest them) but here’s how it could work in real life…Say someone invests the x amount of dollars that you mentioned in their 401(k) but then at the end of the year, they get a bigger refund than they were expecting, thanks to their 401(k) contributions, so they then use that refund money to fund their IRA. Does that seem like a more realistic example?

      What I’m suggesting though, is that you actually work out the numbers, plan for the lower taxes, adjust your withholdings accordingly, and invest the tax savings every month so that more of your money is working for you right away.

      Hope that helps!

  2. Lucas says

    I have been advocating SEPP withdraws for a while because they seem to meet the same goal (and are better then you think they are), but this strategy also appears to work well, with some slight different trade offs. Will have to give it a thought for a bit.

    One clarification on the ROTH withdraws on conversions. You can withdraw the converted money Tax free at any point as long as the ACCOUNT has been open 5 years. However you owe a 10% penalty if you don’t wait 5 years, or setup a SEPP withdraw on your ROTH. But withdraws from a ROTH come from direct contributions first, then conversions, then earnings. So if you have enough direct contributions in their you would be able to directly pull from the ROTH you could bridge this gap, or you could always setup a SEPP withdraw (although the SEPP amount would be based on the starting balance of the IRA, so wouldn’t account for future conversions).

    So a couple clarifications on SEPP withdraws.
    1) they are a lot more than most people think. you can use up to 120% of the mid term AFR rate when doing your amortization calculations (November 120% mid term ARF = 1.98%) So using this calculator here:
    it shows that at 35 i can withdraw 3.22% penalty free. This is very close to the safe withdraw limit. This percentage is very likely to go up due to AFR rates increasing in the next 5 years. I agree with your tax reasoning, and this meets the same goals – the SEPP withdraws would be taxed at your “AVERAGE” not marginal rates (starting from $0 income), so would be majority tax free.

    2) If you have a SEPP going there is no restriction on contributing back to a different IRA. So if you earn money or don’t need as much you can just put that money into your Traditional or ROTH IRA (or 401k if you are employed or have your own business) . So this deals with your concern about “having” to pull money out. You have to pull it out, but you can put it right back in if you you don’t need itr. This makes for a very good early retirement cover your butt income! But still gives you the ability to earn varying amounts of money to offset income needs and not suffer additional taxes.

    3) I think a SEPP strategy for early retirement is going to be easier at tax time than dealing with tracking all your 5 year time windows for conversions (each year you have one more to track). You set it up once, and keep the same amount coming out each year. IRA or 401k contributions would be treated as they normally are.

    4) You setup a SEPP based on one IRA balance, so if you want a smaller SEPP amount all you have to do is transfer part of your IRAs into another IRA and setup the SEPP there. Of course this does get a little more complicated and i think is pretty much made a non necessity by #2.

    • Mad Fientist says

      Hey Lucas, thanks a lot for the additional SEPP info.

      I hope it didn’t seem like I was trashing the SEPP method in my post because I agree that it could be very useful for some people. I just think the Roth IRA conversion ladder strategy is a bit more flexible so that is the method that I plan to use personally.

      You provided some great information though so thanks for the additional details.

      • Lucas says

        No issue taken, It has given me some good things to think about. It does look like both could accomplish the goal of pulling money out of IRAs while your income is lower (resulting in no or very little taxes). The choice of either method might seems like it would primarily depend on your age and on how much non tax defered money you have available (or roth contributions) to sustain you while you build up the ladder method over the 5 years.

        I guess worst case a 10% withdraw penalty isn’t that bad as it is less then you saved in marginal taxes when you contributed to the 401k anyway.

    • Jeremy says

      Thanks Lucas, this is a great intro to the SEPPs. I hadn’t really studied them before, since we didn’t need to use them. Your explanation is going to help me answer questions I’ve been receiving from friends. Thank you

    • Ryan says

      You mention that if you have concerns about “having ” to pull money out, you can funnel any unused SEPP withdrawals right back in by investing it back into the Roth or Traditional IRA. Does that mean you would have had to have earned income for that year you are “funneling money back into the ira?” Would that also mean you are only able to funnel back in the yearly IRA contribution limit, currently $5,500?

      I have only a Roth 401k and a Roth IRA; my graph line would look similar to the above “…dark green line [that] represents the first scenario, using taxable accounts only,” I assume? Meaning I’d have to work those two extra years to reach financial independence, but then I wouldn’t have to monkey around with Roth Laddering and I could start withdrawing money right away and at possibly larger amounts as long as I stay below my overall contributions, correct?

      • Lucas says

        To answer your first question lets work though an example:

        1) you know how much you need to live on expense wise. Lets say 25k
        2) you have enough funds in Traditional IRAs to generate a SEPP withdraw of 25k (*Note this actually works great for covering only partial expenses as well, just using this as an example), so you start one.
        3) The 25k you take out with SEPP becomes income. This will show up in your AGI/MAGI income for tax purposes but is not counted as earned income.
        4) If you have no income outside of the SEPP you can not re-contribute back to an IRA/401k as there is no earned income (i consider this unlikely). If you had no earned income one year you can always save the money in a taxable account and contribute to an IRA/401k if you ever have any earned income. You are also allowed one conversion of SEPP withdraws from one of the higher calculation methods down to the Required Minimum Distribution calculation method. So if you found yourself needing far less money then you could do this (it would roughly half your SEPP withdraws). As long as you are not hiting a higher marginal tax rate (which you should have calculated when you set it up), i don’t see any risk here if you “don’t earn” any income.
        5) If you do have any earned income you can contribute to IRAs up to the limit of $5500 into your personal IRA ($11000 if you are married). IRA contributions reduce AGI, thereby reducing tax liability but not MAGI (which is used to qualify for multiple tax credits/etc).
        6) If you work for a company that has a 401k you can contribute up to $17500 (each person) into that. 401k contributions reduce both AGI and MAGI (better then just an IRA), although there is generally little to be concerned on with MAGI <$60k (single), or $90k married.
        7) If you have your own company that you are earning money under – you can have the company contribute up to $50k (per person) of profits directly into a 401k without having to pay any taxes (federal/state/social security/medicare). This money won't show up in your AGI or MAGI either. This is a key reason why people "form" their own company as with a married couple they can shelter 10% when starting to do the conversions then i don’t think this would make much sense because you would loose most of the tax benefits you had by contributing to the traditional IRA in the first place.

      • Lucas says

        looks like my post got cut off for size so here is the rest of my answer:

        8) so in this example if you can live on $25k, you can make up to $5k, $22.5k(17.5k + 5k), or $55k (50k+5k) (per person) ,depending on how you earn it and contributed back to a tax deferred account without paying any additional taxes.

        Second question about ROTHs
        1) I think you understand this, but I will make the point that if you are able to live on a lot less then you were earning during working years, then you have paid a lot more in taxes by utilizing a ROTH then you would have by going traditional route and this is why it will take longer. ROTH locks in taxes at Marginal rate while working, but Traditional IRA you only pay “AVERAGE RATE” while not working. For me this means i would pay ~20.75% on ROTHs, or a projected 1% if utilizing Traditional IRAs.
        2) If all your money is already in a ROTH structure, then yes there is no need to do any conversions. However you are only able to pull out up to your total contributions. After you exhaust contributions you can setup a SEPP withdraw to avoid the penalty, but it is still subject to taxation before 59 1/2. of course if you aren’t pulling that much out you won’t pay much in taxes at all.
        3) It looks like the laddering strategy described here would work best if you had enough ROTH contributions to last you 5 years while you build up the money available from conversions. That way you life on the ROTH contributions while only paying tax on the converted amount. Of course this would work 5 years savings in a taxable account too but that has no tax deferred benefits. If your marginal rate was >10% when starting to do the conversions then i don’t think this would make much sense because you would loose most of the tax benefits you had by contributing to the traditional IRA in the first place.

        • James says

          Great information Lucas! Do you (or anyone else) know if you start a SEPP with an IRA that has multiple funds, can you specify how much is drawn from each fund? And once you set the amount from each fund, can it be altered, or are you stuck with it? Thanks Lucas!

        • Lucas says

          The SEPP doesn’t dictate where you get money from just how much you are required/allowed to pull each year. One common way of doing it would be to sell your choice of funds every Jan (moving them to cash), then withdrawing this amount into a taxible account either in a lump sum or throughout the year. You get complete control of the source of the money.

        • Brian says

          Wow, great tutorial on 72t, Lucas! I just learned a ton.

          One Correction:

          In points 7 & 8 you talk about starting a company and having it contribute 50k to your 401k, and later you say someone could earn 50k and contribute that to their business 401k.

          “$5k, $22.5k(17.5k + 5k), or $55k (50k+5k) (per person)”

          The first two parts are correct, but on the third part:

          Your business can not just stuff the first 50k into a solo 401k/SEP IRA.

          It works like this:

          SEP IRA: Business can defer ~20% of net profits (ie you’d have to earn 250k to tax defer 50k)

          Solo 401k: Business can defer first 17.5k off the top, and then ~20% of net profits after that.

          Hopefully that’s clear and useful.

          When I first started my side business I too was also under the impression I could cram the first 50k I made into a Solo 401k or SEP IRA….but learned the hard way that was not the case.

          • Lucas says

            Thanks for the catch Brian! I had subsequently learned what you explained but never came back to correct my post 😉 The new info makes having SEPPs withdraws a little less useful if you plan to start a business that you expect to earn a significant amount from. If you are under the 23k threshold you can use a Solo 401k to push 17k back into a 401k, and 5k into an IRA. Above that you would be limited to 20% of income into the 401k as you mentioned. I think this covers just about everyone though who would potentially be interested in a SEPP. If you have a booming business going you don’t need the withdraws anyway 😉

          • Brian says

            Exactly! 🙂

            Just wanted to make that slight fix, because I know your post will be read by many over the coming years (I have referred it to a bunch of folks already).

  3. Cash Rebel says

    Wow, just when you think you’re starting to understand how it all works, you hear an interesting new idea. I’d like to retire early, but I haven’t looked too seriously into how withdrawing money from tax advantages accounts works. I figured that there must be a way, and indeed it sounds like there is! Thank you for sharing.

  4. FloridaStache says

    YES! I’ve been looking for a concise treatment of this topic for some time now, and here it is in sparkling clarity. THANK YOU both for this post!

    • Mad Fientist says

      “sparkling clarity” <– Nice! With complicated topics, it can be difficult to strike a balance between providing enough information and making it easy to understand so I'm glad you thought it was clear.

      The great thing about guest posting is that you automatically get a talented editor to help make your post better so thanks to Jim (and even Mrs. JLC!) for the good editing suggestions!

  5. Marc says

    Hi JL,

    I have read all of your posts, thank you very much for all the work, really helpful !!! I have especially sent the link to your stock series to numerous friends/family…

    I have one quick question, probably due to my lack of understanding, but, thinking about the conversion ladder, and willing to open an IRA in Fidelity, I came across the following mention in the web site:

    “A distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and at least one of the following conditions has been met: you reach age 59½, die, become disabled, or make a qualified first-time home purchase.”


    Also consulted the IRS web site, at this link in particular:

    shall we understand that when the IRS says “You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). ” that by “a return of your regular..” it does not mean the interest/dividends from your investment, which is generally named return in the financial industry, but rather distributions of your 5-year old (at least) contributions ?

    because in the Qualified Distributions paragraph, it looks like the IRS embrace the same definition as seen in the Fidelity website:

    A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

    1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
    2. The payment or distribution is:
    a. Made on or after the date you reach age 59½,
    b. Made because you are disabled (defined earlier),
    c. Made to a beneficiary or to your estate after your death, or
    d. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

    I am confused about your assertion that the money contributed 5-years ago is available tax-free and penalty free. Is it that money, or the return generated by that money ? (see also exchanges with Charlie on the Mad Fientist website in Traditional IRA vs. Roth IRA article).

    Last, but not least: I am a non-resident alien, with a 401(k) from my former employer while I was working in the US. I would love to roll it over to a traditional IRA and then use the conversion ladder you are proposing to slowly roll it over Roth IRA. Does anyone know of a US-based financial firm allowing the opening of a traditional IRA / Roth IRA for NON-RESIDENT ALIEN ?

    Thank you very much in advance.
    Will also try to post on MMM website, and already did it on the Mad Fientist web site.

    God bless you.

    • TLV says

      The documentation is certainly complicated and hard to understand. I found for me that the clearest way to understand it was to look up the forms that you have to file with your return and try filling them out under various scenarios. Mad FIentist is right about how it works.

      * Regular Contributions – the amount that you put in directly to your Roth IRA each year, generally limited to $5500 per year (currently). This is tied to the direct dollar amount – dividends and capital gains don’t really matter. For example, if you contribute $3k, and put $1kin a stock that doubles to $2k, another $1k in a stock that gives $1k in dividends that you don’t reinvest, and $1k in a stock that goes to $0, then at the end there is $4k in the Roth IRA, of which $3k is considered regular contributions and $1k is considered earnings regardless of the capital gains/losses and dividends that occurred. If you had $1k in dividends and $1k in capital losses so that you came out even, the whole amount would be considered a regular contribution as there are no net earnings. If you contribute $1k one year, it drops to $500, you withdraw the $500 the next year, the third year you add another $1k, and it doubles to $2k, then there are still considered to be $1500 in contributions even though the first $1k of contributions had already disappeared.

      Regular contributions are always tax-free to withdraw at any time.

      * Conversions – the amount that you converted from a traditional IRA. Like regular contributions, everything above what you converted is considered earnings regardless of how it got there.

      Conversions that are withdrawn within 5 years of the start of the year they were made are taxed 10% on the taxable portion. Most of the time the taxable portion is the whole conversion amount, but if you had made any non-deductible contributions to your traditional IRA, or after-tax contributions to your 401k, then those appear to be immediately available for withdrawal without tax.

      Earnings are whatever’s left after you’ve withdrawn an amount equal all your regular contributions and conversions.

      If you withdrawal is qualified, earnings are tax free. To be qualified the withdrawal must be made at least 5 years after the Roth IRA was first contributed to (this is a different rule than the 5 years for conversions!), AND you have to meet one of the other requirements: 59 1/2, disabled, dead (ie inherited by your heirs), or first home exception.

      If the earnings are not qualified, they are taxed as ordinary income.

      If the earnings are not qualified AND they don’t meet one of a larger list of exceptions, then they are taxed an additional 10% on top of being ordinary income. This list of exceptions includes 72(t) withdrawals, education expenses, some medical expenses, etc. in addition to being over 59 1/2, disabled, etc.

      So, to summarize:
      *Tax free: contributions any time, conversions after 5 years from conversion, earnings after 5 years from opening Roth IRA AND over 59 1/2.
      *10% tax: Conversions within 5 years from conversion
      *Income tax: Earnings before 59 1/2 but due to 72(t), education, or medical; earnings after 59 1/2 but within 5 years of opening Roth IRA
      *Income tax + 10%: Earnings before 59 1/2 and not meeting any other exceptions.

      • Brandon says

        When you write “10% tax: conversions within 5 years from conversion,” do you mean to write “distributions” in place of the first use of “conversions”? I think it is important to clarify that there is no 10% excise tax applicable to multiple conversions during the five-year period, or even during any single tax year, when doing Traditional to Roth IRA conversions.

      • George says

        I know this is an old conversation, but hopefully someone still looks at it! Concerning the “10% tax: Conversions within 5 years from conversion”, does that mean if I retire and start doing the ladder conversion from my traditional IRA to my Roth IRA, I can pull that money out from the Roth IRA anytime between 0-5 years and all I pay is 10% penalty tax? No income tax?

        If that’s the case, isn’t this a way to get around pulling directly from the Traditional IRA, where you have to pay income tax as well as the 10% penalty tax?


        • nadir says

          I’m not an expert but should be able to answer this one. You would pay taxes on the amount converted from the T-IRA to the Roth at the time of conversion. Regardless of when you pull it from the Roth.

  6. Paul says

    Both the IRS rules and my company’s 401k website state I can begin making penalty-free withdrawals at age 55, as long as I am retiring, quit, or get fired from the company whose 401k I will be withdrawing. Why is it I never see this mentioned in any FI sites? Am I missing something?

    • Mad Fientist says

      Hi Paul, that’s correct but a downside to that strategy is that you have to keep your 401(k) until age 55. In many cases, it makes sense to roll a 401(k) into an IRA as soon as you quit your job but if you do that, you won’t be able to start the age 55 withdrawals that you described.

      I, for example, will be quitting my job in my 30s and would rather roll my 403(b) (which is similar to a 401(k) but for non-profit organizations) into a Vanguard IRA so that I can access their low-cost index funds.

      If you are nearing age 55 though and are happy with the investment options and fees in your 401(k), what you described could be a great strategy for accessing your funds early. The reason I imagine you don’t see this written about more though is probably because there aren’t many people happy with their 401(k)s so they’d rather do an IRA rollover as soon as possible instead of leaving their money in their 401(k) until age 55 (see Jim’s 401(k) article for reasons why people usually prefer the rollover option).

  7. TLV says

    I have a scenario where 72t will work and Roth conversion ladder isn’t enough. I have high enough income that I can’t deduct traditional IRA contributions, so we do Roth instead. In addition, my 401k plan allows me to contribute 20k per year after-tax, which can almost immediately be converted to Roth within the plan (only paying taxes on a small amount of earnings within the plan). So if I max out tax-advantaged accounts, each year I have 17.5k tax deferred, ~31k Roth, and 10k-30k left for taxable. I’ve run a variety of scenarios, and it is a distinct possibility that I could have converted all the tax-deferred money to Roth, withdrawn all the Roth contributions and conversions, spent all the taxable funds, and be left with only Roth earnings (albeit millions of them) that are subject to penalty, all by my early 50s. However 72t withdrawals are also allowed on Roth earnings, so I’d be able to get them out that way.

    This situation can be avoided by withdrawing a good chunk of Roth contributions early, thus preemptively transferring future decades of earnings out of Roth, at a cost of whatever tax is owed on taxable earnings between ER and when those earnings will be spent. Since I’ll probably be in a low tax bracket then, that tax should be small to none, but it’s still a tricky thing to predict how much I ought to withdraw from Roth early in ER to avoid the hassle of 72t 20 years later.

    • Mad Fientist says

      Hey TLV, thanks for providing an example scenario where 72(t) SEPP could be a better option. As you mentioned, there could be ways around the problem so that you wouldn’t have to use SEPP but I know for me it’d probably be difficult withdrawing money from a tax-advantaged account early when I didn’t actually need the money (which is one of the reasons I hesitate to use SEPP myself). It’d also be hard to predict, as you mentioned, so maybe 72(t) makes sense if you think you’ll depleat everything but investment earnings before standard retirement age.

  8. kyle says

    Very good info and detailed analysis. My only concern is that with a 4% SWR and retiring even earlier than standard retirement, say at 40 y/o, wouldn’t you run the risk of depleting your portfolio after 30 years? Being 70 y/0 having a struggling portfolio sounds risky. Obviously, you need hard numbers and a date night with FIREcalc to figure this out. Would it be safer to assume someone retiring in their early 40’s to opt for a 3% SWR?

    • jlcollinsnh says

      a 3% safe withdrawal rate (SWR) would certainly be safer. But you have to balence that against how important early retirement is to you.

      If you are enjoying your job, by all means stay a bit longer and build your stash a bit more. But if you are dying a little each day you go to work and if you are willing to adjust your lifestyle or take some part time work if the market moves against you, 4% is a good guideline.

      What people focus on in the Trinity Study is the few times the 4% rule failed. What they miss is that in the vast majority of time it not only succeeds but at the end of 30 years the stash has grown enormously.

      For more, including links to the study and the year by year charts showing this:

  9. Fatchance says

    Jim amd Mad F,

    Beautiful. I was thinking about some of Jims posts just this week and was thinking of asking him to explain a 4% WD rate considering I am heavily weighted in tax advantaged accounts. This post does that perfectly. Nice work and thanks for all you do to educate me about finances.

  10. JP says

    This is an awesome post, and will definitely be checking out the madfientist’s site.

    I’m sure you get this all the time, but for heaven sakes tell me more about UraniumC!


    • jlcollinsnh says

      Glad you like it, JP and the MF site is well worth your time.

      As for UraniumC, I get mixed feed back. Some tell me to take it down as it damages my credibility here. Others, such as yourself, want more.

      I’m not overly concerned about my credibility here. Assuming what I say has merit it can stand on it’s own regardless of UC.

      I am still trying to sort thru the UC saga in my own mind. I will probably pick it up again sometime in the future assuming I get more comfortable with the whole thing myself. Besides, for right now my plate is already too full.

      My best suggestion is to subscribe over there and then, if and when, you’ll know.

      Thanks for the interest.

  11. Jeffrey says

    Great stuff. I’ve seen bits and pieces of this plan before, but it is nice to see it all put together. The one question I have, however, is about the concept of a rollover to Roth without paying taxes…

    Where can I find information on how much you can move in this manner without incurring taxes? I’m specifically looking for information as it would pertain to a married couple with one child.

  12. Done by Forty says

    I’d been planning on utilizing the Roth ladder, so it’s great to have someone so smart validate that plan! With any rental income we can bring it, we might need a relatively small ladder…at least that’s what we’re hoping for.

    Really detailed post, and a subject I think a lot of ER bloggers will appreciate. Thanks!

  13. Jeremy says

    Getting MF and Jim Collins in one place is like getting Jake and Elwood Blues to get the band back together… You know something good is going to happen

    I think my takeaway from this is that you should always take advantage of your tax deferred accounts. ALWAYS.

  14. Mike says

    Thanks, Mad Fientist! This is very helpful! Can you please explain more what the implications are if someone already has a Roth IRA open that they’ve made direct contributions to? I definitely could be wrong, but I think you have to pull from direct contributions first, and then from roll-overs, but direct contributions that are withdrawn early do not avoid the 10% penalty?
    In hindsight, I never should have opened a Roth. I should have just stuck with taxed accounts and 401ks. Now I’m wondering if I’ve made a conversion ladder too expensive.

    • Rob Bertram says

      Hi, Mike!

      I have good news for you. There is no penalty for withdrawing your principal (direct contributions) from a Roth IRA ever. The only penalties are if you withdraw the interest/returns before age 59.5. This is why a lot of people who retire early are so excited about this Roth conversion ladder. It essentially lets them move pretax money into a tax-free account that can be used in 5 years.

      Another nice thing about a Roth IRA is that there is no RMD. In general, it’s a really amazing type of account.

      Now, if you’re looking to maximize your investment dollar, a Roth IRA might not be for everyone. It really depends on your tax bracket and how to efficiently invest your money from a tax perspective. However, having money in a Roth IRA is a good thing.

      I hope that answers your question an alleviates any anxiety you have.


  15. DML says

    “The main reason tax-advantaged accounts are usually best is because they allow you to put more of your money to work for longer.”

    Just to nit-pick. You are not really putting more of your money to work longer but hopefully reducing your tax burden at a future date. If you’re in a 30% tax bracket and deposit $10000 in an IRA, you’ll save $3000 in taxes. IRA’s are easier to understand if you think in terms of only having saved $7000. Think of the other $3000 as belonging to IRS. Suppose that over 20 years your money grows by a factor of 10.In the IRA, your part has grown to $70,000 and IRS’s part has grown to $30,000. If you withdraw $10,000 from your IRA and your tax rate is still 30%, you’ll get to keep $7000 from your part and IRA will get $3000 from its part. If you withdraw $10,000 from your IRA and your tax rate is now 20%, you’ll get to keep $8000 from your part and IRA will get $2000 from its part.

    “By investing the money you save on income tax, you can dramatically increase your savings rate and build up your FU money quicker.”

    You hint at that here but I hope this clarifies where the “more of your money” comes from. Great article overall.

    • Mad Fientist says

      Hey DML, I understand what you’re saying but in the situation described in the post (and for most early retirees), you are putting more of your money to work for longer (i.e. the tax savings) because it’s possible you won’t be taxed at all on the money you contribute to the retirement accounts (and if you are taxed, it will likely be at a much lower rate than the marginal rate you paid when working full time), thanks to a lower amount of taxable income during early retirement.

      Depending on how much you need to live on during early retirement, it could be possible to rollover a significant chunk of money each year into a Roth IRA without paying any tax at all on the conversion. If you do that every year until standard retirement age, most of your money could be in a Roth IRA by then and you would be able to enjoy tax-free distributions from that account.

      Also remember, the money in tax-deferred accounts grows tax free so in your scenario, had you instead invested the $7,000 of after-tax money into a taxable account instead, you’d have to pay long-term capital gains tax when you sell those investments for $70,000 so you’d walk away with less than that.

      I can see where you’re coming from though and I realize that sentence could have been phrased a bit better but hopefully this reply helped back up my reasoning a bit!

      Glad you enjoyed the article!

      • DML says

        Exactly. I find your reasoning spot on. I was hoping to clarify where the “more of your money” comes from. The example I cited is actually more useful when thinking about the differences between a Traditional and Roth IRA and tax rates on withdrawal. Thanks jlc and MF, we all need more well thought out articles like this.

  16. Nancy says

    I’m wondering if I can get some help on a related issue.

    Just some background: my modest salary goes into my 401(k) and I live off of a monthly withdrawal from my investments. This allows me to convert some of my Trad IRA to a Roth every year at a low tax rate.

    My question: I have the option to have my annual bonus (maybe $1500) go into my 401(k) or not. If it goes into my 401(k), it’s not taxed. If it doesn’t go into my 401(k), taxes will be taken out but I could make a tax-deductible IRA contribution of that amount (I can’t make much of an IRA contrib otherwise as I have very little earned income). [I use the bonus money as my cash for the year so if I have it go into my 401(k) I’d probably withdraw the same amount from an on-line savings account that I have.]

    One last thing that is relevant but I don’t understand: last year I could make a $2918 IRA contribution and I was trying to decide whether to put it into a Roth or Traditional. Since I convert money to my Roth every year, it seemed silly to put it into a Trad, while converting other money to a Roth.

    But my tax person told me it’d cost me $610 if I make a Roth contrib. and I’d get back $163 if I make a trad IRA contrib. So really it’d cost me $773 to make the Roth contrib. 773 is ~26% of $2918. So I made a contrib to my Trad IRA. Does that make sense?

    Thanks for any help. Please keep it easy to follow! [My tax person also said that my marginal tax rates for federal and state are roughly 16%]

    • Nancy says

      Hi all — I know everyone is busy. Just to let you know that I need to make a decision about this by tomorrow (Monday) so any replies today would be helpful. Many thanks!

      • Lucas says

        It is hard to answer your questions without full info as there are often a lot of specifics (what your exact income/expenses/taxes/tax credits/ etc. . ) that can easily shift the decision one way or another.
        Couple of thoughts based on the incomplete info you shared:

        1) I switched to getting my bonus put into 401k because it also saved me on social security and medicare tax and because it applied to the companies contributions not my max of 17.5k. Total 401k contributions can be 50k but only 17.5k can come from you. So in general i think bonus into 401k is a good idea (unless maybe you get matching % if you don’t contribute directly).

        2) If you put money into a traditional then roll the same amount of money into a ROTH in the same year, you should probably contribute directly to a ROTH (be easier and won’t have the 5 year withdraw restrictions). Your tax consequences “should” be the same. as you have realized the same amount of income either way. EITC might mess with this though as you need “earned” income for it and i don’t know exactly how withdraws or roll overs work (i think they work against the credit).

        There are a lot of possible caveats though as you might have EITC credit, and we don’t know your filing status or income/expense needs so can’t verify any marginal or average rate on your taxes.

      • Mad Fientist says

        Hi Nancy, sorry for the delayed reply; I have been out of town all weekend and only just got back now.

        I’m glad to see Lucas stepped in to offer some sound advice though (thanks, Lucas). As he mentioned, it’s difficult to know exactly what you should do without having all of your information but hopefully his reply helps.

        I wouldn’t stress out too much about it though because it sounds like you’re on the right path and are optimizing quite a bit already so I’m sure whatever you decide will be the right decision. Good luck!

  17. Executioner says

    I had been piecing this strategy together myself for a while, but I was glad when I saw this article on the Mad Fientist site recently, and this refresher today. It gives a very nice summary (and a name) to the Roth Conversion Strategy.

    I do want to ask for clarification on one area, though (quoted below).

    “Assume for this scenario that he is comfortable paying a few hundred dollars in tax each year for the conversion so he decides to convert $12,800 each year to cover over 75% of his $16,800 worth of annual expenses during early retirement.”

    Is it correct to assume that the subject of this example is not earning any income? No salary, no rental income, no dividends or interest or capital gains in a taxable investment account? I’m just wondering where the $12,800 figure came from. I assume it is a blend of the standard deduction plus the personal exemption?

    My wife and I would like to use this strategy, but it seems to me that the most cost-effective use of the Roth Conversion Ladder requires that earned income be reduced to zero prior to implementing it (starting the yearly Roth conversions).

    • Mad Fientist says

      Hey Executioner,

      Yeah, I probably should have included a better explanation for why I chose such an arbitrary number like $12,800.

      For the Retire Even Earlier post, I ran all of the numbers for the example person’s entire life (career, early retirement, standard retirement) and based on those numbers and the predicted balances in his taxable and tax-advantaged accounts, I decided $12,800 per year was a reasonable amount to convert to minimize taxes and ensure that his taxable money didn’t run out too early.

      You definitely don’t need to have $0 earned income to benefit from the Roth conversion ladder but just remember, the conversions count as earned income so you need to figure out whether doing the conversions makes sense based on your current and predicted future tax rates.

      In this particular example, he does have some qualified dividends and long-term capital gains in his taxable account but he doesn’t have a salary or any rental income. Even if he had $33,000 worth of qualified dividends and long-term capital gains, he’d still be able to convert $12,800 per year and pay less than $300 in federal income tax. If he didn’t want to pay any tax at all, he’d simply have to dial back his Roth conversion to $10,000 per year instead of $12,800.

  18. Brad says

    Jim, as you know from our discussion at my site (, I think the Mad Fientist is absolutely brilliant and I was really excited to see this post on your stock series.

    Hopefully the MF doesn’t think I’m a stalker, because I’m constantly linking to his articles and telling other people to read his work! It’s just rare to come across someone who thinks so differently yet so clearly, that I feel like I have to tell people about his site…

    Can I try to sum up my understanding of the Roth IRA conversion in as succinct a way as I can and hopefully the MF can confirm:

    x = yearly expenses

    You need:
    5x + some cash cushion in your regular taxable accounts
    Between 25x and 33x (depending on 3% or 4% withdrawal comfort level) in your 401k/traditional IRA.

    Day 0 you retire. Income from employment going forward = 0
    Years 1-5 you draw down 1x/year from your taxable accounts to pay your yearly living expenses.
    Each year you convert 1x from your Rollover IRA to a Roth IRA. This continues indefinitely.
    Year 6 and each year going forward you are able to take out your 1x conversion from 5 years prior tax and penalty free.
    Repeat each year.

    Thus, the only taxable income you’ll have is 1x less your standard deduction, personal exemptions, etc.

    You can expect to pay little to no tax on this money (ever) and of course no payroll tax.

    Does that sound about right?

    As a total aside: Jim: any chance we can commission the MF to come up with a strategy so we all can essentially pay zero for our kid’s college educations?

    I know the federal financial aid formula is structured in such a way that you can maximize it (retirement accounts do not count as assets for instance) with some planning, but I keep running into brick walls.

    • jlcollinsnh says

      Hi Brad…

      Perhaps we should start the Mad Fientist Fan Club!

      His work certainly deserves a wide readership and from what he tells me this guest post has given him a nice boost in traffic to his site.

      As for the college aid question, great idea. But too late for me. My daughter is in her last year and I have only one more semester to pay for. Fortunately she chose a state school and revived a nice merit scholarship. Even so, lots of $$$.

      Still if she’d gone to NYU, her second choice, it would have been 60-65k per year and no scholarship. 240-260k total.

      One of my friends discribes it this way:

      “It is like going out and buying a brand new BMW, driving it for a single year and then throwing it in the trash.

      Oh, and you do this for four consecutive years.”

      • Brad says

        I like that BMW quote!! I’ll have to remember that one…

        It’s almost unbelievable how much college costs these days — I can’t believe NYU is over $60k/year! Where is the value in that? I just don’t get it…

        Here’s a story that made me feel very old: My parents just cleaned their house out recently and they brought me a few storage boxes of my old junk. Not sure why I kept it, but in there was my acceptance letter from Duke University from 1997 and tuition and room & board totaled only about $30,000!

        That seems like a quaint price from another era, but I remember absolutely balking at that time as I just couldn’t see spending $120k for a diploma (and going deeply into debt), even if it was from a top-10 university.

        I should have gone to SUNY Geneseo like my wife, but I still didn’t walk away with more than a few thousand dollars of student loan debt for an accounting degree and a job after graduation, so it worked out okay…

    • Mad Fientist says

      Brad, thank you very much!

      Haha, I definitely don’t think you’re a stalker. I’m honored and appreciative when someone includes a link to my site on their site (especially when the link is in an excellent article like the one you referenced in your comment).

      To answer your question, your summary looks great but there’s one thing I’d like to mention. Due to contribution limits on tax-advantaged accounts, it may not be possible to accumulate 25x to 33x in your retirement accounts before retiring early so it’s likely you’d instead reach FI with 10x in taxable accounts and 15x in tax-advantaged accounts, for example.

      That’s really funny you should mention college accounts…J. Money from Budgets are Sexy and Rockstar Finance fame actually just emailed me asking my take on 529 plans. I told him that I don’t have any kids so I haven’t really looked into them but since he thought they could potentially be another great way to avoid paying taxes, I’m going to do some more research. I’m hoping there are some nice loopholes to exploit but I won’t know until I investigate further so stay tuned!

      Thanks again, Brad, and keep up the good work over at Richmond Savers!

      • Brad says

        Thanks for the reply, I appreciate it!

        That makes perfect sense about the ~10x in taxable accounts and ~15x in tax-advantaged accounts. I’ve told numerous people about this strategy and I wanted to make 100% sure I had it summarized, so this confirmation helped a lot.

        That’s funny, because I emailed with J. Money this week (great guy) and we mentioned your site. This would be a great intellectual exercise, even if you don’t have children, as you can definitely save many of us tens if not hundreds of thousands of dollars!

        Where I see a strategy in particular for early-retirees is not necessarily with 529 plans, but with the free tuition (and room & board in some cases) programs that top 75 schools like Washington & Lee, University of Richmond, Harvard, etc. have for people with incomes under a certain threshold. Just looking at UR’s Promise to Virginia, if you make under $60k, tuition and R&B are 100% free if you “qualify for financial aid.”

        My understanding is that 401k/retirement assets don’t count, but home equity and regular investments do. If there’s a way to structure your assets to get college for free, this could be an incredible savings!

        • Mad Fientist says

          I agree that J. Money is a great guy. I had the pleasure of meeting him in person a few months ago and he is such a fun dude to be around as well.

          Good call on the low income/free tuition angle! I’m looking forward to diving into this stuff because as you said, there’s big money involved!

  19. Shilpan says

    Great post Mad Fientist! I have a question — what if you start saving $12,800 five years prior to your retirement into your Roth IRA account? It may be hard to do so while you are maxing out on your tax deferred savings, but you won’t have to worry about funding first five years while you build the Roth IRA conversion ladder. Am I wrong?

    • Mad Fientist says

      Thanks, Shilpan! Great to hear from you again. I hope your wrist has healed up nicely and you are feeling back to normal.

      In this particular example scenario, the person has decided to max out his Traditional IRA (to further decrease his tax burden during his working years) so he sadly wouldn’t also be able to contribute to his Roth IRA during that time.

      • Shilpan says

        Yes, wrist is normal. Hardest part is to get range of motion. I am going through therapy and making great improvement.

        Thanks for your kind words! I am about to start writing again!!

        You both are great source of inspiration for me to start writing again in the near future.

  20. Free Money Minute says

    It is good to find more strategies to retire early. I had actually never heard of the SEPP plan or the ladder plan you outline. Thanks for sharing! Right now I am tax diversifying my retirement accounts between traditional 401k plans and Roth 401k plans. It is so hard to know if I will be in a better or worse situation (as far as taxes) when I retire . I hope better, but I am diversifying to have options at that time.

  21. Justin @ RootofGood says

    Jim, I’m glad you are sharing the Roth IRA Conversion Ladder post from Mad FIentist. After I read it a month or so ago at MadFIentist, it made me realize it’s a “more elegant solution” (as my eloquent British differential equations teacher frequently said) than the 72t SEPPs. At least in my case of retiring at age 33.

    I have enough taxable accounts to last way more than 5 years, so setting up the Roth conversion ladder isn’t a timing issue at all. By building up this bank of flexible Roth balances I can withdraw anytime after 5 years post-conversion, I can push off the choice for 72t distributions for a long time (or indefinitely).

    I was reluctant to start 72t distributions since you are locked in for the rest of your life (age 33 to age 59.5 seems like the rest of my life from my nubile 33 y.o. vantage point). Now I have a this valuable option of the 72t SEPP in my back pocket should I ever need to start it later. In the meantime, taxable+converted Roth balances should keep me well funded during ER with ultimate flexibility to craft my income stream and optimize tax liabilities. Me likey!

    • jlcollinsnh says

      Glad you liked it, Justin….

      …and I’m glad MF was willing to share the concept with the readers here. It has gotten a great response and high readership.

  22. Kurt says

    “It’s possible though, due to a low amount of income during early retirement, that he won’t have to pay any tax at all on the conversion”

    How is this done? Anywhere I have read it is taxed as ordinary income when you do the conversion. Oh, unless you mean his Personal Deduction/Exemption take care of the tax due on the conversion??

    • Justin @ Root of Goo says

      That’s pretty much how you do it. Standard deduction and personal exemption = $20k per year tax free for a married couple with zero kids.

      With our 3 kids, we can actually convert $31,700 totally tax free. And even more than that since we get the child tax credit (x3). Needless to say, the Root of Good household won’t be paying federal taxes in retirement either. 🙂

  23. Shawn says

    Is there a set hiearchy that the IRS has on the roth ira.
    eg: 1. contributions, 2. conversion, 3. earnings,

    and what is the best way to keep all that straight, 5498?s, or any other personal way that you guys use?

    • jlcollinsnh says

      Hi Shawn….

      I’m not entirely sure I follow your question.

      Form 5498 comes from the custodian of your IRA or Roth IRA and is sent to you with a copy to the IRS. It reports any contributions, transfers or rollovers, along with any withdrawals or conversions. It also reports the current value of your accounts.

      For more:

      I have both our IRAs and Roth IRAs with Vanguard. Anytime I want to check on them I can go to the Vanguard site and take a look.

      I also keep a spreadsheet I created, but that is for my own use and analysis. It is not something necessary for you or anyone else to do.

      Does this help?

  24. GordonsGecko says

    Being a little bit late to the Early Retirement goal (39 y/o), I am struggling to determine what the most efficient approach to early retirement would be. While 50 might be possible, 55 is the more likely age where we’ll be able to retire.

    My taxable investments are only about 15% of total investment balances. The rest is ~ 2/3 and 1/3 in 401(k)/IRA and ROTH Funds. In total, the balances today could fund my expenses for anywhere from 4.5-6 years.

    What I don’t want to happen is to put too much money into pre-tax 401(k)/IRA’s to the point where I won’t be able to convert them all to ROTH and/or have to worry about RMD’s.

    It’s complicated, for sure! So many variables!!!!

    • jlcollinsnh says

      Welcome GG…

      The important thing to do is to get started, which you have!

      At this stage, I wouldn’t worry too much about the RMDs. Focus on increasing your savings rate and aggressively investing. There’ll be plenty of time to cut back if you see the pot getting too big.

      Nice problem to have, that. 😉

  25. Even Steven says

    I know the MF talks about possibly not paying tax on the conversion each year assuming you have no other income coming in, any chance someone has a reference/link chart for the approximate amount of taxes paid each year assuming certain withdrawals and a standard deduction for example?

  26. Gen Y Finance Guy says

    This was a very enlightening article. It really made me think and like you I like to here from smart people that have ideas I have never thought about. Looking forward to reading more from both MF and you Jim.


  27. JLeet says

    I feel I am a bit at odds with my specific situation and which method (buckets) would benefit me the most.

    I make $49,700 annually, my employer has a SIMPLE IRA setup with a 3%match. Due to the Employer IRA only having Oppenheimer funds with ridiculous fees (lowest ER is 1.66%) I only contribute 3% to get the employers match. With that being said I think with my deductions and exemptions I don’t fear hitting the higher tax bracket this year….I would also like to open up additional accounts to dump the rest of my money in (hopefully ~12k) which bucket would be more beneficial to me?

    I also then begin thinking about what would be more beneficial in the future (2-5) years when I expect to be at a salary point that I will have to work harder at to stay in that lowest tax bracket. Not to throw yet another curveball for analysis but I then have to think about my employer rolling our SIMPLE IRA over into a 401k (due to employee # restriction for SIMPLE IRA) and the potential of accessing better fund options.

    So what do….open a ROTH since I’m already in the lowest bracket? Open a traditional, expecting to be in a higher tax bracket in the near future? And how about the thought of the change in employee retirement fund.

    I’m not sure if I go the roth/taxable route or the traditional/taxable route and if my employer account situation does anything to sway my decision one way or another for whatever reason..

  28. Ryan says

    I didn’t read all of the comments, so this may have been asked. If you are withdrawing contributions only to avoid the taxes from the Roth conversion (as gains are taxed no matter what before 59.5), won’t you reach a point before age 59.5 where you’ve withdrawn all of your contributions and then you have to start dipping into the gains and hence will end up having to pay the taxes on those? Obviously this will depend on how early you retire and begin withdrawing ahead of age 59.5

    Is my thinking correct?

    • Jeffrey says


      From your 401k/IRA, you can convert both contributions and earnings. This doesn’t avoid taxes – it just gives a way to access the money without the early withdrawal penalty. By targeting a specific amount each year, you can potentially minimize the rate that you are taxed at. And it should also be noted that you’d be taxed on the money down the line either way when you pull it out of the tax advantaged account.

      The only part that you won’t be able to access is the earnings that are made within the Roth during the 5 year time-frame between when you make each yearly conversion and when it is regarded as an initial contribution that is available for access. Those 5 years of earnings will be stuck within the Roth until age 59.5, but the rest of the money you earned in the 401k/IRA will be seen as initial contribution to the Roth. Make sense?

    • jlcollinsnh says

      Hi Ryan…

      Yes your thinking is correct: If you withdraw earnings before 59.5 you’ll face taxes and penalties.

      But, as Jeffery points out, for most people there are other 401k/IRA options to be played.

      Plus, I’d add, in using this conversion strategy most of your money will be in the converted contributions rather than in the earnings.

      Hope this helps!

  29. simon liao says

    Hi Jim and Mad F,
    I really enjoyed the article. However, I do have a question.

    Why do you do 401k -> traditional IRA -> Roth IRA instead of straight 401k -> Roth IRA? Assuming i am happy with my current 401k (low manegement fee, 0.019% ish with good performance). It seems redundant to do the indirect transfer while you can do the direct transfer from 401k -> roth IRA if the 401k plan allows to roll over to roth IRA. Or I am missing something here. That will be great if someone can answer it.

    Thank you!

    • Mad Fientist says

      Glad you enjoyed the post, Simon!

      I too have good options with my workplace plan but it’s really hard to beat a Vanguard IRA so I plan to immediately roll my 403(b) into a traditional IRA at Vanguard as soon as I leave my job. Then, I can strategically plan my Roth conversion ladder conversions over time but at least all of my money will be somewhere with very low fees.

      If you are happy with your 401(k), aren’t getting charged too many fees, and don’t think there are better options, by all means do what you suggested!

    • Lucas says

      If you go straight from 401k to Roth IRA you owe the whole conversion tax all at once, which is not a good idea (unless you have a smaller 401k balance). Like MF said, going to an IRA first gives you the freedom to time out the conversions over time.

  30. Matt Simon says

    So wish I had read this post 2 years ago when I got laid off and foolishly rolled a traditional 401K to a Roth IRA. I don’t even know how much tax I ended up paying.

    Live and learn, I guess

    • jlcollinsnh says

      Hi Matt…

      Well, the good news is that, once you have it, a Roth is a wonderful thing to have.

      You’ve taken the hit and now, it is all tax free going forward.

  31. Hannah says

    Thanks, Jim and Mad Fientist. Great information clearly laid out. Would you have any suggestions for early retirement in the following case?

    Let’s assume in Australia a tax-advantaged account that is taxed at 15% contributions and 0% withdrawals. The tax-advantaged account is inaccessible until around age 60, there is no possibility of ladder conversion. Therefore an early retiree would also require a taxable account.

    (Finer details: 15% is less than most people’s income tax rate. There is a cap of ~$30k, above which contributions are taxed at the income tax rate plus maybe a penalty. Contributions can also be made after income tax.)

    How would a mid-income earner (who contributes less than the 30k cap) in their 30s think through which order to invest in? Put contributions into just the tax-advantaged account first to maximize the tax advantage? Save in both simultaneously to boost the pre-60 funds?

    With gratitude for your work and any thoughts.

    • jlcollinsnh says

      Hi Hanna…

      I’d advise fully funding all the tax advantaged accounts available to you first, short of any extra tax and penalty. If you are saving aggressively enough for early retirement, you are likely saving more than the 30k limit allowed. That can go into your taxable account.

      Once you retire, you will draw down your taxable account first to get you to 60.

      If you are saving less than the 30k per year, unless your spending needs are very low you well might not be retiring before 60 anyway.

      However, if you are confident you can, you will need to divert some of your savings to an accessible, taxable account to cover you from retirement until age 60.

      To do this you’ll need to calculate the number of years between retirement and 60, the amount you spend each year and how much you’ll need in your account to cover it.

      The good news is, while you are drawing this down, your tax advantaged accounts will continue to grow to meet your needs post age 60.

      Make sense?

      • Hannah says

        Thank you very much, Jim. That is helpful. And somehow when I read your response it seemed so much clearer than when it was in my head. Almost as if I knew (or should have known) what the answer would be, but needed to hear it outside of myself. In addition to being a great writer and money expert, you’re a great sounding board!

        Yes, maximizing the tax-advantaged account first makes sense. And then I can start working backwards to fund the years before age 60 in a taxable account. It sounds so much clearer now!

        One final scenario on this topic, if I may? I have some after-tax income in cash savings and am deciding where to put it. I can contribute after-tax money towards the tax-advantaged account, but it has already been taxed at the higher rate. So the initial advantage is smaller, yet there is an on-going tax advantage because the dividends and capital gains will be taxed at a lower (e.g. 15% for dividends) rate. Or I can put the after-tax income towards my taxable accounts — after all, I’ve already paid the income tax — but any dividends (and later capital gains) will be taxed at my income rate. I’m thinking it will be good to take advantage of the tax-advantaged account for the dividends and capital gains, but having already paid the extra income tax there is less incentive to return it to an untouchable purse. Suggestions are welcome.

        You are correct, unless I save a lot more I will not be able to retire early. As my spending is low, my plan is to increase my income so that I will have more to save. And, as you suggest, if I am confident that I can build up enough funds to retire early then I will divert some of my savings to the taxable account.

        Many thanks to you!

      • jlcollinsnh says

        Happy to help, Hanna!

        You can fund your tax-advantaged accounts with the money in your savings account as long as you are under the contribution limits and income limits and have at least enough income to match the contribution.

        But that likely won’t meet your goals.

        I’d fund the tax-advantaged accounts from your income and additionally invest the savings in a taxable account.

        • Alex says

          This might be a dumb question, but what taxable account is going to provide 5% return and allow no penalties on withdrawal? After reaching the contribution limits, not sure where to put the rest (my 401k plan is terrible btw. don’t want to put too much in there)

          • jlcollinsnh says

            Hi Alex…

            Accounts providing a set return, such as 5%, are typically bank CDs or individual bonds. At the moment, I am unaware of any bank offering 5% returns and individual bonds carry additional risks worth considering carefully before investing.


            Taxable accounts don’t have withdrawal penalties. You will pay tax on any dividends or capital gain distributions in the year they are received and, if you sell shares, tax on any capital gains realized.

  32. Johnny says

    Hey Jim,

    Thanks for the insightful post, had a few questions I’d like to ask in one place if you don’t mind.

    1. Do you recommend Betterment over Wealthfront? Can you explain why.
    2. VOO vs. VTSAX, what’s your take on S&P500 vs. total market.
    3. For the conversion described above, can you help me through this scenario: my dad is 68, turning 70.5(and he’s still working) in 3 years and he’s got about $500K in his 401k and traditional IRA, so according to this plan laid out, he should:
    1. Convert all 401k to traditional IRA
    2. Convert traditional to ROTH IRA
    3. When he reaches 70.5 and let’s say he decides to retire, he won’t have income and he’s allowed $20-23k free tax a year(him and my mom), if the requirement to withdraw is $20k, will that $20k be tax free because he has no income since he’s retired? Or is that a separate box because it’s mandatory withdraw and therefore will be taxed(this is the part I’m a little confused about). If you could give us a few pointers in this matter it would be much appreciated, thank you for your time. I’m trying to help figure out his retirement plan now since he’s retiring soon and your blog has been one that’s helped us tremendously and we want to thank you for all your contributions, you are awesome and a lifesaver.

    • jlcollinsnh says

      Hi Johnny…

      Thanks for the very kind words. Glad the blog has helped.

      1. I am unfamiliar with Wealthfront but my understanding is it is much like Betterment. Here is my take on them:

      2. I have a slight preference for the total stock market index, but the S&P 500 is just fine.

      3-1. Yes

      3-2 This would be a taxable event, so you’ll need to consider that. But any money you can get into a Roth with minimal tax is a good thing.

      3-3 At age 70.5 your dad’s RMDs – – will be treated as ordinary income. So, yes, it will be protected to the extent of his deductions and exemptions. Of course, it will be added to any other income he might have.

      • Johnny says

        Thanks for the info Jim.

        1. I just finished reading Money Masters by Tony Robbins and wanted to ask your opinion on Ray Dalio’s All Weather Portfolio. Tony had his guys run the numbers and they were quite impressive, what are your thoughts on this portfolio? Obviously I know you’ve toyed with these portfolio ideas in the past and that’s why I’m really curious on your take on it. And for a regular Joe like me, how would I implement such a portfolio for the intermediate and long term bonds?
        Ray Dalio’s All Weather Portfolio:
        -30% stocks (S&P 500 such as VFIAX)
        -15% Intermediate term bonds 7-10 years (Is there a fund on Vanguard?)
        -40% Long term bonds 20-25 years (Is there a fund for this on Vanguard?)
        -7.5% Gold (gld)
        -7.5% commodities (not sure what this is about)

        2. My buddy just informed me that you can take our your principal out of your ROTH-IRA penalty free after 5 years(earnings stay in), is that true? That means it is as good as cash after 5 years.

        3. My dad’s retirement 401k fund with Vanguard has literally doubled within 7-8 years and it’s amazing, I can’t say the same for his Edward Jones(terrible mutual funds loaded with frontload costs and high expense ratio) and Fidelity(they’re ok). I noticed one of the funds in his Vanguard retirement 401k is: KP Retirement Path 2015 Fund Institutional Shares(exp. ratio: 0.33%), is that a bit high expense ratio for this kind of fund and what are your suggestions for funds that have past their target dates, is it wise to just keep it in there? What happens inside these target funds once the dates have been passed. I was also thinking of converting his 401k into traditional IRA, but I realized the expense ratio for most of his funds are really low and good already, so I’ve decided to keep those funds esp. since some of them have lower costs or are not made available to the public anymore such as the T. Rowe Price International Discovery Fund I Class (exp. ratio: 1.07%), so it’s advantageous to keep them in there. Do you think that’s a good idea?

        Thanks for everything!

  33. Michael says

    Based on TLV’s comment on Dec 5 2013. How are we able to withdraw from the Roth IRA before age 59.5 when using the Roth conversion ladder method? I don’t understand how we would be able to avoid 59.5 age criteria.


  34. Keith says

    Thank you, your guest bloggers, and all the commenters for putting such great insight and hard won lessons out there for the rest of us. I am late to the party at 49, though I can still aspire to at least the FI portion of FIRE. I have always been an aggressive saver and committed to LBYM (thanks to spending so much time with my Depression-era grandfather) so I do have a decent nest egg in my traditional IRA to start with. But I am energized to start putting the various strategize here in place, and making changes to my allocations and see how fast I can exit the rate race.

    Thanks again!

  35. Keith Kay says

    One opportunity for Roth conversions that is unique to US Service Members, is during a deployment. Military pay while deployed to a combat zone is tax free, so depending on how much of a tax year you are deployed for, you can end up with little to no taxable income, and able to convert traditional IRAs to a Roth.

    I was able to take advantage of this after my deployment to Iraq and was able to convert all of my existing Traditional IRAs to a Roth.

  36. Stephanie Pinto says

    Hello jlcollinsnh and Mad Fientist,

    I looked through the comments to find something similar to my situation but it was not present. However, I may be wrong and just do not have all the financial terms down correctly (1 year out of college and never learned about investing, you can’t blame me hahah).

    I started my full time job last April (2019) and have now been a little over a year working for my employer. Although not with Vanguard, I have my 401k plan with Fidelity and actually swapped to a Roth 401k the week that my account was opened once hired after talking to a financial advisor who reccomended it since I am in the “lowest tax bracket” (confused on the term). I did not end up talking to him ever again but after doing my sreareach, I see that the Roth 401k has its benefit that my taxes are being taken care of now and won’t have to pay them later on. My asset allocation is in VTTSX Vanguard TRD 2060 (yay for Vanguard).

    With that said, I am very young and definitely not well-seasoned in this investment. How do the Mad F ways described above impact my Roth 401k? If I leave the job, would I roll it over to a Roth IRA and I would then be able to take out money in the next 5 years? I do not think my thinking is correct here as I would go from a Roth to Roth and a conversion ladder would not be needed or maybe it does? I also would like some pointers on whether my choice of a Roth 401k was a right move for me or if I should go back to the Trad 401k. I greatly appreacte any insight that can be given to me! Apologies in advance if my questions are too basic but appreciate the help and both of your willingness to help people be less scared of investments by making these posts on both your sights so intriguing to read!


  37. JSchwent says

    Just finding you/this! This is great!

    A few years ago, before I spent any time studying these things, I had sought out a financial advisor to get some things started. Per his suggestion, we rolled over the small amount ($10k~) of my wife’s retirement from a previous employer into a life insurance annuity whose performance is based off of MLRPM. The performance has been terrible. I’m paying 1.5% and have a 145% allocation rate. My contract expires in 2029.

    I’d like to move it. To do so would cause us to take a 13% hit. I’m trying to weigh the cost analysis of:

    – Leave it in. Eat the terrible performance. And let it be.

    – Eat the 13%. Move it to VTSAX and hope for 7 years of better performance.

    What suggestion would you have to help me weigh this decision so I can have a clearer picture of the financial implications?

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