017R | The Roth IRA Conversion Ladder | A Case Study
Apr 7, 2017
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Guest Brandon shares his perspective on early retirement and the benefits of financial independence. The podcast discusses the Roth IRA Conversion ladder, tax planning, and finding joy in life. They also cover side hustles, dual enrollment for college, maximizing tax deductions, and frugal alternatives to standing desks.
Align financial decisions with values and what brings joy and happiness in life.
Utilize the Roth conversion ladder to minimize taxes in retirement and withdraw funds from 401k/retirement accounts.
Optimize itemizing and standard deductions by doubling down on donations and alternating tax advantages.
Deep dives
Podcast Recap and Community Milestone
The podcast episode featured Brandon from the Mad Scientist, who shared his origin story and introduced the concept of the Roth conversion ladder. The hosts expressed their gratitude for the supportive ChooseFI community and celebrated reaching their 50th written review milestone, which unlocked the voicemail feature. The hosts expressed their excitement about the opportunity to engage with their audience and use listener feedback on the show.
Financial Independence Strategies and Secrets
Brandon emphasized the need to focus on goals and values rather than just the pursuit of a specific monetary number. He talked about the importance of figuring out what brings joy and happiness in life and aligning financial decisions with those values. The hosts discussed the power of the entry-level middle-class lifestyle, with its comfort and lack of waste, and the flexibility and options it provides. They also highlighted the advantages of tax optimization, the Roth conversion ladder, and the potential for free or low-cost college education and healthcare for early retirees.
Managing Retirement Income and Financial Security
The hosts addressed a listener's question about the 4% rule and how to withdraw funds for living expenses in early retirement. They emphasized the importance of maximizing contributions to retirement accounts like 401(k) and IRA and suggested exploring options like the Roth IRA conversion ladder and taking advantage of tax-efficient withdrawal strategies. They also discussed the potential benefits of generating side income during financial independence to cover expenses and the flexibility it offers to enhance the financial security and lifestyle of individuals and families.
Future Plans and College Hacking
The hosts shared their excitement about upcoming articles and community resources on college hacking. They highlighted an article by Edmund T on dual enrollment as a powerful strategy to cut college costs and time in half. They emphasized the FI community's focus on finding innovative ways to optimize college expenses, including upcoming content on FAFSA hacking. The hosts expressed their commitment to providing valuable tools and resources to help individuals and families navigate the college system more efficiently and avoid excessive student loan debt.
The power of the Roth conversion ladder
The podcast episode discusses the concept of the Roth conversion ladder and how it can be used to minimize taxes in retirement. They provide a specific scenario of a 20-year-old individual who contributes to a 401k for 20 years, eventually accumulating $889,000. They explain how this person can then use the Roth conversion ladder to convert their 401k funds into a Roth IRA, enabling them to withdraw the money tax-free. They emphasize the importance of maximizing the use of deductions and free money, such as standard deductions and personal exemptions, to minimize taxes during the conversion process.
Using donations to optimize itemizing and standard deductions
Another topic covered in the podcast is a strategy to optimize itemizing and standard deductions for tax purposes. The hosts discuss a frugal analog provided by a listener, which involves doubling down on donations in alternating years. By making a lump sum donation for the current year and the following year, individuals can maximize their deductions in one year and then take advantage of the standard deduction in the next year. This strategy allows for a more efficient use of deductions, resulting in potential tax savings. They also mention applying this concept to other expenses that can be paid ahead of time to alternate tax advantages.
017R | In Today’s Podcast we cover: Friday Roundup # 6 This is our 23rd episode and providing a home for the FIRE community Thank you for our 50th review on Itunes (from Chad Carson!) – we plan to implement the voicemail feature on the website so we can use your input on the show Episode with Brandon from the Mad Fientist This podcast humanized Brandon and you got to hear his story “Early retirees are such a different breed…I’m looking at this through the very focused lens of early retirement.” The built-in benefits of financial independence aside from just the dollars and cents: College, health care, taxes The Roth IRA Conversion Ladder The Roth IRA conversion ladder is the key to early retirement and accessing your 401k/retirement funds and pay little to no taxes on the money It was amazing how open and honest Brandon was: depression, ‘quarter-life crisis’, deprivation period Brad went to a retreat over the past weekend for “designing the life you want to live into” Quote from Keith: “I never dreamed past here.” Dream bigger and find what brings you joy and happiness in life Money is not the end goal. It is a tool to let you live a better life How Brandon tested the upper limits on their spending and how it impacted their happiness (and only a couple of thousand dollars per year) Brad thinking differently: How could he spend a little more money to bring more joy to his life Roth IRA conversion ladder step-by-step scenario: 20 year old guy earns $60,000 per year, has $30,000 of expenses per year and is on a 20 year plan for FI. How does he take advantage of the Roth IRA conversion ladder to pay little to no tax and still fund his early retirement. The Key for the Roth IRA Conversion is to max out the 401K Itunes reviews – thanks to the audience! Question from the audience: Heather about what to do with her 401k after leaving her job. Should she leave it in her company’s 401k or roll it out to Vanguard and her own IRA? Question from Bryan: How the 4% rule works on pulling out money from Roth, 401k, IRA, etc. and how to manage your tax liability in early retirement When you reach FI, you aren’t going to sit back and do nothing when “retired” Where ChooseFI is going: college hacking from Edmund Tee and Seonwoo Lee Tax hack from an audience member: if you can’t itemize every year, consider putting all deductions (donations, state taxes, etc.) into every other tax year so you can itemize every other year and in the off year you get the standard deduction Frugal hack of the week: Jonathan created a standing desk for his treadmill For More Tax Related Content Tax Optimization for FI Links from the show: Mad Fientist Dominick Quartuccio – Take Command Subscribe to Chad Carson’s email list Dual Enrollment article on college hacking Oristand standing desk
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