ChooseFI 503 | Deep Dive: Roth IRA Conversion Ladder
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Aug 5, 2024 
Cody Garrett, a financial expert from Measure Twice Money, joins to explore the Roth IRA conversion ladder, a powerful strategy for accessing retirement funds early. The conversation dives into the intricacies of tax planning, including the five-year bridging period and its implications. They discuss the impact of Roth conversions on health insurance subsidies and penalties for early withdrawals, with insights on avoiding unexpected costs. Cody emphasizes meticulous long-term financial planning to optimize income and propel listeners towards financial independence.
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Roth Conversion Ladder Concept
- The Roth IRA conversion ladder unlocks pre-tax retirement savings for early retirees by staging conversions over years.
- Each conversion must 'season' five tax years before penalty-free withdrawal, creating a ladder of maturing rungs.
Cost Of Early Normal Distributions
- If you take a normal distribution from a traditional IRA before 59½ you pay ordinary income tax plus a 10% additional tax on the distribution amount.
- Example: $100k distribution could cost ~$18k total in federal taxes for a married couple with standard deduction.
Start With The End In Mind
- Plan Roth conversions with your end goal, estimating living costs, inflation, and tax payments tied to conversions.
- Include conversion tax liability and possible healthcare premium impacts when calculating your bridge funds.