How much $ to retire and how to fund your lifestyle in retirement

[mongo]

No I cannot, the context here is using Rule of 55 to allow me to retire early and thus the money has to stay in that companies 401k or I face penalties for withdrawing before I turn 59 1/2.

Sorry, I was reading #610 and Rule of 55 from #607 hadn't registered as 'leaving job at 55'; my mind put it in the same category at Rule or 72, or something like having 55x your annual something before retiring. But that's my mistake.

If this is Vanguard, you may be ok. They let me pull funds from other pretax retirement accounts without withholding (and default looks to be 10%).

2 ways to use retirement money early | Vanguard

 

[dhanson865]

OK, so this isn't Rule of 55 but here is another way you can pull money out before 59 1/2 without using a 72t.

Essentially if you put a roth in your account between birth and age 54 1/2 it means that money (even the gains), can be taken out as though it's a contribution. You could have bought shares of TSLA in 2013 in a roth account and pulled them out (with all the crazy gains) at the all time high in 2021 even if you were a freshman in college in your 20s and not paid the early withdrawal penalty.

Essentially your age doesn't matter if the money is old money. I saw the 59 1/2 rule so many times and no where did anyone make it clear that the loophole on that is so wide you could drive a cargo freighter through it.

There is more than one 5 year rule for roth accounts and I think this video explains it more clearly than the average article I've seen on roth 5 year rules.

 

[mongo]

OK, so this isn't Rule of 55 but here is another way you can pull money out before 59 1/2 without using a 72t.

Essentially if you put a roth in your account between birth and age 54 1/2 it means that money (even the gains), can be taken out as though it's a contribution. You could have bought shares of TSLA in 2013 in a roth account and pulled them out (with all the crazy gains) at the all time high in 2021 even if you were a freshman in college in your 20s and not paid the early withdrawal penalty.

Essentially your age doesn't matter if the money is old money. I saw the 59 1/2 rule so many times and no where did anyone make it clear that the loophole on that is so wide you could drive a cargo freighter through it.

There is more than one 5 year rule for roth accounts and I think this video explains it more clearly than the average article I've seen on roth 5 year rules.

That goes against everything I've read about Roths which is that contributions can be pulled tax/ penalty free, but earnings are a different beast.

 

[Oil4AsphaultOnly]

OK, so this isn't Rule of 55 but here is another way you can pull money out before 59 1/2 without using a 72t.

Essentially if you put a roth in your account between birth and age 54 1/2 it means that money (even the gains), can be taken out as though it's a contribution. You could have bought shares of TSLA in 2013 in a roth account and pulled them out (with all the crazy gains) at the all time high in 2021 even if you were a freshman in college in your 20s and not paid the early withdrawal penalty.

Essentially your age doesn't matter if the money is old money. I saw the 59 1/2 rule so many times and no where did anyone make it clear that the loophole on that is so wide you could drive a cargo freighter through it.

There is more than one 5 year rule for roth accounts and I think this video explains it more clearly than the average article I've seen on roth 5 year rules.

Not quite. The youtuber deliberately obfuscated the fact that only the amount being converted counts as a contribution. If you rolled from one Roth IRA into another one, there's no conversion, so no treatment of the full amount as a "contribution". So if you bought TSLA in 2013 in a 401k, and then converted that into a Roth IRA in 2016, then you can only pull out the value of the conversion in 2021, since you would've paid taxes on that full amount at the time of the conversion.

 

[mongo]

Not quite. The youtuber deliberately obfuscated the fact that only the amount being converted counts as a contribution. If you rolled from one Roth IRA into another one, there's no conversion, so no treatment of the full amount as a "contribution". So if you bought TSLA in 2013 in a 401k, and then converted that into a Roth IRA in 2016, then you can only pull out the value of the conversion in 2021, since you would've paid taxes on that full amount at the time of the conversion.

Yeah. Roth to Roth doesn't reset contribution/earnings.
You can convert an IRA to Roth, pay the taxes and pull out the transferred amount in 5 years penalty (and tax) free

 

[dhanson865]

Not quite. The youtuber deliberately obfuscated the fact that only the amount being converted counts as a contribution. If you rolled from one Roth IRA into another one, there's no conversion, so no treatment of the full amount as a "contribution". So if you bought TSLA in 2013 in a 401k, and then converted that into a Roth IRA in 2016, then you can only pull out the value of the conversion in 2021, since you would've paid taxes on that full amount at the time of the conversion.

That goes against everything I've read about Roths which is that contributions can be pulled tax/ penalty free, but earnings are a different beast.

He didn't obfuscate but I think I did add confusion there.

Wrong mentioned Scenario 1: I mentioned creating a roth account in 2013, it's already a roth account, so there is no conversion. But 5 years after creation the first 5 year rule is satisfied, then for every purchase of stock in that account if the shares have been there 5 years that other 5 year rule has been satisfied.

That is wrong because no conversion took place and his video specifically says and the slide says for rule 2 (about 5:30 in the video) that these statements are about conversions, not rollovers and by extension we could infer it doesn't apply to fresh contributions along the way that don't get converted.

Right Scenario 2: the section of the video I was referring to is about roth conversion from 401k to roth so in that case after the 5 years that second 5 year rule is satisfied. It is correct in that case that if you say had money in a 401k in 2013 you could have roth converted to a roth in 2013 and have access to all of it even gains in 2018 (or even better 2021) no matter your age.

Unmentioned Scenario 3: you added in moving from one account to another without converting. Yeah that doesn't change the nature of the funds after 5 years because it was already in a roth account to begin with but depending on how it got there it may have already been converted or not.

He didn't obfuscate the fact, but I twisted it slightly and you jumped on that. Correct for you to say I was wrong, incorrect to say the video was wrong.

 

[Oil4AsphaultOnly]

He didn't obfuscate but I think I did add confusion there.

Wrong mentioned Scenario 1: I mentioned creating a roth account in 2013, it's already a roth account, so there is no conversion. But 5 years after creation the first 5 year rule is satisfied, then for every purchase of stock in that account if the shares have been there 5 years that other 5 year rule has been satisfied.

That is wrong because no conversion took place and his video specifically says and the slide says for rule 2 (about 5:30 in the video) that these statements are about conversions, not rollovers and by extension we could infer it doesn't apply to fresh contributions along the way that don't get converted.

Right Scenario 2: the section of the video I was referring to is about roth conversion from 401k to roth so in that case after the 5 years that second 5 year rule is satisfied. It is correct in that case that if you say had money in a 401k in 2013 you could have roth converted to a roth in 2013 and have access to all of it even gains in 2018 (or even better 2021) no matter your age.

Unmentioned Scenario 3: you added in moving from one account to another without converting. Yeah that doesn't change the nature of the funds after 5 years because it was already in a roth account to begin with but depending on how it got there it may have already been converted or not.

He didn't obfuscate the fact, but I twisted it slightly and you jumped on that. Correct for you to say I was wrong, incorrect to say the video was wrong.

But your scenario #2 is still incorrect (somewhat). Yes the amount you converted from the 401k Roth into your Roth IRA can be counted as a contribution after 5 years, and thus withdrawn tax-free. But the GAINS after the conversion do NOT.

 

[dhanson865]

But your scenario #2 is still incorrect (somewhat). Yes the amount you converted from the 401k Roth into your Roth IRA can be counted as a contribution after 5 years, and thus withdrawn tax-free. But the GAINS after the conversion do NOT.

Yeah so if you had TSLA in a 401k from 2013 to 2021 and converted to a roth in 2021 then even left it as cash in the roth (or reinvested in your stock of choice), you would then be able to pull the money out in 2026 no matter your age because those gains from the 401k would be considered contributions to the roth.

So yeah I didn't qualify my statements correctly again. The point I was trying to make is that you could have had crazy good gains in a retirement account and the conversion would turn them into contributions that could be pulled out at younger ages without penalties. I just didn't realize how long and specific I'd have to make the scenario to show that actually happening.

It's a specific path + a concept that was new to me, not a general concept minus the path.



The video covers multiple rules, one subset of which is a rule for a specific scenario, I didn't know that rule existed or had that effect, but I did a poor job of explaining how to get there once I tried.

Since I'm well under 59 1/2 and have a lot of TSLA gains in my 401k this seemed like a big new thing to me, I thought it'd be worth sharing for others that might want to retire early. If you did the roth conversion early enough you might not even need the rule of 55.

I mean I knew that contributions (actual money from my checking account into my Roth) could pulled out without penalty. I just didn't know before today that money I've had in a 401k for more than a decade could be washed into being a "contribution" that can come out without penalty in the same way.

 

[Oil4AsphaultOnly]

Yeah so if you had TSLA in a 401k from 2013 to 2021 and converted to a roth in 2021 then even left it as cash in the roth (or reinvested in your stock of choice), you would then be able to pull the money out in 2026 no matter your age because those gains from the 401k would be considered contributions to the roth.

So yeah I didn't qualify my statements correctly again. The point I was trying to make is that you could have had crazy good gains in a retirement account and the conversion would turn them into contributions that could be pulled out at younger ages without penalties. I just didn't realize how long and specific I'd have to make the scenario to show that actually happening.

It's a specific path + a concept that was new to me, not a general concept minus the path.



The video covers multiple rules, one subset of which is a rule for a specific scenario, I didn't know that rule existed or had that effect, but I did a poor job of explaining how to get there once I tried.

Since I'm well under 59 1/2 and have a lot of TSLA gains in my 401k this seemed like a big new thing to me, I thought it'd be worth sharing for others that might want to retire early. If you did the roth conversion early enough you might not even need the rule of 55.

I mean I knew that contributions (actual money from my checking account into my Roth) could pulled out without penalty. I just didn't know before today that money I've had in a 401k for more than a decade could be washed into being a "contribution" that can come out without penalty in the same way.

Just to be clear, IF you convert from a standard 401k (pre-tax contributions only) to a Roth IRA, you do have to pay income tax on the full amount being converted. ONLY IF your 401k has only post-tax contributions (aka Roth 401k) can those amounts avoid the tax implications.

So if your 401k started off with $5000 of TSLA shares in 2013, and then you converted that to a Roth in 2021, you would've incurred a hefty tax bill on that ~$340k account (guessing well over $100k in federal AND state income taxes due).

 

[dhanson865]

Just to be clear, IF you convert from a standard 401k (pre-tax contributions only) to a Roth IRA, you do have to pay income tax on the full amount being converted. ONLY IF your 401k has only post-tax contributions (aka Roth 401k) can those amounts avoid the tax implications.

So if your 401k started off with $5000 of TSLA shares in 2013, and then you converted that to a Roth in 2021, you would've incurred a hefty tax bill on that ~$340k account (guessing well over $100k in federal AND state income taxes due).

Yeah, I'm not talking about the total tax implications of the withdrawals or conversions. I'm talking about avoiding the 10% penalty for being under 59 1/2.

I'm also not talking about wholesale account conversions, I'm talking about taking smaller amounts that I could afford to move around since I don't have access to the vast majority of my retirement funds until I'm 59 1/2.

 

[SageBrush]

and the breakeven on the decision is approx. age 85

I'd like to see the arithmetic that supports this statement since my understanding is different. A couple of years ago I calculated that the lifetime benefit is calculated to be about the same (to within 1-2%) based on average life expectancy when benefits start in 64 - 68 year old range

The spousal benefit brings the break-even age down, as does the fact that a couple is much more likely to have at least one person live past the break-even age.

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That is the math (so far as I know). My personal take is a bit different though, since I tend to value money more at a younger age, By this I mean that my consumption of material goods, luxury items, and leisure decrease with age. The offset to this can be rapidly increasing healthcare costs as we age.

This issue of healthcare costs is the elephant in the room. Since I have a healthy lifestyle and do not value for myself a low quality of life or short term life extending treatment or life in a nursing home, I severely discount healthcare costs. YMMV

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By the way, people may find this graph interesting. In a way it is common sense and amounts to selection bias, but I think it is common for people to skip over the point that a healthy 65 year old is very likely to live past the SS break-even point.

 

[SageBrush]

Here is a snippet from my spreadsheet that shows relative SS benefit cumulative return as the retirement age varies, based on average life expectancy of 15 years of benefits from FRA

 

[tivoboy]

I mean I knew that contributions (actual money from my checking account into my Roth) could pulled out without penalty. I just didn't know before today that money I've had in a 401k for more than a decade could be washed into being a "contribution" that can come out without penalty in the same way.

I would check this last part six ways from Sunday… unless one is at the minimum withdrawl age, I’ve never head that pre-tax contributions to tax deferred accounts can be withdrawn PENALTY free if they have been in there at least 10 years. Not talking about gains, or recent contribution, but the 10+ FIFO contributions coming out penalty free even before reaching the minimum age with exception for a few limited cases (like 10K for first time home buyers or 10K for emergency medical, etc.) I haven’t head that can come out penalty free in advance of the age of minimum.

And of course, it’s still all taxed as INCOME, just no 10% penalty.

 

[dhanson865]

I would check this last part six ways from Sunday… unless one is at the minimum withdrawl age, I’ve never head that pre-tax contributions to tax deferred accounts can be withdrawn PENALTY free if they have been in there at least 10 years. Not talking about gains, or recent contribution, but the 10+ FIFO contributions coming out penalty free even before reaching the minimum age with exception for a few limited cases (like 10K for first time home buyers or 10K for emergency medical, etc.) I haven’t head that can come out penalty free in advance of the age of minimum.

And of course, it’s still all taxed as INCOME, just no 10% penalty.

You seem to be missunderstanding the point of the story if you are talking about "at least 10 years" nothing I said about taxes or tax penalties has anything to do with 10 years.

The amount of time the money is in the 401k account does NOT matter for this concept. It could be in the 401k for 1 week, 1 month, 1 year, 1 decade, it doesn't matter how long it was in the 401k.

It'd be like if I told you that I was driving a red car while calling my tax advisor and you said "I've never heard that driving a red car would reduce your taxes".

You've picked a part of the story that has no correlation to the rules for the taxes.

 

[tivoboy]

You seem to be missunderstanding the point of the story if you are talking about "at least 10 years" nothing I said about taxes or tax penalties has anything to do with 10 years.

The amount of time the money is in the 401k account does NOT matter for this concept. It could be in the 401k for 1 week, 1 month, 1 year, 1 decade, it doesn't matter how long it was in the 401k.

It'd be like if I told you that I was driving a red car while calling my tax advisor and you said "I've never heard that driving a red car would reduce your taxes".

You've picked a part of the story that has no correlation to the rules for the taxes.

So what did that sentence from your post that I quoted mean then, like Im a seven year old..that comment about the red car seems like you intended it for a five year old?

 

[dhanson865]

So what did that sentence from your post that I quoted mean then, like I'm a seven year old..that comment about the red car seems like you intended it for a five year old?

If you would have asked me several years ago, I would have said that 59 1/2 was the age you had to be above to avoid the age related 10% penalty for Roth and 401k accounts (or other tax deferred accounts).

If you would have asked me several months ago, I would say 55 was the age you had to be above to conditionally avoid the age related 10% penalty due to the Rule of 55. It requires a certain scenario, it doesn't apply to Roth accounts or even all 401k accounts, it only applies to a 401k account with an employer you worked for after you turned 55 and then left.

If you would ask me today what the age you would have to be above to avoid that penalty conditionally I would say something like 23. With a huge disclaimer that it requires a very specific combination of accounts and steps. It doesn't apply to Roth accounts on their own or 401k accounts on their own. It requires having funds in a 401k (or some other tax deferred retirement account), converting those funds into a Roth, and waiting 5 years after that specific conversion.

So what's the minimum age someone could get a 401k? It has to be offered if you are 21 or over. But they could offer one to an 18 year old even if they aren't required to do so.

"Companies that offer 401k plans are obligated by the IRS to offer you their plans if you're at least 21 years of age, have worked at least a year at the company, and provided at least 1,000 hours of service. There is no minimum age requirement for making 401k contributions."

Whats that age + 5? That is the minimum age you could conditionally wash 401k into Roth contributions and unlock it so that it could be withdrawn as a contribution without penalty.

I'm saying a hypothetical 18 year old making a 7 figure income could max his 401k contribution for his first year in the span of a few paychecks and invest it into a hypothetical stock that goes ballistic and a few months later convert funds from the 401k to a Roth, wait 5 years and have access to the gains in his 20s. Yes he'll pay very high taxes along the way for the 401k to roth conversion, but I'm saying it's new to me to conceive that he can avoid the 59 1/2 age related 10% penalty while doing so.

Which comes back to this

In the clip below he gives the example of someone who is in their 30s

âï¸ 401k to roth avoding 59 1/2 10% penalty

48 seconds · Clipped by Doug Hanson · Original video "The Roth IRA 5 Year Rules Explained: Navigating Three Confusing 5 Year Roth IRA Rules" by Safeguard Wea...

youtube.com

That is what the quoted sentence "I mean I knew that contributions (actual money from my checking account into my Roth) could pulled out without penalty. I just didn't know before today that money I've had in a 401k for more than a decade could be washed into being a "contribution" that can come out without penalty in the same way." was about. It's not that it's coming out of the 401k tax free (there would be plenty of taxes involved), it's that I can access it before 59 1/2 without paying an additional 10% penalty, that is the concept I'm highlighting.

 

[Oil4AsphaultOnly]

If you would have asked me several years ago, I would have said that 59 1/2 was the age you had to be above to avoid the age related 10% penalty for Roth and 401k accounts (or other tax deferred accounts).

If you would have asked me several months ago, I would say 55 was the age you had to be above to conditionally avoid the age related 10% penalty due to the Rule of 55. It requires a certain scenario, it doesn't apply to Roth accounts or even all 401k accounts, it only applies to a 401k account with an employer you worked for after you turned 55 and then left.

If you would ask me today what the age you would have to be above to avoid that penalty conditionally I would say something like 23. With a huge disclaimer that it requires a very specific combination of accounts and steps. It doesn't apply to Roth accounts on their own or 401k accounts on their own. It requires having funds in a 401k (or some other tax deferred retirement account), converting those funds into a Roth, and waiting 5 years after that specific conversion.

So what's the minimum age someone could get a 401k? It has to be offered if you are 21 or over. But they could offer one to an 18 year old even if they aren't required to do so.

"Companies that offer 401k plans are obligated by the IRS to offer you their plans if you're at least 21 years of age, have worked at least a year at the company, and provided at least 1,000 hours of service. There is no minimum age requirement for making 401k contributions."

Whats that age + 5? That is the minimum age you could conditionally wash 401k into Roth contributions and unlock it so that it could be withdrawn as a contribution without penalty.

I'm saying a hypothetical 18 year old making a 7 figure income could max his 401k contribution for his first year in the span of a few paychecks and invest it into a hypothetical stock that goes ballistic and a few months later convert funds from the 401k to a Roth, wait 5 years and have access to the gains in his 20s. Yes he'll pay very high taxes along the way for the 401k to roth conversion, but I'm saying it's new to me to conceive that he can avoid the 59 1/2 age related 10% penalty while doing so.

Which comes back to this

View attachment 974393

In the clip below he gives the example of someone who is in their 30s

âï¸ 401k to roth avoding 59 1/2 10% penalty

48 seconds · Clipped by Doug Hanson · Original video "The Roth IRA 5 Year Rules Explained: Navigating Three Confusing 5 Year Roth IRA Rules" by Safeguard Wea...

youtube.com

That is what the quoted sentence "I mean I knew that contributions (actual money from my checking account into my Roth) could pulled out without penalty. I just didn't know before today that money I've had in a 401k for more than a decade could be washed into being a "contribution" that can come out without penalty in the same way." was about. It's not that it's coming out of the 401k tax free (there would be plenty of taxes involved), it's that I can access it before 59 1/2 without paying an additional 10% penalty, that is the concept I'm highlighting.

So that's what this is all about. I like rule 72t better then. It allows early withdrawal without the 10% penalty as well, but without the whole conversion ladder setup thing.

 

[tivoboy]

So that's what this is all about. I like rule 72t better then. It allows early withdrawal without the 10% penalty as well, but without the whole conversion ladder setup thing.

I’d just like to know what how an 18 year old is that makes a ”7 figure income”.. let alone a 28 y.o. or other, making it into the .1% (that’s 1 THOUSANDS of a percent) at that age?

 

[dhanson865]

I’d just like to know what how an 18 year old is that makes a ”7 figure income”.. let alone a 28 y.o. or other, making it into the .1% (that’s 1 THOUSANDS of a percent) at that age?

It's called a thought exercise. Showing the minimum.

To be ahead of 59 1/2 you need to do it at 54 or younger

To be ahead of Rule of 55 you need to do it at 49 or younger

To do it at all you need to be 18 years old to get started and the rest can be done in short order and be ready in your 20s, but could also be done in your 30s, or in your 40s.

That is the point of an example. Just to show the concept not to find the one magical person somewhere in the US that has the youngest age that has done this.

It would be just as helpful for someone in their 40s that had the 401k around for decdades but doesn't want to wait for 55 or 59 1/2.

 

[dhanson865]

So that's what this is all about. I like rule 72t better then. It allows early withdrawal without the 10% penalty as well, but without the whole conversion ladder setup thing.

There is no conversion ladder required. 401k (or other deferred account) to Roth can be done in one lump sum if you like.

Rule 72t requires very specific structure, Roth conversion is free form, you can make it all at once or in varying sizes, start and stop at any time.

Nothing about roth conversion requires you to make a 5 year ladder or any other length ladder. If the word ladder or the concept of doing 5 years in a row triggers you.