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Early IRA and 401k withdrawals
Old 09-17-2020, 02:27 PM   #1
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Early IRA and 401k withdrawals

Just realized I'm just over the age for withdrawing from IRA and 401k.

After 5 years of ER, I'm spending well under 2% of my assets a year but that represents around double what I was spending 5-6 years ago.

I don't need to withdraw anything. There aren't any toys or other splurges I haven't been able to make, even though I'm spending less than the distributions I get every year.

But by the time I have to make RMDs, I would also have Social Security as well. More importantly, I'd be older and who knows what my health would be or whether I'd be as active.

My assets have grown over 50% in value despite spending most of the distributions, reinvesting a small percentage.

We've had a lot of threads about taking Social Security early, but I don't recall too many discussions about early withdrawals of IRA and 401k.

Anyone doing so? Or it wouldn't be good tax-wise or it would be better to sell after-tax assets first?

I was thinking of withdrawing 5% a year. My ROTH IRA balance isn't that large but withdrawing 5% of my 401k balance would be like 25% of what I've been spending so far.

Again, maybe not great for taxes but the decision would partly be to blow that dough, especially while still able to travel more.
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Old 09-17-2020, 02:56 PM   #2
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You don't recall much discussion of this because unnecessary IRA withdrawals aren't the best play. Since you don't need the money, you are much better off converting it to a Roth rather than just withdrawing it. All future investment gains and dividends in a Roth grow tax-free, unlike if you withdraw to your taxable account. Just beware of the 5 year rule that might keep you from accessing the conversion without penalty. I don't actually know it offhand but you can look it up yourself or someone else may know it better.

I convert to the edge of the ACA subsidy cliff. If you aren't going for a subsidy, then convert to the top of the tax bracket you expect to be in when you start taking SS. The math works even better if you pay the tax with outside funds (i.e., from your taxable account). So if you plan to convert $50,000, move the whole $50,000 to your Roth, and pay taxes from your taxable account.

Now, if you really want to blow some dough, withdraw away and spend, since it sounds like you have plenty.
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Old 09-17-2020, 02:59 PM   #3
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From a gut feel, I think a Roth conversion and/or the 401K>IRA>Roth route would be worth looking into rather than just considering a straight withdrawal from either the IRA or 401K. Taxes are the same and any Roth growth is not taxed (after the usual restrictions) If as you say, you have already met those requirements, then what's the holdup? Certainly, don't take my word as gospel. Do your due diligence.
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Old 09-17-2020, 03:08 PM   #4
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In this case, I have 401k account with my former employer and a Roth IRA, no traditional IRA account.

So I guess I could try to convert that balance.

I just tried this calculator:

https://www.fidelity.com/calculators...r/index.html#/

Not sure if it applies to 401k or not but it concluded, based on tax rates that I had to guess, that I'd have about 10% more money by not converting?

I may have to look at my tax return last year and retry with different tax rate assumptions.
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Old 09-17-2020, 03:22 PM   #5
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A transfer from 401K to IRA incurs no taxation and is simple to do. Then a Roth conversion becomes a taxable event. Assuming you pay the tax from within the 401K/IRA accounts, and you would be in the same tax rate now vs. later when you would be withdrawing you will end up with the same spendable dollars when you withdraw either the Roth IRA or the tIRA. If you pay the taxes from outside the 401K/IRA, then you might be ahead in by doing the Roth. There are other considerations than simple dollars and taxes though, which have been discussed many times.
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Old 09-17-2020, 03:24 PM   #6
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Yeah.... I would convert to Roth. No RMDs on Roth and growth is tax free.

If you can't convert directly from your 401k to the roth - open an intermediary IRA, to funnel through. Be sure to account for taxes on the withdrawals OR roth conversions.
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Old 09-17-2020, 03:32 PM   #7
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Rolling a 401K over to a tIRA is trivial. But if you decide not to do any Roth conversions you ought to look at this thread: https://www.early-retirement.org/for...nt-105554.html . It has some great info on why you may or may not want to do the 401K->tIRA rollover.

I haven't used that Fidelity calculator so I don't know how accurate it is, or what information you put in. I'd be very surprised if you have 10% more by not converting, since you'll likely be in a higher bracket when you have MRDs along with SS. In fact, the conversion should put you ahead. i-orp is the tool many seem to use here for such advice. Some say it's too aggressive with recommending conversions, but those people may not be factoring in how the tIRA investments can grow over time.

Tax-wise, at least with respect to an eventual conversions, there's no difference between the money starting off in a 401K or a tIRA. You just need to convert from a tIRA. A straight rollover from the 401K will not result in any taxes due.
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Old 09-17-2020, 03:53 PM   #8
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I see a reference to the 5-year rule?

So any funds I convert I wouldn't be able to withdraw for 5 years?
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Old 09-17-2020, 04:42 PM   #9
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Quote:
Originally Posted by explanade View Post
I see a reference to the 5-year rule?

So any funds I convert I wouldn't be able to withdraw for 5 years?
The rule as I understand it is your contributions can be withdrawn at any time. For withdraws above the amount contributed or converted you need to wait 5 years from when the account was opened. Since you already have an Roth, the 5 year clock started when you opened the Roth. There is also the 59.5 age rule, but I think you said that was past also.
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Old 09-17-2020, 04:58 PM   #10
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Quote:
Originally Posted by RetireBy90 View Post
The rule as I understand it is your contributions can be withdrawn at any time. For withdraws above the amount contributed or converted you need to wait 5 years from when the account was opened. Since you already have an Roth, the 5 year clock started when you opened the Roth. There is also the 59.5 age rule, but I think you said that was past also.
just in case you have had a number of Roths, it is the age of the first one that matters (if you are over 59.5)

Here is a table by kawill of the fairmark.com site that gives more detail:

"Here is the table version of the Roth Conversion chart that many here reference:

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified"
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