using a roth ladder to retire early...and avoid early withdrawal penalties!
TRANSCRIPT
STEP #1: FINDING YOUR ENOUGH
Without consciously figuring out what you need to be happy,
you’ll always be susceptible to the hedonic treadmill.
As fellow Fool Morgan Housel has pointed out, happiness
really boils down to a few key factors:
Control over what you’re doing.
Progress in what you’re pursuing.
Connections to other people.
Having purpose and meaning.
Try to focus on these four things and you’ll be leading a more
balanced life while (most likely) drastically reducing your
spending.
STEP #2: MAX OUT YOUR 401(K) AND
TRADITIONAL IRA
We’ll get to why these two can work even better
than a Roth a few steps later.
For now, all you really need to know is that by
maxing out both of these accounts, you
significantly reduce your taxable income .
Yup, you read that right—start investing in a regular old
brokerage account.
Because you’re a long -term investor, you shouldn’t owe much—
if anything— in capital gains.
You will , however, need to pay taxes on dividends you receive.
Once you retire, this will provide you with a necessary cushion
and, in the end, you might not owe anything in taxes.
STEP #3: USE YOUR EXTRA SAVINGS TO PUT
INTO NON-TAX ADVANTAGED ACCOUNTS
STEP #5: USE YOUR MONEY FROM STEP 3
TO LIVE OFF OF…FOR NOW
Believe it or not, you could actually l ive off of your capital
gains and dividends tax-free if you’ve truly reduced your
spending.
If you are in the 10% or 15% tax brackets in retirement, you
owe nothing for such gains. As I’ve shown before, you could
bring in over $100,000 per year and stil l be in this tax
bracket, depending on your fil ing status and the exemptions
that you take.
STEP #6: BEGIN SLOWLY CONVERTING TO
A ROTH IRA
In your first year of retirement, convert an amount equal to
your expected yearly expenses into a Roth IRA. You will
continue doing this every year until all of your money has been
converted.
Any conversions are considered regular income, so there’s
l ikely no way to avoid paying some taxes on these conversions.
However, because you are retired and living off of less than you were
earning in your working years, the taxes you owe should be
substantially less than had you initially put your money into a Roth
IRA.
STEP #7: AFTER FIVE YEARS, START
LIVING OFF OF YOUR ROTH MONEY
Once five years have passed, you can withdraw any principal
you’ve put in a Roth tax free!
By the time you reach 59 ½, you can also withdraw any capital
gains tax-free as well!
And just l ike that, you’ve avoided paying a ton of taxes, and
maximized your time for the most important things in life!
LOOKING FOR OTHER WAYS TO MAXIMIZE
RETIREMENT INCOME?
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