59 ½ is an oddly specific age. But it’s the age that has several retirement rules around it that often dictates when people decide to retire. Because of those rules, many individuals feel like they can’t afford retirement until they hit at least age 59 ½. This is because, over the years, they likely have contributed to tax-deferred accounts, like 401(k)s and IRAs, which have a 10% penalty plus taxes associated with withdrawals before age 59 ½ unless you qualify for a special exception.*
One strategy for retirement in your mid-50’s or earlier that has become increasingly popular is the Roth conversion ladder. When you complete a Roth conversion, you move money from tax-deferred accounts (think 401(k) or IRA) to a Roth IRA. If done properly, you will owe taxes on the conversion but not the 10% penalty, and you open yourself up to new set of rules. The biggest of these new rules is that the principal of the conversion can be accessed after 5 years have passed.
Jane has $1,000,000 IRA and is 45 and wants to retire at 50.
- Between ages 49 – 53: She converts $50,000 each year from her IRA to her Roth IRA
- Between ages 54 – 58: In each of these years, she has access to the lesser of $50,000 or the market value from her conversions between the ages of 49 – 53.*
- By doing the Roth conversions early, she has access to retirement funds that she otherwise wouldn’t have had without a 10% penalty.
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.
*1 “Retirement Plans FAQs Regarding IRAs Distributions Withdrawals.” Internal Revenue Service, 30 May 2018, www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals.
*2 Roth Conversions/Retirement Planning for Life Events. 2010, www.irs.gov/pub/irs-tege/forum10_roth_conversions.pdf.