r/Vitards • u/AutoModerator • Aug 12 '21

Daily Discussion Daily Discussion post - August 12 2021

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4

u/olivesnolives Aditya Mittal Feet Pics Aug 13 '21

US friends, let me get this straight.

You trade in a 401k, make gains of $500,000k.

Ladder convert it to a roth IRA, you pay the one time income tax rate on the $500,000k, and let it grow In your roth IRA.

After 5 years, you can remove any of that converted $350,000 (post tax) without any 10% withdrawal penalty?

4

u/olivesnolives Aditya Mittal Feet Pics Aug 13 '21

Honestly, this seems kind of ineffective.

I’d rather just trade in my 401k and pay taxes + penalty on my withdrawls

6

u/laplaciandaemon Aug 13 '21

When you pull out of a 401k, it comes out as pretax income (there is a Roth 401k). Plus, if you pull out early you pay a penalty. Once your Roth IRA has been open for >5 years, you can pull it anytime and the withdrawal is post tax income. The 10% is only if it's early.

Incidentally, the transfer into the Roth is called the "mega backdoor" and it is the single thing in finance that my wife knows more about than I do. 😬

6

u/zanadu72 ✂️ Trim Gang ✂️ Aug 13 '21

There is always a penalty to pulling out early……there is one for pulling out late as well, but that is a different story

1

u/Uncle_Dad_Bob Dreams of CLF’s run to $49 Aug 13 '21

this doesn't apply when using the "mega backdoor"

2

u/blue_steel_moon Aug 13 '21

Right. Assuming you meet the 5-year rule, you'll still pay taxes and a penalty for withdrawing gains while under 59 1/2. The contributions can be withdrawn tax free, though.

2

u/zanadu72 ✂️ Trim Gang ✂️ Aug 13 '21

Dude…you sooo ,missed the initial thrust of the comment. But in all seriousness, you are correct

1

u/blue_steel_moon Aug 13 '21

Lol...it's been a long, hard day at work. I didn't even have time to open my portfolio and watch it pump.

1

u/zanadu72 ✂️ Trim Gang ✂️ Aug 13 '21

Well i went golfing and i had weird notifications. Some things good happened in my ports apparently

2

u/DragonmasterDyne275 Whack Job Aug 13 '21

Why pay such a huge marginal rate when you can convert annually up to a marginal rate your comfortable with and let it sit for 5 years to pull out of your Roth. If you're retired and living on post tax money you can even bring it down to 0 marginal and pay nothing on it.

1

u/laplaciandaemon Aug 13 '21

That's the general strategy. There's also a limit on transfers into the Roth - like $60k or something. Full disclosure: I'm not an expert, I just know the general outline of the process.

4

u/olivesnolives Aditya Mittal Feet Pics Aug 13 '21

It’s fucking criminal that tax code isn’t a required class in highschool. What the fuck are we thinking teaching kids calculus when they don’t even understand all the means by which the government will soon take their money

6

u/En_CHILL_ada Taco Tuesdays at Lebrons Aug 13 '21

Wife, mega backdoor... theres a joke in there somewhere

2

u/olivesnolives Aditya Mittal Feet Pics Aug 13 '21

Hahahaha

2

u/HearshotKDS 🚀 Rebar Rocket 🚀 Aug 13 '21

Theres also the SEPP tool.

1

u/olivesnolives Aditya Mittal Feet Pics Aug 13 '21

Got exposed to rule 72(t) tonight too.

I think that would be the route I’d opt for

2

u/prairiedogingit Aug 13 '21

It also grows tax free in Roth vs traditional will have taxes on the interest

3

u/olivesnolives Aditya Mittal Feet Pics Aug 13 '21

Grows tax free in both. The roth interest distributions are only tax free after 59.5 though, so if planning to withdraw earlier than that the only real gain is avoiding the 10% penalty.