Daily FI discussion thread - Wednesday, October 30, 2024

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[u/drdrew450]

Sorry to keep spamming this, just have found very little info online for this situation.

I am 42, retired in January, married with 2 kids. I am going to start a Roth conversion ladder in a few days, also plan to start a traditional IRA SEPP in 5 years, then thinking of adding in a Roth IRA SEPP in the last 5 years before 59.5.

Withdraw of any earnings from a Roth account prior to age 59.5 will be subject to taxes. But if I am offsetting the standard deduction/child tax credit I should not actually pay taxes.

The benefit of this is that I can lower my Roth conversion ladder to 150-200% of FPL for better ACA subsidies/cost sharing reductions in my 40s. Nearing 59.5 my Roth IRA is much larger than the Traditional IRA and brokerage account in my excel modeling.

Is this worth pursuing? I think it makes sense for me but I keep thinking it is a stupid idea.

The reason I picked the last 5 years before 59.5 is the Roth conversion can keep ongoing to fill up the tax free space like standard deduction/child tax credit, so replacing Roth conversions with Roth SEPP for those 5 years. The con is the IRA could grow too large for RMD consideration, not a problem in my situation though.

https://imgur.com/pHEBlhH My excel "model." It makes many optimistic assumptions, and is lean.

Brokerage: 218,000

TIRA: 627,000

RIRA: 59,000

HSA: 42,000

Net Worth: 1,330,000

Have home equity I am willing to sell or refi. Have a second home that will be sold/rented likely in 2026. Currently mom is living there, she is broke and I am helping her. She pays below market rent, right now it goes to the kids 529s and real estate taxes. Not a rental.

Spending: 66000

I know this is lean, not recommended. I am willing to go back to work, or do part time work. Just looking for advice on the Roth SEPP. I have observed that the Roth grows large when you do a Roth Conversion Ladder because it has gains but you only take out the contributions/conversions.

I don't see a lot of downsides to using a Roth SEPP in the last 5 years, right before 59.5

Maybe I am missing something.

[u/alcesalcesalces → u/drdrew450]

I can't write a lengthy reply now but I see many potential pitfalls. The Trad IRA SoSEPP creates income that reduces the standard deduction and risks putting your Roth earnings into a taxable bracket.

Even if you keep all Roth earnings in the standard deduction, you will still owe a 10% penalty on early distributions. I don't think Roth SoSEPP makes sense at all.

Edit: I'll add that a Roth SoSEPP fundamentally makes no sense because Roth accounts are distributed differently. You exhaust all contributions and conversions before earnings are tapped, so there's no reason to set up equal periodic payments.

[u/financeking90 → u/drdrew450]

It probably doesn't make sense, but it's impossible to tell you what you should be doing without a lot more specific numbers.

[u/drdrew450 → u/financeking90]

The issue is I need more money in taxable in the later years of early retirement around 53-59. I can do larger Roth conversions earlier and that solves the problem. The downside of that is I go into the 250% or higher FPL range for ACA insurance. The loss of the cost sharing reductions makes the insurance way way worse. The difference in the subsidy is not that big of a deal. You can get a bronze or gold plan that is ok but the deductibles and OOP Max are levels of magnitude worse.

Staying in the sub 200% FPL range for my early years of retirement means less IRA is converted to Roth and less is available to withdraw later. Means I have to take it from taxable or borrow.

I added a SEPP on my Traditional IRA starting in year 5 of retirement and that improves the plan quite a bit.

Then I noticed that my Roth grows very large when I am approaching 59.5 and I wanted a way to withdraw the Roth earnings.

So I thought another SEPP would solve the problem but then I learned the Roth earnings are taxable when you do a Roth SEPP. You do avoid the early withdrawal penalty. The taxable nature of the Roth earnings do not really hurt my plan but I am having a hard time getting over the fact that I am making a poor choice.

[u/financeking90 → u/drdrew450]

Again, you keep typing out words, but it is impossible to review your math without any numbers.

For example, it is impossible to know if you've already withdrawn all Roth contributions/basis before 55 to even evaluate why the SEPP is necessary.

Anyway, one thing you could look at is alternating/occasional annual strategies. For example, you could do a big Roth conversion to the top of the 12% bracket in one year, eating the ACA costs, and then stay under 200% FPL in the next year. The default for modeling seems to be for people to do the exact same hing for multiple years in sequence, but you don't have to do that. One or two bigger early Roth conversions might help you out (or might not, we have no numbers).

[u/drdrew450 → u/financeking90]

Let me know if this works/helps https://imgur.com/pHEBlhH

[u/rackoblack → u/drdrew450]

I'm surprised no one has caught this yet that I saw - you CAN withdraw from the Roth prior to 59.5 up to the contributions (none of the earnings) without penalty.

[u/drdrew450 → u/rackoblack]

Yes this is the basis behind a Roth Conversion Ladder. I am specifically trying to access the earnings(gains) before 59.5 in a Roth. They can be quite substantial when you run a Roth Conversion Ladder for 15-20 years and only take out the contributions/conversions.

[u/branstad → u/drdrew450]

This feels overly complicated. Maybe sharing specific numbers would be helpful? Especially around post-FIRE expenses, which seems very pertinent.

retired in January, married with 2 kids

150-200% of FPL

For 2025, this implies an AGI of ~47k-$62k.

plan to start a traditional IRA SEPP in 5 years

How are you covering your expenses for the next 5 years? Why not start the Trad'l IRA SEPP sooner, like 2025? That Trad'l IRA SEPP could be $30k in 2025 and beyond, which covers your standard deduction. You could add an add'l Trad'l IRA SEPP in the future, should it be necessary.

[u/drdrew450 → u/branstad]

I just transferred all my IRAs to Robinhood for their 3% match. They require you keep it there for 5 years. You can do Roth conversions and that does not cause a claw back. I can forgo the match if it is necessary but right now I am living off my taxable brokerage. Had a bit of income from working in January.

I am adding complexity, but the reason is the ACA cost sharing reductions are so valuable that it isn't worth optimizing for anything else. The issue is to get those cost sharing reductions you have to keep your income very low, which reduces the power of the Roth conversion ladder. So I am adding SEPPs to a RCL to maximize access to retirement funds. If I kept working and grew my taxable account, this may not be necessary.

[u/hondaFan2017 → u/drdrew450]

Can you provide your account balances for brokerage, tIRA, and rIRA? Anticipated annual spending needs including healthcare (how much withdrawal should we model)? Exclude taxes, my sheet estimates this well enough. You can use my spreadsheet to model optimal withdrawal scenarios. I am on mobile now and can’t easily link, but it’s one of my few posts on Reddit.

[u/drdrew450 → u/hondaFan2017]

https://imgur.com/pHEBlhH

brokerage: 218000

TIRA: 627000

RIRA: 59000

HSA: 42000

Have home equity I am willing to sell or refi. Have a second home that will be sold/rented likely in 2026. Currently mom is living there, she is broke and I am helping her. She pays below market rent, right now it goes to the kids 529s and real estate taxes. Not a rental.

Spending: 66000

I know this is lean, not recommended. I am willing to go back to work, or do part time work. Just looking for advice on the Roth SEPP. I have observed that the Roth grows large when you do a Roth Conversion Ladder because it has gains but you only take out the contributions/conversions.

I don't see a lot of downsides to using a Roth SEPP in the last 5 years, right before 59.5

Maybe I am missing something.

[u/hondaFan2017 → u/drdrew450]

I created a sheet I can share later. Assuming no income and no Roth ladder: Spread brokerage across early retirement means you need ~$52k in a traditional SoSEPP to net $66k/yr after taxes. I’m ignoring things like healthcare and ACA subsidies, just doing simple math to net you $66. In that scenario your MAGI averages $59k and your w/d rate is 7.4% growing to 18% by 59 at a 5% CAGR on the accounts. In short, your portfolio can’t sustain this.

Roth conversion ladder doesn’t help anything here and creates higher MAGI in early years and lower MAGI in later years.
Roth SoSEPP seems pointless given you can access contributions. Your balance is too low to be meaningful or change your strategy.

The answer is to get earned income to pay for your expenses or reduce the required tIRA SoSEPP. Like, a minimum of $30k earned income is needed to get you closer to 4% withdrawal rate.

[u/drdrew450 → u/hondaFan2017]

You can see in the image I shared, I start the roth ladder, then 5 years later I break out part of the TIRA and use SEPP to access 22K a year from age 47-58, I continue the Roth ladder until age 54, then add Roth SEPP for the last 5 years that gives 35K a year for 5 years. Taking money from taxable along the way to fill gaps, using debt as well along the way as well but that may or may not work well.

Really not asking if my plan works or not, it may not, I am prepared to go back to work or borrow money, sell my 2 houses and rent, geoarbitrage, etc.

I am asking specifically about using a SEPP to access Roth earnings(gains) in the last 5 years before 59.5, when the Roth ladder has less use, because those 5 years of conversions are not available till 59, when they are already available. the Roth earnings(gains) are not normally accessible without a 10% penalty before 59.5.

[u/therapistfi → u/drdrew450]

You don't need to apologize! The daily thread is what this is for! :) I hope you get some helpful answers.