Tax strategy allowing FIRE retirees to access traditional IRA/401k funds before age 59.5 without penalties by converting to Roth IRA, waiting 5 years, then withdrawing contributions. Requires careful planning and 5 years of other funding sources.
How It Works
Year 1-5 (Still Working):
- Max traditional 401k contributions ($22,500/year)
- Build taxable brokerage account for first 5 years of retirement
Year 1 (Retired at 40):
- Convert $50K from traditional 401k → Roth IRA
- Pay income tax on conversion (but tax bracket is low now that you’re not working)
- Live off taxable brokerage account
Year 2-5: Repeat conversions
Year 6: Original $50K conversion has been in Roth for 5 years
- Withdraw $50K from Roth IRA tax-free, penalty-free (even though you’re 45, not 59.5)
Year 7-onward: Access each year’s conversion after 5-year aging
”5-Year Rule”
Roth IRA contribution withdrawals are always tax/penalty-free, but CONVERSIONS must age 5 years to avoid 10% penalty. Each conversion starts its own 5-year clock.
Planning Complexity
Must project:
- 5 years of living expenses from other sources (taxable account, Roth contributions, side income)
- Optimal conversion amounts (stay in low tax brackets)
- State tax implications (some states tax conversions, others don’t)
Madfientist and Go Curry Cracker blogs documented their own ladders; became FIRE movement “graduate-level” technique.
Sources:
- Madfientist Roth Conversion Ladder tutorial
- Go Curry Cracker tax optimization
- IRS Publication 590-B (Roth distribution rules)