Withdraw Your Retirement Accounts In Your 30s. No Taxes. No Penalties.

I’ve been writing a contract proposal for my 9 to 5 this past week. Unfortunately, this kind of proposal isn’t as easy as this kind of proposal–which I loved writing–so it has really taken away from my Retire29 schedule. Ten days without a post is rough.

Anyway, let’s get to it.

First, a disclaimer. This article is about taxes–a topic that I absolutely love. As far as I’m concerned, an effective tax strategy beats an effective investment strategy any day of the week, because there’s no better return than making 25% overnight (or whatever your marginal tax rate is), by legally avoiding taxes. Specifically, this article is detailing my well-researched plan on how I’ll be withdrawing my entire Traditional IRA and 401(k) while in my 30’s without paying income taxes or penalties–thereby making my very early retirement possible. This plan has been fully vetted by Wesley Snipes the internal revenue code, which I cite throughout. However, taxes are a lot like fingerprints–they’re a little different for every person. Find an answer to the question: how do umbrella companies work? They will handle all the accounting for you. So, I can only write about my situation, and I hope you readers can take the lessons therein and use them in your own approach.

The 401(k) Problem

401(k)s are a pretty fantastic little creature. They’re easy to enroll into, they often come with a company match, they increase the value of your paycheck through tax avoidance, and the money is saved before it is available to you–a classic “pay yourself first” savings strategy. Th3 401(k) is precisely why something like 60% of my investments upon retirement will be in 401(k)s and  Traditional IRAs (from rolling over old 401(k)s).

A commonly cited problem with these tax-deferred accounts is that the money is tied up until one turns 59 1/2. Withdrawing your money before age 59 1/2 results in not only the owing of ordinary income tax, but also a 10% early withdrawal penalty. This desire to avoid the penalty is an oft-cited reason for needing to work longer. A early commenter to Retire29, Heather, spoke of this withdrawal restriction and lamented it as her reason for needing to work much longer. I’ve owed her a thorough response to this issue.

Then, a couple months ago, I was having lunch with a buddy of mine who spoke of the same restriction. It has even pervaded the financial blogosphere. Last week, my brother asked me about it. It’s a problem with seemingly no easy answer…until today.

I encourage you to read through this, as there’s a pretty big, yet simple “bottom line” that I’ll conclude with at the end that may really change how you approach your early retirement savings.

How To Do It

This is approximately how my retirement savings (and income from that savings) will look when I retire. Don’t get too hung up on the exact numbers or even the date, though, because the strategy is agnostic of the account balances or the date it begins.


As you can see, I’m heavy into accounts where my money is off-limits to me. The only money that is immediately accessible (unencumbered) will be my current income (couple rental properties, writing income, maybe some part-timing work), my taxable brokerage, and my Roth IRA deposits. As most of us know, contributions to Roth IRAs can be withdrawn at any time and for any reason. As such, my only fully unencumbered funds (at this point) will be just my taxable brokerage balance and about one-third of my Roth.

First Action:


The day after I retire, I’ll go ahead my move my Roth contributions over to my taxable brokerage. Because these are just the Roth contributions (not the earnings), then this is not a taxable or penalized event. I’ll also move my entire 401(k) balance over to my traditional IRA (which is where I do my dividend growth investing). The common tax-deferred structure of both 401(k)s and Traditional IRAs means that there is no tax event or penalty owed to the IRS for this move (as long as the rollover to the IRA occurs within 60 days of the 401(k) withdrawal).

Second Action:


The second step, which will occur at about the exact same time as step 1, is to move roughly $60k from my Traditional IRA to my Roth IRA. There is no 10% penalty for this conversion as long as the deposit to the Roth IRA occurs within 60 days of the withdrawal from the Traditional IRA. However, this move is a taxable event. Traditional-to-Roth conversions count as ordinary income, so I will owe tax on this conversion for my 2020 return. I will repeat this ~$60k conversion each year into perpetuity, until the Traditional IRA balance is zero. Likewise, I will owe income tax each year on that ~$60k, as well. I say that I will owe income tax, but I describe later down below that I probably won’t. Please read on.

It is important to note that the only money, still, that I can use for living expenses is what is in my taxable brokerage (~$145k). Recall that I have already moved my original Roth contributions over to my brokerage account (Action 1), so my entire Roth is still off limits. Until…

Third Action:

pic4Enter the 5-Year Roth IRA conversion rule. This is described in vivid detail in Internal Revenue Code 408A, but it says this:

  • Any money converted from a Traditional IRA to a Roth IRA can be withdrawn from the Roth IRA after five tax years without penalty.
  • Since income taxes were paid upon initial conversion to the Roth IRA, no taxes are owed upon withdrawal from the Roth IRA.
  • Five tax years means that any conversion made at any point in a calendar year is assumed to be made on January 1st of that calendar year. Theoretically, if I convert funds on December 31st, 2020, I can withdraw those funds on January 1st, 2025 (4 years and 1 day later)
  • Each conversion made is subject to its own five-year period.

I will withdraw from my Roth IRA the conversions I made in Step 2. Assuming (from step 2) I converted $60k each year starting 2020, then I’ll withdraw $60k each year starting 2025. I will continue these withdrawals from the Roth IRA until the balance of the Roth is just the earnings. As long as I follow this five-year waiting period, then there is no penalty for this withdrawal of converted funds–even though I’ll still be way under age 59 1/2.

Wait??? What about those taxes?

Recall from step 2 those conversions in 2020 and onward of $60k per year. Those are subject to ordinary income tax. But, I said tax free, right? Okay, so here is what my 1040 will approximately look like in the years 2020 and onward.


I’m obviously making some assumptions here on what the standard deduction and exemption amounts will be five years from now. However, the Tax Policy Center has a nice PDF that shows the growth of standard deductions and exemptions over the last 15 years, so I’m factoring in growth in those figures at rates slower than in the past. I’m being conservative. I’m also not factoring in any other possible credits or above-the-line deductions.

My best guess is that any tax liability in retirement as a result of these big conversions will be close to zero. I will have some other income coming in, but that income will be largely offset by for-AGI deductions, I’d have to check with an advisor like Dave Burton just to make sure I am on the right page here.

In Summary

Just to recap the steps, for the first five years of retirement, funds for my living expenses will be limited to current income, passive income generated from my taxable brokerage and original Roth contributions (as they will convert to my taxable brokerage), and principal in the taxable brokerage account.

During the first five or so years of retirement, I’ll convert ~$60k from my traditional IRA to my Roth IRA, owing income taxes (but not really, as discussed) but no penalties.

After five years of retirement, my unencumbered assets increase every year by ~$60k as I withdraw those funds from my Roth and deposit them into my brokerage account. Because I’m adhering to a five-year hold rule, I owe no penalty on the withdrawals even though I’m well under age 59 1/2.

The Bottom Line

There is an often cited number in retirement circles: you need 25x your yearly net expenses* in investments in order to retire. I agree with that number; it is the basis of the 4% safe withdrawal rule. However, little is said about the disposition of that nestegg. Need it be all taxable and available? Can it be in retirement accounts? What if I retire early?

I’m here to propose a new rule. You still need 25x your yearly net expenses, however, you only need at least 5x in unemcumbered accounts, and 20x in retirement accounts–no matter your age. If you’re above 59 1/2, then all 25x can be in retirement accounts.

Now, please talk to me. What are your thoughts about this strategy?

Thanks so much for reading!


*: I say “net expenses” referencing the 25x rule because any current income you make (meaning, income generated outside of your investments) will offset any expenses you have, lowering the burden on your investment assets. Hence, the strong power of making a little bit of money during retirement can greatly reduce the amount of assets needed to retire.

**: MadFIentist wrote this post about this exact same strategy two years ago. It is as applicable as it is today. I only found it a couple weeks after originally publishing this post, so I’m linking to it down here.


  1. I just discovered your blog and I am enjoying catching up on your posts.

    A few questions about this rollover strategy:
    – When/how can you access the earnings you left in the Roth IRA in the first action?
    – In the third action, is the amount you convert from the Roth IRA to the taxable account based on the dollar amount (i.e., not share value) of the conversion from Traditional IRA to Roth IRA 5 years earlier? Also, how do any earning/losses from shares bought with the money you converted affect this?

    • Hey Colin,
      The Roth earnings are stuck in the Roth under age 59 1/2 unless you can make a qualified distribution (disability, first time homebuyer, beneficiary dies), otherwise you’re paying a 10% penalty.

      The conversion to from Roth to taxable is only dependent on the dollar amount converted from Traditional to Roth. If the converted amount grew in the interim, then I could only withdraw the converted amount. If it decreased, then I could still draw down the converted amount, assuming the Roth balance is high enough.

      Thanks for the questions.

  2. Great Post – Retire 29
    This really hits home to me since I am trying to figure out the best withdrawal strategy for our family- I’m 35 now and I have about 5 years left me at the 9-5 before I seriously consider implementing my plan to retire.

    The biggest difference for us is during the transition stage, my wife will continue working while I retire and determine the best way to transfer funds to Roth. She’s a teacher in a non-stressful job so will continue to work another 10 years- which is good because her job will provide health care and she also has 2 tax deferred accounts at here disposal 457/403B. So we can continue to build our tax deferred income while we are transitioning. My goal is to build the Roth IRA income as high as possible and not to touch the Roth income unless absolutely needed over next 10-15 years to let the compounding take effect.

    As for our current situation, we are pretty exited as we just hit $950K in our investments!
    Taxable 123.7 123.7 13.0%
    Roth IRA 237.9 75.9 313.8 32.9%
    401/403B 355.5 44.6 400.1 42.0%
    529 86.8 24.6 111.4 11.7%
    HSA 4.0 4.0 0.4%
    953.0 100.0%

    In our plan over 10 year period we expect to transfer ~$60K-80K a year from trad IRA to Roth IRA every year. During this time we will rely on my wife’s income to limit Taxable Account withdrawals to only what is necessary. We probably won’t tap out the Tax deferred completely – our goal will be to just try to get it low enough to minimize RMD’s at 70.

    That’s our short/mid term plan – I haven’t decided what to do after we turn 50. Since lots could change with the tax code by then.

    Thanks again for sharing your strategy!

    • Mike,
      Thanks for commenting and sharing your numbers. Sounds like your strategy is not much different than my own, utilizing the Roth conversion to avoid penalties and mitigate taxes. One of the best parts of this strategy is that around the end of a given year it’s rather easy to know what your tax bill will look like, then, with that knowledge in hand, you transfer whatever amount that will optimize your tax situation.

      Awesome investable assets! Those are some big numbers. I don’t expect to be at $950k in five years.


  3. Great plan. Thanks for the visual aids that makes it pretty clear. When I see these approaches and tax savings strategy I could retire much sooner… But I still have a couple of costly projects I’m pursuing and working on. Probably will retire after My kit plane is paid for.. Then I’ll have time to build it and start flying it.


    • Tim,
      Sounds like a reasonable stopping point (it’s as good as any other). We are shooting for right around new year 2020, unless we want to have even more kids at that point. We want to have all our kids birthed before retirement–so that might be the only thing to delay things.


    • It ends up not being nearly as complicated as it may sound in an initial read. Just a few transfers here and there, the tax forms will all get sent from your bank–so it handles pretty well. I encourage you to give it some serious thought. Thanks so much for commenting!


  4. Thanks for the very informative article, it’s amazing to see the kinds of things that people can think up!

    Technically, you are paying taxes… but with your assumptions, you will be tax-free! Hopefully it comes true!

    Have a good day,

    • Yep, paying taxes, but adjustments will result in no actual tax bill. It’s pretty fantastic. One of the only ways I can think of to make money without ever paying taxes on it (legally).


  5. I love how clearly you have explained this strategy. I recently left my employer and in rolling my 401k to my traditional IRA I just want to caution it can take 7-10 business days. I haven’t figured out why they can’t perform an electronic transfer, instead the 401k company has to issue a check, send by US mail, I get to turn around and ‘snail mail’ it to Vanguard.
    I definitely have more time before I’m FI, but will keep this strategy in mind. Thanks!

    • It is sort of funny how long 401(k) transfers can take–and that it’s still primarily a “snail mail” operation.

      But, once you’re done, you’re done.


  6. I love that more and more people are planning for this strategy and sharing with others. I think Root of Good and Mad Fientist introduced me to this concept at first and I’ve incorporated the plan into my goals.

    I think Erik was pointing out that you are paying taxes on the conversion but the child tax credit happens to wipe that out, otherwise you would receive a larger refund. In any case though, it is the cheapest way to convert that money to be able to use it at a young age, especially with frugal living.

    • Danny,
      Thanks for commenting. Yah, the tax considerations are obviously very fluid. I will probably be making a little money on the side in 2020 and onward, so I’m sure I’ll still have a some sort of tax liability. However, it will be very minimal.


  7. Thanks for spelling out your plan. I knew there was the 72(t) distribution to access the retirement funds earlier but this definitely seems like a better plan. It takes a lot more long term planning to figure out how you’re going to execute the strategy but it’ll be worth it. Having the retirement funds out of retirement accounts will be a huge boost to your passive income.

    • Totally Right, JC. The 72(t) distribution (which, for those who don’t know, is like a long-term annuity payment from your IRA) wouldn’t be much income for somebody as young as I will be. Just a few hundred per month.


  8. Great Article as usual. If they change the back door Roth conversion would it affect this strategy as well? I keep reading Congress is looking to close it.

    If so, how does this affect your plans?



    • The backdoor Roth conversion, as it is commonly called, refers to those in income brackets that are eligible for Traditional IRAs but not Roth IRAs. The “backdoor” is setting up a traditional and converting to Roth–since converting has no income restrictions.

      When we hear talk about closing this loophole, it is referring to preventing high income earners from converting to Roth. As such, there would be no effect on little old me.

      I suppose Congress might close the option to convert to Roth for all incomes, but I see that as quite unlikely. Anything that hampers the middle class is pretty quickly shot down in both houses. But, it’s something to keep an eye on for sure.


    • Thanks, Adam. I did put in a little time on the visuals. I, myself, was having hard time keeping up with everything without them, so I knew they were necessary to maintain reader interest.

      Thanks for reading and commenting!


  9. Your plan may be workable but have you considered the effects of withdrawing your retirement benefits early? They will be subject to tax just like ordinary income (unless you think the tax has insignificant impact of your financial well being and I think it does). Secondly, do you trust these IRA schemes? Suppose the one you choose to roll over your contributions collapse?

    • Hi Chella,
      Yes, they will be subject to ordinary income tax at the point of Traditional-to-Roth conversion, however, as I describe above, my exemptions, deductions, and credits will all but wipe out any tax liability.

      I wouldn’t call this a “scheme” either. That has a sort of negative connotation. This is a totally legal strategy for unlocking retirement assets prior to 59 1/2 years old.

      I’m not sure what you mean by my “contributions collapse.” The investments won’t change regardless of what account they’re in.

      Thanks for reading and commenting!


  10. Hey, great post! My only concern is that you intend to transfer funds from your Roth to your taxable brokerage account. After 5 years, you can withdraw the converted sum directly from the Roth. There is no need to move the money to your taxable account. If you do, you’ll lose the benefit of tax-free growth and you’ll have to pay cap gains on withdrawals from your taxable account. I’d hate to see you needlessly pay taxes after getting your money in the holy grail of investment accounts (my pet name for the Roth). It’s more tax efficient and administratively less burdensome to withdraw funds directly from the Roth.

    • Hi Fallon,
      Thanks for reading and commenting. You’re right, except that I want to keep the money working for me. Plus, I’d only be paying cap gains on shares I sold. I never plan on selling any shares. The dividends from my taxable brokerage would be qualified, and I’ll be in a tax bracket (15%) that allows me to collect qualified dividends without paying ordinary income tax.

      So, even though I’m moving the money from a Roth to taxable accounts, I still won’t have any taxes because I’m not selling (thus no capital gains tax) and the dividends will be qualified and tax-free because of my income bracket.


  11. May I ask why you’d risk changing tax schemes, and inevitable increases in cap gain/qualified dividend taxation rates, when your money is already shielded from tax in the Roth, and may be withdrawn (in large part), within 5 years, penalty/tax free? I’m wondering if there is a need/ benefit to consolidating your assets that I’ve failed to consider. Thanks for the reply, I always love learning more about other folks’ strategies and underlying rationale, as it better informs my thinking and investment approach.

    Thanks again!

  12. I’ve read the Mad Fientist article on the topic and I think you did a great job explaining, especially with the pictures and examples that helped a lot.

    You brought up a couple points that I never really thought about with the Roth IRA and moving over what you need over to your taxable account, my thoughts were to keep it in the taxable account.

    The question that I always have and it’s really independent for each person is the amount to transfer over each year to avoid taxes. We will also have rental income each year so getting this to match up will be a good project in the last year working towards FI.

    Great post though, hats off to you sir.
    Even Steven recently posted…What I Learned from a Week of Biking to WorkMy Profile

    • I found the Mad Fientist article just a couple weeks after I wrote mine. His was probably written better, but I definitely am glad I added the graphics, as it’s easy to get lost in the numbers.

      Thanks for commenting!


  13. Love the pictures. What are the income numbers on the various pictures? Are they expected dividends? Doesn’t this money have to stay in the Roth and IRA buckets unless it qualifies for transfer. That is you can’t use all of this income to pay expenses in retirement, or did I miss something.

    • The income numbers are what I expect to receive in dividends from the balance, so you’re right. The common misconception is that the money does need to stay in those buckets, however, the transfer qualifications–as I laid out above–aren’t all that stringent. Once the assets are converted to a Roth, then you just need to leave them for five tax years until they can be withdrawn without penalty.


  14. Having a family really seems to help you avoid taxes. However, do you still owe FICA (social security, medicaid) taxes on the $60K that you converted?

    • Yes, family really helps with tax reductions.
      And No, FICA and Medicare were already paid when I initially earned the money. Those are payroll taxes, and are paid when the money is earned.


  15. Eric, Great article and blog!
    This is really useful to think about. I need to read about the Roth conversion rules. I only understood the 72t part, and yes that would be minimal income. Even though it’s not enough total income, would it work to combine both methods 72t and this blog post topic (IRA->Roth conversion->Roth withdraw within 5 yrs)?
    Is Roth money the last that you want to spend/touch, for tax avoidance? Maybe that’s how this would end up. Leave it in the Roth, if you’ve got enough after-tax $ to get to 59.5, and that’s where the last lump stays.
    I laughed at your comment ‘We want to have all our kids birthed before retirement–so that might be the only thing to delay things.’ You’re getting a good early start! Our holdup now is kids are still at home and don’t want to quit school. Also we’ll want a little earned for college expenses.
    An additional strategy, if not already done: You can do in-service withdrawal rollovers from your 401k, before retiring and rolling the whole thing. Especially if you’ve ever let your contributions go over the yearly pretax limit, then there are after tax contributions that should be rolled to a roth. Otherwise you’d be paying tax on the earnings as they grow in the 401k.
    Another strategy, do a test retirement. We rented out our house and took this past year off in a camper. Now back at work and highschool for the kids. Taxes got near zero in 2015 (worked 9 months), and will be zero for 2016 with 3 months income. I don’t think it will be low enough to convert IRA->Roth in 2016. But if it was done over a full calendar year, early in career, then that money will be growing tax free in the Roth a long time.

    Thanks! Dale
    Dale recently posted…
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  16. Great strategy to avoid taxes on conversions, and I enjoyed reading the article very much!
    But my question is how can one retire early with this strategy when a $600k + account will be depleted after 10 years into retirement, with only ~$1500 in dividend income?
    Maybe I am missing something since I read the article really fast….

  17. Eric,

    I think that everything is a good strategy (converting the 401k’s-to traditional IRA’s/ then tonthe Roth IRA’s). This is where I think its best to stop. Why, move money from the Roth into your taxable brokerage account? Your Roth grows tax free on any earnings and you never pay tax on distributions or withdrawals of your contributions. Your taxable brokerage account you will pay tax on your earnings, so why put it in there? Keep it in the ROTH!

  18. Good strategy to avoid taxes on conversions, and I enjoyed reading the article very well but I was having hard time remain up with everything without them, so I realize they were necessary to maintain reader interest.

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