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A man who retired at age 34 says a lot of retirement investing advice won't work for early retirees, but he has some that will

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  • Brandon, the “Mad Fientist,” retired at 34, six years ago.
  • The most impactful choice he made, he says, was to be strategic about minimizing taxes on his savings.
  • He invested the bulk of his savings in pre-tax accounts, then converted them to a Roth IRA and executed a Roth Conversion Ladder.

If you’re planning to retire early, some traditional retirement advice might not work.

“Mad Fientist” blogger and podcaster Brandon, who retired six years ago at age 34, tells Insider that while the traditional retiree has a high income that keeps increasing until they reach retirement age in their 60s, the early retiree’s income peaks before they quit their job in their 30s or 40s — and then it suddenly drops. 

“All the advice that I was reading on these financial sites and blogs at that time was geared to those normal retirees, and we’re not like that at all,” Brandon, who uses only his first name online, says. “We have this 10 or 20-year period where our income is lower.”

This can be a problem, because you can’t withdraw penalty-free from many kinds of tax-advantaged retirement accounts until you reach age 59 ½. But for after-tax accounts without those penalties, like Roth IRAs, you can only contribute money that’s already been taxed, diminishing your ability to save as much.

The “most impactful” thing Brandon did in order to be able to retire early was put everything into pre-tax accounts only — which for him, included 401(k)s, 403(b)s, and traditional IRAs. “That really helped me accelerate it because I was paying very little on taxes, and I was just able to invest a lot more,” he added.

Early retirees might consider the Roth Conversion Ladder

On his blog, Brandon describes the next step for his money: a process known as the Roth Conversion Ladder, which allows early retirees to access the money before age 59 ½ without paying massive penalties.

The fact that early retirees have a 10 or 20-year period of low income before they reach traditional retirement age “means that there’s this period of time that you can take all those traditional IRAs and 401(k)s and convert them to Roth IRAs,” he says.

The Roth Conversion Ladder is a multi-step process that takes years to complete, but doing so can allow you to access your retirement funds early without having to pay the 10% penalty. In order to do it, you need to start the process about five years before you think you’ll want to retire. 

1. Roll all pre-tax money into a traditional IRA 5 years before you retire

This first step is fairly quick and easy, and comes with no penalties because the rules for most pre-tax retirement accounts are the same: Convert any retirement savings you have into a single, traditional IRA.

Rolling over a 401(k) into an IRA is also something many people do after they leave a job for another. Typically, it just involves opening an IRA with a broker or financial institution and completing some paperwork from your 401(k) provider. Sometimes the 401(k) provider will send a check directly to the institution where you opened your new IRA; other times, you’ll get a check you must deposit into your IRA no more than 60 days later to avoid penalties.

You’ll need to roll your retirement savings into a traditional IRA no less than five years before you plan to retire to be able to do the process successfully while avoiding the 10% penalty for withdrawing funds. 

2. Then, convert some of your funds from a traditional IRA to a Roth

You’re not going to convert all of your funds, now stored in a traditional IRA, into a Roth. You’re still five years out (or more) from retiring, so you should only convert as much as you’ve calculated you’ll need for the first year of retirement. Because you’ll have to pay taxes when you make the conversion, converting only some of the funds will minimize the taxes due now.

You’re planning five years ahead because of what’s called the “5-year rule,” in which the IRS requires anyone who has converted a traditional IRA to a Roth to wait five years before withdrawing converted funds (which includes both contributions and earnings), or pay a 10% penalty.

However, in the meantime, you will have to pay some regular income taxes on the funds, and the lower your tax bracket at the time of conversion, the less you will pay in taxes. Eric Bronnenkant, a CPA, financial planner, and the Head of Tax at Betterment, tells Insider it’s also important to keep in mind at this stage that taxes for the conversion must be paid with non-retirement funds to avoid that 10% penalty.

3. Do a series of annual conversions for withdrawals in subsequent retirement years 

After you do the initial conversion five years in advance for your first year of early retirement, do one conversion each year to finance your next years of retirement: A year after your first conversion, you’ll convert the funds you need to finance year two. The next year, you’ll convert the funds for year three, and so on. Like for your first year, making your conversions in pieces will reduce the total amount of income tax you’ll pay each time.

This step is why this process is called a “ladder” — you’re “laddering” your conversions so you have a smooth and steady stream of penalty-free retirement money for the extra 10 or 20 years that you’re retired before traditional retirement age 59 ½. 

4. Withdraw the funds in pieces as planned

After the five-year waiting period, you should be able to access the money for the first year of your retirement without paying the 10% penalty. If you’ve done the annual conversions correctly, you should have money parked in your Roth IRA, waiting for future annual withdrawals for several more years.

If you’re planning on trying the Roth Conversion Ladder, one thing to remember is that while you can pull contributions from the Roth IRA as planned, you can’t take out any investment earnings from the account without penalty until you hit 59 1/2 (no matter how much they grow!). “If the earnings are withdrawn prior to age 59.5,” Bronnenkrant said, “they will be taxable as ordinary income and subject to a 10% early withdrawal penalty.”

This process can be complex and it does require careful planning, so it may not be for everyone, and you may want to enlist the help of a financial planner or accountant. 

Also, the Roth Conversion Ladder is not the only strategy that early retirees can use, Bronnenkant said. Other methods, such as Substantially Equal Periodic Payments distributions can also help you avoid the 10% penalty on early withdrawals from retirement accounts. However, he added that the SEPP distributions have “very limited flexibility” when compared to the Roth Conversion Ladder.