If you’ve ever wondered about Roth IRA withdrawal rules, the best way to manage stock holdings, or how to avoid costly tax missteps, this article is for you.

1. Funding Early Retirement Before Age 59½

Peter Lemon asked how to cover a few “gap years” before age 59½ without triggering penalties on retirement account withdrawals. He considered using Roth IRA contributions, which can be withdrawn tax- and penalty-free at any time. But he was unsure how that applied to dollars rolled over from a 401(k).

Julie clarified that even after a rollover, Roth contributions retain their original basis and are still eligible for penalty-free withdrawals. However, earnings on those contributions are subject to the five-year rule or age 59½, whichever comes later.

Joe and Big Al cautioned against tapping Roth IRAs too early, emphasizing that preserving tax-free compounding is often worth the wait. Alternatives like the IRS 72(t) election—which allows for penalty-free withdrawals if you take equal periodic payments for five years or until age 59½—were also discussed.

2. Paying Roth Conversion Taxes from Retirement Accounts: A Costly Move

One common mistake? Using retirement funds to pay the taxes on Roth conversions. Big Al illustrated this with a cautionary tale: a couple withdrew $500,000 to pay off a mortgage, leading to a $200,000 tax bill and additional stress.

Whenever possible, taxes on Roth conversions should be paid from non-retirement (non-qualified) assets. Otherwise, you risk reducing your long-term nest egg and missing out on future tax-free growth.

3. Backdoor Roth Contributions vs. Brokerage Accounts

David from Cincinnati asked whether to prioritize backdoor Roth contributions or build liquidity through a taxable brokerage account. With $630,000 in assets at age 30, he’s in a strong position either way.

Joe pushed for maximizing Roth contributions to take advantage of tax-free compounding. Big Al made a case for building up liquidity, especially with kids and potential home improvements on the horizon.

The takeaway? It depends on your goals. If you’re laser-focused on retirement, Roth wins. If you value flexibility, taxable accounts give you more freedom.

4. Consolidating Individual Stocks vs. Index Funds

Another listener asked whether they should roll 20 individual stock positions into an S&P 500 ETF. Big Al noted that an index fund offers broad diversification across 500 companies—compared to the limited scope of 20 individual stocks.

Joe added that selling stocks may trigger capital gains taxes, so investors should evaluate both the tax implications and their confidence in the individual holdings.

5. Understanding the Roth IRA Five-Year Rule

A common point of confusion: does the five-year rule apply to non-taxable Roth conversions, like those from after-tax 401(k) contributions?

Big Al confirmed it does. All Roth conversions—taxable or not—are subject to the five-year waiting period before the money can be withdrawn penalty-free. That’s in addition to the rules around age 59½ and original contribution tracking.

6. Home Office Deduction After the Tax Cuts and Jobs Act

Big Al clarified that the home office deduction is now only available to self-employed individuals. Employees can no longer claim it on their federal returns. However, some states still allow it—so it pays to check local tax laws.

7. Balancing Pretax and Roth 401(k) Contributions

A participant asked if contributing 15% pretax and 5% Roth is a smart strategy. Big Al said it depends on expected tax rates in retirement.

Pretax contributions lower your taxable income today but are taxed later. Roth contributions offer no upfront break but provide tax-free withdrawals. Balancing the two offers flexibility, especially if you’re unsure where future tax rates will land.

8. Can You Use Roth Dollars to Pay for Roth Conversion Taxes?

Michelle wondered if it’s okay to pay Roth conversion taxes using Roth IRA dollars. Joe and Big Al said it’s technically allowed—but not ideal.

Why? Because using Roth funds today means giving up future tax-free growth. If other non-qualified money is available, it should be used instead.

Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.

IMPORTANT DISCLOSURES:

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.

• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.

• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.

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