Title: How I'm Accessing My IRA at 45 (Without Paying Penalties)

Podcast Information:

• Title: BiggerPockets Money Podcast
• Hosts: Mindy Jensen & Scott Trench
• Description: For those who have money… or want more of it! Join Mindy Jensen and Scott Trench weekly as they interview financial experts and thought leaders about earning more, keeping more, spending smarter, and growing wealth.
• Episode: How I'm Accessing My IRA at 45 (Without Paying Penalties)
• Release Date: July 4, 2025

Introduction

In this episode, Mindy Jensen and Scott Trench explore advanced retirement strategies with special guest John Bowens from Equity Trust. The focus is on the Roth IRA Layer Cake strategy, an alternative to the 72T strategy for early access to retirement funds without incurring penalties. This detailed discussion aims to provide listeners with actionable insights to maximize their retirement savings and achieve financial freedom earlier.

Understanding the Roth IRA Layer Cake

John Bowens introduces the Roth IRA Layer Cake as a flexible method for accessing Roth IRA funds before the age of 59 and a half without facing the 10% early withdrawal penalty associated with traditional IRAs or 401k accounts.

John Bowens [04:19]: "We start distributing first in, first out from our contributions. So we got $50,000. $50,000. $50,000."

The Three Layers Explained

The Roth Layer Cake strategy is built upon three distinct layers, each with its own rules for withdrawal:

1. Contributions

   • Description: Direct contributions made to the Roth IRA.
   • Withdrawal Rules: Can be withdrawn anytime, tax- and penalty-free.
   • Contribution Limits for 2025: $7,000 (under 50), $8,000 (50 and over).

   John Bowens [10:12]: "Layer number one, 50,000. The ordering rules say that we start distributing first in, first out from our contributions."

2. Conversions

   • Description: Funds converted from traditional IRAs or 401k accounts to Roth IRAs.
   • Withdrawal Rules: Must be seasoned for five years before being withdrawn tax- and penalty-free.

   John Bowens [10:26]: "As long as the converted amounts have seasoned for five years, we can take out that money without any taxes or penalties."

3. Earnings

   • Description: Investment gains within the Roth IRA.
   • Withdrawal Rules: Must remain in the account until the account holder is 59 and a half years old to avoid taxes and penalties.

   John Bowens [10:43]: "Our earnings are growth that must stay in there until we're 59 and a half."

Strategic Advantages for Early Retirees

Early retirees with substantial assets in pre-tax accounts like 401ks or traditional IRAs can leverage the Roth Layer Cake to maximize tax efficiency and financial flexibility. By converting funds during low-income years, retirees can minimize tax liabilities and enable more significant tax-free growth within their Roth IRAs.

Scott Trench [22:11]: "The Roth IRA has superior features... no required minimum distributions and tax-free withdrawals, making it a powerful tool for early retirees."

Tax Implications and Conversion Strategies

Converting traditional IRA funds to Roth IRAs results in the converted amount being treated as ordinary income for the year of conversion. While this generates a tax obligation, the long-term benefits of tax-free growth and withdrawals can outweigh the immediate tax costs, especially if done strategically over several years.

John Bowens [39:58]: "The amount that you convert is going to be added to your 1040... So I convert a hundred thousand from traditional to Roth and I pay $25,000 in taxes."

Practical Examples and Scenarios

John Bowens shares real-life examples to illustrate the effectiveness of the Roth Layer Cake strategy. For instance, a couple converting $117,000 to Roth IRAs in the early stages of retirement saw their investments grow to over $2 million, generating substantial tax-free cash flow annually.

John Bowens [42:32]: "They have 14 cash-flowing properties in their Roth IRAs... generating over $200,000 in net tax-free cash flow every single year."

Clarifying Questions and Additional Insights

The hosts address common questions, such as the differences between backdoor and mega backdoor Roth contributions, and the importance of adhering to IRS rules to avoid prohibited transactions. They emphasize the need for professional guidance when implementing these strategies to ensure compliance and optimal benefits.

Mindy Jensen [35:36]: "Are your backdoor and mega backdoor Roth contributions treated any differently or are those just contributions?"

John Bowens [36:21]: "When you contribute to a traditional bucket or traditional account, that could be a 401k or a traditional IRA, and then you convert to Roth—that's going to be included in that converted layer."

Prohibited Transactions and Compliance

John Bowens explains the importance of avoiding prohibited transactions within self-directed IRAs, such as directly managing properties or engaging in business activities with IRA funds. Compliance is crucial to prevent severe penalties, including the disqualification of the entire IRA.

John Bowens [42:51]: "Prohibited transactions... can result in the entire distribution of all assets and cash of that account in the year the transaction occurred."

Conclusion

The Roth IRA Layer Cake offers a robust framework for early retirees to access their retirement funds without penalties while enjoying the benefits of tax-free growth. By understanding and properly implementing this strategy, individuals can enhance their financial flexibility and secure a more prosperous retirement.

Mindy Jensen [50:47]: "The more you know, the better prepared you are to make informed decisions that align with your financial goals."

Notable Quotes with Timestamps

• John Bowens [04:19]: "We start distributing first in, first out from our contributions. So we got $50,000. $50,000. $50,000."
• John Bowens [10:12]: "Layer number one, 50,000. The ordering rules say that we start distributing first in, first out from our contributions."
• John Bowens [10:26]: "As long as the converted amounts have seasoned for five years, we can take out that money without any taxes or penalties."
• John Bowens [10:43]: "Our earnings are growth that must stay in there until we're 59 and a half."
• Scott Trench [22:11]: "The Roth IRA has superior features... no required minimum distributions and tax-free withdrawals, making it a powerful tool for early retirees."
• John Bowens [39:58]: "The amount that you convert is going to be added to your 1040... So I convert a hundred thousand from traditional to Roth and I pay $25,000 in taxes."
• John Bowens [42:32]: "They have 14 cash-flowing properties in their Roth IRAs... generating over $200,000 in net tax-free cash flow every single year."
• John Bowens [42:51]: "Prohibited transactions... can result in the entire distribution of all assets and cash of that account in the year the transaction occurred."
• Mindy Jensen [35:36]: "Are your backdoor and mega backdoor Roth contributions treated any differently or are those just contributions?"
• John Bowens [36:21]: "When you contribute to a traditional bucket or traditional account, that could be a 401k or a traditional IRA, and then you convert to Roth—that's going to be included in that converted layer."
• Mindy Jensen [50:47]: "The more you know, the better prepared you are to make informed decisions that align with your financial goals."

Final Thoughts: The Roth IRA Layer Cake strategy is a sophisticated approach for those aiming to access their retirement funds early while maintaining tax efficiency. By leveraging contributions, conversions, and understanding the rules surrounding earnings, retirees can enjoy greater financial control and flexibility. As always, consulting with financial and tax professionals is recommended to tailor these strategies to individual circumstances.