Keeping track of Roth conversions

[misanman]

What's the best way to keep track of Roth conversions? I have been creating a new Roth account (easy with Fidelity) each year that I convert. So, there would be one for 2011, 2012, 2013, etc. My thinking was that this would allow me to easily track the conversions with respect to the 5 year restriction on the use of the income.

I'm somewhat concerned about the proliferation of accounts, however, and thinking that I could convert into a single Roth account as long as I was careful not to withdraw more than my total contributions during the restricted period. Is this reasonable?

How do others handle this? I'd like to follow what ever is "best practice".

Thx

 

[gauss]

Is IRS form 8606 always required for Roth conversions, and if so, would this serve the purpose (ie saving your old tax returns)?

I was looking into this recently for the purpose of funding years 52-59 1/2.

-gauss

 

[GrayHare]

If the 5-year rule may hit you, I can't think of a more-definitive way to track it than what you are doing. Note the 5-year rule does not impact many people, so you might not need to worry about it. It applies only if you take a non-qualified distribution of IRA dollars beyond your original contribution. There's more at http://www.investopedia.com/ask/answers/05/waitingperiodroth.asp

 

[Animorph]

That's what I'm doing. After 5 years I'll probably start combining. I mash it all together in Quicken and a spreadsheet, so the number of accounts is not a big concern.

I also may have multiple accounts within each year to allow for recharacterizations and alternate Roth conversions, picking the best one at the end of the year. For example, the one fund I converted early this year is about 6% down. I'll probably try again soon with another conversion and recharacterize the old one at the end of the year. I'll wait to recharacterize until the end of the year just to make sure it doesn't go crazy just as my second conversion halves in value later this year. No points for being early in this case.

 

[misanman]

That's what I'm doing. After 5 years I'll probably start combining. I mash it all together in Quicken and a spreadsheet, so the number of accounts is not a big concern.

I also may have multiple accounts within each year to allow for recharacterizations and alternate Roth conversions, picking the best one at the end of the year. For example, the one fund I converted early this year is about 6% down. I'll probably try again soon with another conversion and recharacterize the old one at the end of the year. I'll wait to recharacterize until the end of the year just to make sure it doesn't go crazy just as my second conversion halves in value later this year. No points for being early in this case.

I hadn't really considered the possible re-characterization issue. I believe you can only re-characterize at the account level, so that makes sense. Would you expect to recombine any multiple accounts that were not re-characterized after the deadline is passed?

 

[Animorph]

I hadn't really considered the possible re-characterization issue. I believe you can only re-characterize at the account level, so that makes sense. Would you expect to recombine any multiple accounts that were not re-characterized after the deadline is passed?

I think you can do partial recharacterizations, but the rules sounded too hard to think about.

Yes, I'd like to combine accounts that have the same 5 year period. With a larger account it's easier to leave enough cash to make meaningful moves if I need to sell something in a taxable account and buy it in the Roth. Or buy and sell funds simultaneously in the Roth for rebalancing. Until then, my Roth accounts are named "Roth 2013a" and "Roth 2013b". hopefully I can reuse them if I'm able to combine some next year.

 

[kaneohe]

You'll want to verify w/ Alan S. on either the fairmark.com or bogleheads.org
sites but it was my understanding that the only reason for separate Roth accounts was for the 1-2 yr period after conversion when recharacterization is allowable.

After that period is over, you do have to keep track of 5 yr conversion clocks but that is on the overall Roth account (rather than individual accounts).
Tracking is done by the ordering rules: first out are original contributions,
then conversions (oldest conversionfirst, w/ taxable amount first, then non-taxable within each conversion), then earnings last, regardless of which account they come from.

 

[ronin]

The 5 yr time period begins with the first Roth opened only and not with each separate account as kaneohe says.

 

[kaneohe]

The 5 yr time period begins with the first Roth opened only and not with each separate account as kaneohe says.

There are actually 2 types of 5 yr clocks:
1) the age of the oldest Roth
2) the age of each conversion
after you age past 59.5 yrs, only the first type matters but until then, the individual conversion clocks are still in play.


see this wonderful table by KAWill from fairmark.com
(put a semi-colon after each yes & no)

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-Yes (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.

 

[misanman]

...

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-No

It's been really hard for me to find a good explanation of this - thank you!

What's quoted above is my situation. I'd like to ask a related follow on: My understanding is that Roth accounts are counted "in total". That is, all conversions (or contributions, for that matter) are considered together. So, if I had two accounts, each consisting of $50,000 in conversions and $5,000 in earnings, I could at any time withdraw up to $100,000. In order to withdraw any of the $10,000 in earnings, I would have to have satisfied the 5 year period from when the first Roth was established. Does this sound right?

 

[kaneohe]

Sounds right to me..........as a practical matter if you don't withdraw everything at once, often, by the time you get to the earnings, you will have aged that first Roth to 5 yrs........but you do need to keep track.

Until you age that 1st Roth to 5 yrs so all distributions are qualified, you need to keep track via Pt III of 8606
http://www.irs.gov/pub/irs-pdf/f8606.pdf
see the instructions which will deal w/ the "basis" from
contributions and conversions line 19 and more
http://www.irs.gov/pub/irs-pdf/i8606.pdf

you will see in line 22, basis from contributions
and in line 24, basis from conversions. Perhaps that is what you were looking for in how these things were tracked (at least by IRS).

 

[HighRoller]

Nothing to add other than to say this is an excellent thread and very timely for me since I plan to start Roth conversions this year and continue for the next 8 years before RMD's set in.

Thanks

 

[Sesq]

I have contemplated bunching my conversions - e.g. this past year I started back up and did 2012 and 2013 together. I could stick money in another account and the do 2014 and 2015 together in January 2015.

I agree it only matters for re-characterizations, but I did that once in the early 2000's.