New to Roths and have questions

[always_learning]

I am new to Roths and am looking for some input. Specifically, conversions from T-IRA / 401k and if I'm on the right track with my thinking. First off, a 401k = T-IRA, right?

Would we have to roll it into a "real" T-IRA and then convert or can it just be converted directly? Or is this plan specific? DH's SPD doesn't spell it out and just mentions "withdrawals".

We have twice as much in 401k as we do in after-tax investments. I'm thinking that, once retired, we should convert as much of the 401k to Roth as we can to minimize our RMD down the road. DH hopes to retire in 3 years at age 58.

Here is where I need help fleshing things out, or at least confirmation that I'm on the right path with my thinking:

The 5-year rule(s) has me stumped. I am finding conflicting/incomplete info about this and I am completely confused now.

*Does the 5-year rule even matter if DH is over 59 1/2 when he wants to w/d from the account, or is the 5-year "account age" true no matter what? I.e. could he convert to a Roth at the age of 58 and begin withdrawing from it when he's 59 1/2 and one day of age without penalties/taxes?

*I understand the 5-year period for conversions begins anew with each year's conversion, but does this rule go away once DH is over 59 1/2 and the account's age is at least 5 years (providing that the account must be 5 years old--see my bullet question above this one)?

And finally ~~ DH does not have a Roth (due to high AGI), so we are thinking about opening one right now to start the clock on the 5-year rule, making the account 5 years just after he retires. We would fund it by converting his T-IRA which has a small value of $9k and just take the tax hit on this year's taxes. Next year has the potential for a higher AGI, even with the proposed tax plan changes, which is why I was thinking of doing it now.

Thoughts?

[joylesshusband]

You have come to a place where many of us could teach you proper calculus, but there are prerequisites.
Like knowing the numbers (all of the 10 digits), and some basic arithmetic.
You don't seem to be there yet.

Where to begin...

Quote:

Originally Posted by always_learning First off, a 401k = T-IRA, right?

No.

And on it goes...

[RunningBum]

I find Fairmark a great site that explains things in a very readable way. Far better than I can explain. Roth IRA and Other Roth Retirement Accounts - Fairmark.com Fairmark.com

[VanWinkle]

Quote:

Originally Posted by always_learning I am new to Roths and am looking for some input. Specifically, conversions from T-IRA / 401k and if I'm on the right track with my thinking. First off, a 401k = T-IRA, right? Would we have to roll it into a "real" T-IRA and then convert or can it just be converted directly? Or is this plan specific? DH's SPD doesn't spell it out and just mentions "withdrawals". We have twice as much in 401k as we do in after-tax investments. I'm thinking that, once retired, we should convert as much of the 401k to Roth as we can to minimize our RMD down the road. DH hopes to retire in 3 years at age 58. Here is where I need help fleshing things out, or at least confirmation that I'm on the right path with my thinking: The 5-year rule(s) has me stumped. I am finding conflicting/incomplete info about this and I am completely confused now. *Does the 5-year rule even matter if DH is over 59 1/2 when he wants to w/d from the account, or is the 5-year "account age" true no matter what? I.e. could he convert to a Roth at the age of 58 and begin withdrawing from it when he's 59 1/2 and one day of age without penalties/taxes? *I understand the 5-year period for conversions begins anew with each year's conversion, but does this rule go away once DH is over 59 1/2 and the account's age is at least 5 years (providing that the account must be 5 years old--see my bullet question above this one)? And finally ~~ DH does not have a Roth (due to high AGI), so we are thinking about opening one right now to start the clock on the 5-year rule, making the account 5 years just after he retires. We would fund it by converting his T-IRA which has a small value of $9k and just take the tax hit on this year's taxes. Next year has the potential for a higher AGI, even with the proposed tax plan changes, which is why I was thinking of doing it now. Thoughts?

There is much to learn about Roth conversions and the Roth account.

You are able to withdraw your original investment basis at any time without penalty.

In the 5th year of the Roth being established, you are able to withdraw your original basis and the investment returns. If you are under 59 1/2, there is a penalty of 10% on the investment returns only.

After 59 1/2 and in the fifth year of the established Roth, all investment basis and investment returns can be taken penalty and tax free.

There are exceptions to every rule, but this is the simple explanation.

Whether you should start a roth conversion is based on your tax brkt now and your tax brkt in retirement (at 70 1/2) when RMDs start.

Read all of the information you can in the link provided in the above post.

[Sunset]

OP - You talked about your Husband, now lets talk about you.
Do you work ?
Do you have an existing IRA in your name ?
Do you have a ROTH ?

My thinking here (and others please chime in if it's wrong), is that suppose the wife has no IRA. She can contribute to a non-deductible IRA, and then immediately convert it to a ROTH.

Now if the Husband also has no IRA, then he could do the same.

Anyone see issues with this ?

[kaneohe]

http://www.early-retirement.org/foru...s-89234-2.html

see post #21 and kawill's Roth withdrawal table.

[pb4uski]

401k and tIRA are similar.... both are tax deferred and subject to 10% penalty for withdrawals under 59 1/2 with some exceptions... like 55 for a 401k if you ended service in the year you turn 55 or later or 72t/SEP withdrawals in the case of a t-IRA.

While you can roll/convert 401k monies into a Roth IRA, more typically one rolls a 401k into a t-IRA and then convert a portion of the t-IRA to a Roth. I suspect this is because 401ks commonly have elaborate rules and restrictions on what you can do and t-IRAs are more flexible.

Quite often, once you are retired and have no earnings coming in you are in a lower tax bracket and can "fill up" those lower tax brackets with Roth conversions and save compared to taking the money out of the t-IRA later once pensions and/or SS has started. I have done this for the last 5 years and converted over $250k and paid about 8% in federal tax on average... vs 28% or more when I deferred that income or 25% or more if I waited until SS starts.

I like the idea of doing a small Roth conversion this year to get the account started. Same with you if you can or can make Roth contributions.

[always_learning]

Quote:

Originally Posted by joylesshusband You have come to a place where many of us could teach you proper calculus, but there are prerequisites. Like knowing the numbers (all of the 10 digits), and some basic arithmetic. You don't seem to be there yet. Where to begin... No. And on it goes...

That was bad paragraph spacing on my part. I meant the same as far as tax treatment/IRS withdrawal regs. Had that comment flowed directly into the next sentence, it should have been obvious that I was asking about withdrawals, especially since I did ask if I could convert directly or if I had to roll into a TIRA first. My comment about a “real T-IRA” was only a few words after the "401k = T-IRA”. Odd wording on my part, yes, but it should have been clear that I know they are not the same vehicle.

Your post is not helpful. I don’t know why you even bothered replying.

[always_learning]

Quote:

Originally Posted by RunningBum I find Fairmark a great site that explains things in a very readable way. Far better than I can explain. Roth IRA and Other Roth Retirement Accounts - Fairmark.com Fairmark.com

Thanks, RunningBum. That site is fantastic. I'll spend some time on there later today. Kitces has a great blog entry about the different 5-year rules, and while it's very good, it still left me confused on conversions with regard to 59 1/2 and whether the 5 years resets with each conversion. I'll keep reading and studying.

Quote:

Originally Posted by VanWinkle There is much to learn about Roth conversions and the Roth account. You are able to withdraw your original investment basis at any time without penalty. In the 5th year of the Roth being established, you are able to withdraw your original basis and the investment returns. If you are under 59 1/2, there is a penalty of 10% on the investment returns only. After 59 1/2 and in the fifth year of the established Roth, all investment basis and investment returns can be taken penalty and tax free. There are exceptions to every rule, but this is the simple explanation. Whether you should start a roth conversion is based on your tax brkt now and your tax brkt in retirement (at 70 1/2) when RMDs start. Read all of the information you can in the link provided in the above post.

Yes! Tons on Roth and a search on this site lead me down many (interesting!) rabbit trails, which lead to information overload. I am comfortable with the Roth rules for the working/younger folk, but the 59 1/2 bit with the different 5 year rules are a bit harder for me to parse. I guess I'm wanting to see it written explicitly somewhere that the only 5 year rule that's important once one hits 59 1/2 is the age of the Roth, especially since conversions have their own rules. I'd hate to convert over several years only to find that we can't touch batches of it until XX number of years goes by...

I'm thinking Roth conversion is the way for us to go--- we are 28/33% bracket now and most likely will be in a lower one in retirement since we'll be able to control our income. However, if we do nothing, once DH hits RMD age, we'll be right back up here. I was hoping to use a few years to move some money over while we can.

Thanks for your informative post.

[always_learning]

Quote:

Originally Posted by Sunset OP - You talked about your Husband, now lets talk about you. Do you work ? Do you have an existing IRA in your name ? Do you have a ROTH ? My thinking here (and others please chime in if it's wrong), is that suppose the wife has no IRA. She can contribute to a non-deductible IRA, and then immediately convert it to a ROTH. Now if the Husband also has no IRA, then he could do the same. Anyone see issues with this ?

Do you work ? No
Do you have an existing IRA in your name ? Yes. Enough that converting mine would be a tax pain and a 2-3 year endeavor.
Do you have a ROTH ? No

For my situation, the non-ded IRA-then-convert wouldn't work due to my T-IRA, which is why I'm focusing only on my DH. I'm sort of stuck. LOL. Until we do something with my DH's small T-IRA, he can't backdoor a Roth, either. It's because of this that I was thinking of converting his T-IRA now to get the clock started on him having a ROTH and just taking the tax hit this year. Otherwise, I think your thinking is sound. Thanks for offering your thoughts.

Quote:

Originally Posted by kaneohe http://www.early-retirement.org/foru...s-89234-2.html see post #21 and kawill's Roth withdrawal table.

Great post! Thanks for linking it. I'll be making notes on that, for sure.

Quote:

Originally Posted by pb4uski 401k and tIRA are similar.... both are tax deferred and subject to 10% penalty for withdrawals under 59 1/2 with some exceptions... like 55 for a 401k if you ended service in the year you turn 55 or later or 72t/SEP withdrawals in the case of a t-IRA. While you can roll/convert 401k monies into a Roth IRA, more typically one rolls a 401k into a t-IRA and then convert a portion of the t-IRA to a Roth. I suspect this is because 401ks commonly have elaborate rules and restrictions on what you can do and t-IRAs are more flexible. Quite often, once you are retired and have no earnings coming in you are in a lower tax bracket and can "fill up" those lower tax brackets with Roth conversions and save compared to taking the money out of the t-IRA later once pensions and/or SS has started. I have done this for the last 5 years and converted over $250k and paid about 8% in federal tax on average... vs 28% or more when I deferred that income or 25% or more if I waited until SS starts. I like the idea of doing a small Roth conversion this year to get the account started. Same with you if you can or can make Roth contributions.

Fantastic. Thanks so much. This really helps clarify some of the info I read. It all runs together when I try to assimilate too much at once. I did find a blurb on Fidelity's site about doing a 401k direct to Roth, so I guess it's possible at times. At a glance, it seems that it would be easier to roll a chunk into a T-IRA and convert some, and then use some of what's left in the T-IRA for our income (if needed)....is this accurate? All these years, we've been so focused on saving that I'm having to learn a lot about the ways to actually get it back.

Your description on the tax brackets & filling up the 15% bucket is what I'm trying to grasp now. DH will have a smallish pension that will take up some of that but I'm investigating our options on delaying and if that makes sense. It doesn't look like it would make sense to wait so we may just take it right away, in which case, conversion amounts would be lower but would still help if we can make them over seven or eight years.

Thanks for the thoughts on starting DH's Roth this year by doing a conversion. I'm glad to hear it's not a dumb idea. I'll look at doing a backdoor Roth for DH for next year, as well, since we'll have that conversion done. As for me, I'm stuck with my T-IRA for now and no more contributions. No conversions for me, I'm afraid. 'Tis an OK place to be in, though, so I'm not complaining.

And, not in the least bit related to this thread, I have to tell you that after two years +/- of me hanging out on this forum, I only figured out your screen name yesterday. I also, just this moment, realized this forum doesn't have a "thumb's up" emoji. Huh.

[pb4uski]

Quote:

Originally Posted by always_learning Do you work ? No Do you have an existing IRA in your name ? Yes. Enough that converting mine would be a tax pain and a 2-3 year endeavor. Do you have a ROTH ? No For my situation, the non-ded IRA-then-convert wouldn't work due to my T-IRA, which is why I'm focusing only on my DH. I'm sort of stuck. LOL. ..... Thanks for the thoughts on starting DH's Roth this year by doing a conversion. I'm glad to hear it's not a dumb idea. I'll look at doing a backdoor Roth for DH for next year, as well, since we'll have that conversion done. As for me, I'm stuck with my T-IRA for now and no more contributions. No conversions for me, I'm afraid. 'Tis an OK place to be in, though, so I'm not complaining. ....

I'm struggling to understand why the notion of starting Roth to get the 5 year clock started wouldn't apply equally to you...even if you can contribute you could do a small coversion to get the clock started. Usually $1,000 will do it.

[pb4uski]

Quote:

Originally Posted by always_learning .... Your description on the tax brackets & filling up the 15% bucket is what I'm trying to grasp now. DH will have a smallish pension that will take up some of that but I'm investigating our options on delaying and if that makes sense. ....

You just work backwards from the top of the 15% tax bracket. Here's an example for an empty next married couple that takes the standard deduction:

Top of 15% tax bracket = taxable income of $75,900
Standard deduction (under 65).....................12,700
Two exemptions @ $4,050 each......................8,100

Income............................................ ........$96,700

Pension........................................... ...........10,000

Possible Roth conversion.............................$86,700
Tax on Roth conversion...............................$10,452 (12%)


If you itemize, the Roth conversion amount would be higher, and other sources of income like interest or dividends would affect the calculation as well.

[always_learning]

Quote:

Originally Posted by pb4uski I'm struggling to understand why the notion of starting Roth to get the 5 year clock started wouldn't apply equally to you...even if you can contribute you could do a small coversion to get the clock started. Usually $1,000 will do it.

I guess my thinking was that we will be so focused on converting DH's 401k that there is no reason for me to convert any of my T-IRA. As long as the market doesn't take a crazy tumble, we will never fully convert the 401k if we aim to stay in the 15% bracket, so I just figured my IRA $ was moot and would just stay in the T-IRA. Am I off base with that?

I also didn't think I could do a backdoor Roth if I had any $ in a T-IRA, correct?

Quote:

Originally Posted by pb4uski You just work backwards from the top of the 15% tax bracket. Here's an example for an empty next married couple that takes the standard deduction: Top of 15% tax bracket = taxable income of $75,900 Standard deduction (under 65).....................12,700 Two exemptions @ $4,050 each......................8,100 Income............................................ ........$96,700 Pension........................................... ...........10,000 Possible Roth conversion.............................$86,700 Tax on Roth conversion...............................$10,452 (12%) If you itemize, the Roth conversion amount would be higher, and other sources of income like interest or dividends would affect the calculation as well.

Ack! Sorry! I can see, now, how my comment is confusing.

I meant that I was struggling to decide on whether to have DH take his smallish pension right away or wait a few years. Delaying the pension would mean we could convert more because of an 'empty bucket' but we would have XX years without that pension income and since the pension doesn't seem to be higher if he waits, it would make more sense to take it and just not have as much converted. I think the pension is more than tax savings but I haven't run those numbers to be sure. Anyway, that's why I don't think there is any benefit to waiting on the pension. (Sorry for the horrid run-on sentence).

I'm good on filling up the brackets and the tax part of it.

Thanks for trying to help. You are most patient.

[pb4uski]

I faced that issue myself. The annual increase in my pension was pretty good from 55 to 60, but then was less attractive from 60-65. I ended up taking my pension at 61 and accepted that as a result my Roth conversions would be lower.

On the other issues, there is no reason that I can see to not establish both his and her Roths to get the 5 year clock started.

[mamadogmamacat]

If you have after tax contributions in your 401k, those can be rolled over directly to a ROTH IRA. Contributions only, not the earnings on those contributions. Of course you have to make sure both your 401k plan mgmt co and whoever holds your IRA's understands you want to do this and you have the dollar amount of the after tax contributions spelled out in your communications with both parties. How much this complication is worth to you to get access to those contributions tax and penalty free is up to you, of course. It was a significant enough amount to be worth doing for me.

[Splash]

Quote:

Originally Posted by RunningBum I find Fairmark a great site that explains things in a very readable way. Far better than I can explain. Roth IRA and Other Roth Retirement Accounts - Fairmark.com Fairmark.com

Thanks for sharing this link. I have been following the recent posts regarding Roth contributions, Roth conversions, and the 5 year rules with much interest. DH and I both retired 2/1/17 and are planning our first and last Roth contributions this year along with our first of many Roth IRA conversions. In October, 2017, former employer began allowing Roth contributions and conversions in the 401k plan where I continue to have significant investments. This change muddled my thoughts on how best to execute the conversions. After reading the info at Fairmark, I have a much better understanding of the consequences of my options.