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Old 09-26-2012, 09:54 AM   #41
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I'm ambivalent about embarking on any conversions between the two, and I think it is relevant that I do not have any kids - it's quite possible whatever happens to be left ends up going to charity. I can see the points being made here and in many other similar threads about conversion strategies, so no problems there. But I think for me, I'll just sit pat and use the resources (when they are available, which is a few years away) to retain some flexibility with taxes.
Similar for me. I do not have a Roth yet. I'm still w*rking.

I looked at backdooring, but the conversion of my tIRA would be slammed at 28 or 33%. I also would have had to roll over my roIRA from an old 401k back into my current 401k to make backdooring possible. Blah. Not sure I want all the eggs in that basket. I like the flexibility of a variety of accounts.

This discussion has been good though, because it has opened up my eyes to doing some conversions once I FIRE. Didn't consider that previously. I'll have that period before 59.5 to generate income from these deferred accounts. I could do conversions while still tapping a taxable account to live. Don't need the IRA money, but would like to draw down the account so RMDs don't kill me later.

At least I kind of like the idea of converting during that pre 59.5 period instead of the 72(t) which is very restrictive.
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Old 09-26-2012, 12:53 PM   #42
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Similar for me. I do not have a Roth yet. I'm still w*rking.

I looked at backdooring, but the conversion of my tIRA would be slammed at 28 or 33%. I also would have had to roll over my roIRA from an old 401k back into my current 401k to make backdooring possible. Blah. Not sure I want all the eggs in that basket. I like the flexibility of a variety of accounts.

This discussion has been good though, because it has opened up my eyes to doing some conversions once I FIRE. Didn't consider that previously. I'll have that period before 59.5 to generate income from these deferred accounts. I could do conversions while still tapping a taxable account to live. Don't need the IRA money, but would like to draw down the account so RMDs don't kill me later.

At least I kind of like the idea of converting during that pre 59.5 period instead of the 72(t) which is very restrictive.
It should be pointed out that many people above the thresholds for contributing to a deductible IRA and wanting to "Save" some money face a decision of leaving in a taxable account, contributing to a non-deductible IRA or investing in a Roth, neither will change the amount of taxes due. If one is able to invest directly to the Roth (or can go backdoor without bringing any other taxes due on other IRA's), the contributions are always "available" tax and penalty free (5yr wait if you convert). To me, this is the best of both worlds, tax "free" growth and preserving some flexibility. The decision is almost made for you.

Some years we are over the direct Roth contributions, and only my wife will will convert a non-deductible IRA since she has no other traditional/rollover IRA's and "my" contribution gets stuffed into our taxable account. Other years we can contribute directly and we both do so.

And just to be clear, if you plan to convert pre 59.5, you'll have to do so 5 yrs in advance to avoid making an IRS auditor's day.
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Old 09-26-2012, 01:30 PM   #43
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And just to be clear, if you plan to convert pre 59.5, you'll have to do so 5 yrs in advance to avoid making an IRS auditor's day.
We're already contributing to non-deductible IRA. I've been filing that paperwork for something like 15 years, so once I did it, I've continued. So, there's a lot there to backdoor. Problem is the gains and earlier deductible contributions, along with a roll-over IRA, would have to be proportionally declared on the backdoor, so I'm holding off on that. So, the idea is to push it off until j*b income goes away.

As for your 5 yr comment... I'm a bit confused. I'm not planning on withdrawing from the roth until much later, past age 70 or so. Your comment about "IRS auditor's day" would be if I was withdrawing from Roth at 59.5, right? In other words, I'm going to keep that 5 year buffer well beyond 59.5 for the Roth.
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Old 09-26-2012, 02:28 PM   #44
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I apologize if I wasn't clear and misread your statement. I thought when you were talking about converting and not doing a 72t, you meant you wanted to convert to roth and then use that money pre 59.5. You can do so, usually if you wait 5 yrs. Once you reach the magic age and you have at least one Roth IRA account established for 5 yrs or more, you can convert one day and withdraw the next (which would make me question why one would do such a thing, but it is in the cards).

i'm in the same boat due to a rather large rollover ira which would mean I would have to do the conversion pro-rata. That is why I just put the money in a taxable account if I am over the Roth contribution limits. I find the taxes paid along the way are worth the flexibility over the non-deductible IRA (which without the ability to convert directly to a Roth, turns me off).
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Old 09-26-2012, 03:33 PM   #45
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No worries, ronocnikral.

Really, what is comes down to for me is leveling out that deferred income from FIRE until the end. I'm going to have this pre-59.5 time in which I can bring some of that income back at reduced tax rates from what I have today.

Like you, I have a variety of accounts, both taxable and deferred to play with. I'm fortunate that I can do conversions without tapping any of that converted money.

The joys of optimizing many variables at one time.
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conversion once I FIRE
Old 09-26-2012, 07:43 PM   #46
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conversion once I FIRE

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Originally Posted by JoeWras View Post
This discussion has been good though, because it has opened up my eyes to doing some conversions once I FIRE. Didn't consider that previously. I'll have that period before 59.5 to generate income from these deferred accounts. I could do conversions while still tapping a taxable account to live. Don't need the IRA money, but would like to draw down the account so RMDs don't kill me later.
+1
this is my view exactly. It does not make sense to me, to convert to Roth and pay higher tax before FIRE, assuming lower taxable income and lower taxes then.
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Old 09-26-2012, 09:10 PM   #47
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You can do so, usually if you wait 5 yrs. Once you reach the magic age and you have at least one Roth IRA account established for 5 yrs or more, you can convert one day and withdraw the next
As I have understood IRS rules, there are two 5 year rules.

First 5 year rule is that a Roth IRA has to be started 4 years plus the partial year of the first Roth's implementation. Other Roths started go back to this date so if you are working and not sure, start a beginning Roth to get the clock ticking down.

The second 5 year rule deals with conversions. Each conversion starts a new 5 year clock. If you convert starting at 59.5 years old, you have to be 64.5 years to be able to get the gains tax free. If you also convert at 60.5, then you have a third clock running to 65.5 ticking concurrently. I have read conflicting things about the partial year being rounded up for this rule!

I am planning do the bucket approach to Roth conversions. YMMV.
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Old 09-26-2012, 09:28 PM   #48
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I think staying within the 15% bracket with the conversions is a good idea, ESPECIALLY if your partner has family/heirs to pass unused Roth funds to from the estate.
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Old 09-26-2012, 10:29 PM   #49
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As I have understood IRS rules, there are two 5 year rules.

First 5 year rule is that a Roth IRA has to be started 4 years plus the partial year of the first Roth's implementation. Other Roths started go back to this date so if you are working and not sure, start a beginning Roth to get the clock ticking down.

The second 5 year rule deals with conversions. Each conversion starts a new 5 year clock. If you convert starting at 59.5 years old, you have to be 64.5 years to be able to get the gains tax free. If you also convert at 60.5, then you have a third clock running to 65.5 ticking concurrently.

I am planning do the bucket approach to Roth conversions. YMMV.
see the flow chart on p. 63 http://www.irs.gov/pub/irs-pdf/p590.pdf

Once you turn 59.5 y.o., the only clock that matters is the 5 yr clock of the oldest Roth. If you have a pre-existing older Roth (>= 5 yr old), the conversion clocks don't matter unless, of course, they are the oldest Roth.
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Old 09-26-2012, 10:50 PM   #50
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As I have understood IRS rules, there are two 5 year rules.

First 5 year rule is that a Roth IRA has to be started 4 years plus the partial year of the first Roth's implementation. Other Roths started go back to this date so if you are working and not sure, start a beginning Roth to get the clock ticking down.

The second 5 year rule deals with conversions. Each conversion starts a new 5 year clock. If you convert starting at 59.5 years old, you have to be 64.5 years to be able to get the gains tax free. If you also convert at 60.5, then you have a third clock running to 65.5 ticking concurrently. I have read conflicting things about the partial year being rounded up for this rule!

I am planning do the bucket approach to Roth conversions. YMMV.
as kaneohe points out, this is not correct. There are qualified distributions and non-qualified. It is important to note the rules pertaining to each of these distributions. Generally speaking, non-qualified is any distribution taken before age 59.5 (with some exceptions of course).

These rules are often muddled in the world wide web. Another example is people often think direct Roth contributions cannot be withdrawn for 5 years. This is not true either.
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Old 09-28-2012, 12:28 PM   #51
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see the flow chart on p. 63 http://www.irs.gov/pub/irs-pdf/p590.pdf

Once you turn 59.5 y.o., the only clock that matters is the 5 yr clock of the oldest Roth. If you have a pre-existing older Roth (>= 5 yr old), the conversion clocks don't matter unless, of course, they are the oldest Roth.
Nice. Good pointer to the chart. That cuts through a lot of the confusion.
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Old 09-28-2012, 12:40 PM   #52
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What you fail to consider is purchasing power of your dollars today vs. purchasing power of those dollars at some future date after the inflation effect. After all, it not about the number of digits in the bank but what can actually be consumed with those dollars when you go to spend it.

You left out a time preference, so lets assume 10 years. If we just consider today's conservative estimate of 9% real inflation and not a hyper-inflation scenario, the actual lost buying power of the $17,250 tax bill in the future is equivalent to $7,287 today, since you will be paying the tax bill with dollars that are worth less in the future.

This situation only gets worse for Roth as you extend the time preference and increase the real inflation rate, which is already baked in the cake.
I doubt most on here will agree with your hyperinflation ideas. Also, in the future, if you are going to post comments like "Today's conservative estimate of 9% real inflation", without links, noone is going to take you seriously........
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Old 09-28-2012, 01:17 PM   #53
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I checked your pointer. The flowchart is excellent. The part that has me concerned is in the points on the end of that same page 63. If IRC, my internet source talked of the additional 10% penalty rules especially concerning a 401K conversion and a Roth 401K conversion not being the same as an IRA conversion.

From your link:
"The 5-year period for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion or rollover contribution, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution."

The link that you provided then gives an example that is clear as mud that indicates that year basis is not the same. I am not a tax expert, but where the flow chart giveth, the fine print seems to taketh away. The ramifications of a mishandling is too costly for me to blithely assume that I have covered bases needed for that IRS audit. Been there, did that once and won, but really don't wish to repeat the hassle...ever. This is one that I want to check with a much better tax expert than I am
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Old 09-28-2012, 01:22 PM   #54
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This is one that I want to check with a better expert. The ramifications of a mishandling is too costly for me to blithely assume that I have covered all the documentation needed for that IRS audit. Been there, did that and won, but really don't wish to repeat the hassle.
Something that all members should remember is that this is an anonymous board and all this free advice should be double-checked as there is no recall should the information provided be wrong.
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Old 09-28-2012, 02:03 PM   #55
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.. noone is going to take you seriously........
There you go again putting words in my mouth. Whether or not I take anyone seriously is noone's business.
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Old 09-28-2012, 06:36 PM   #56
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I checked your pointer. The flowchart is excellent. The part that has me concerned is in the points on the end of that same page 63. If IRC, my internet source talked of the additional 10% penalty rules especially concerning a 401K conversion and a Roth 401K conversion not being the same as an IRA conversion.

From your link:
"The 5-year period for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion or rollover contribution, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution."

The link that you provided then gives an example that is clear as mud that indicates that year basis is not the same. I am not a tax expert, but where the flow chart giveth, the fine print seems to taketh away. The ramifications of a mishandling is too costly for me to blithely assume that I have covered bases needed for that IRS audit. Been there, did that once and won, but really don't wish to repeat the hassle...ever. This is one that I want to check with a much better tax expert than I am
As Alan pointed out, this is the internet and anything goes so you should definitely be careful. This is an interesting general problem......how does a (relative) layman evaluate an expert's competence in a technical field? Does paying for an answer make it better? Does paying more make it even better/more likely to be true. What if you get 2 differing answers? I don't know the solution but I can appreciate the problem.

Not the whole answer but a piece......I would at least learn something so that if the advisor says something that I recognize as wrong, I can probe deeper.

Also recognize that esp. on the internet, this can be a shared responsibility between questioner and answerer..... the answerer will attempt to work on the apparent question. If the questioner leaves other relevant info, the questioner may not realize it. E.g. AFAIK, your reference to 401K/Roth 401K was not in your original post?

A suggestion (and it's free for good or bad)......ask your question w/ all the gory detail whether you think it's relevant or not at the fairmark.com forum (retirement sub-forum). Look for a reply by Alan S. I would bet a fair amount on his answer.......but in all honesty, it's the same dilemna I mentioned in the beginning. How do I (the layman) know he really knows his stuff?

Another tidbit......the section you mentioned has this in the beginning:

Additional Tax on Early Distributions
If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.

To me, that says that the 10% additional tax may apply to a non-qualified distribution. To me, that also implies that if the distribution is qualified,
the 10% additional tax does not apply..............however, it does not actually state the latter so if you are a worrier, there is cause.

I agree w/ you that the passage is clear as mud.....I believe it is pointing out the the 5 yr master clock from when the first Roth was opened is not necessarily the same as the 5 yr clock for each conversion that applies when you are < 59.5 and taking distributions.

Good luck!

btw....how did you quote that section from pub 590. When I try to copy and past from there, my computer highlights both columns and the lines get intermingled.
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Old 09-28-2012, 07:16 PM   #57
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The following table is from KAWill (checked by Alan S.) at the fairmark.com forum.
KAWill found reading IRS pubs confusing and wanted to have a simple table.
It lacks some important punctuation....so imagine a semicolon after every yes/no.
The table lists whether distributions from a Roth are taxable or subject to the 10% penalty. Not explicitly stated but assumed is the ordering principle: contributions come out first, then conversions (oldest thru youngest in that order), and then earnings. Tis a blessing to me, if not all mankind! Consider using it to test your advisor before hiring him.


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.
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Old 09-28-2012, 07:31 PM   #58
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if it matters, I agree with kaneohe's reading on this issue. Pub 590 makes it clear that there are 2 different kind of distributions. Qualified and non-qualified. If your distribution is not qualified, it is obviously non-qualified and gets kicked over to a separate part of the rules. Part of these rules are the roth ordering rules for non-qualified distributions. Another part is the 5 year rule for each conversion/rollover. I read it the same as kaneohe and Alan S. He has answered this question many times, so doing a google search will benefit you. Fairmark Forum :: Retirement Savings and Benefits :: 5 year Roth rule and 59 1/2 early withdrawal

Furthermore, and adding more confusion, I believe IRS publications are non-binding. So, if something is clear to me, you and the rest of the world as read from an IRS publication, they aren't held to what is written in the publiCAtion. it is their interpretation of the legislation that matters. or at least a judge's if you choose to take it that far. With that said, I think the IRS makes a fair and honest attempt to describe the regulations which they impose.

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Old 10-01-2012, 09:51 AM   #59
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I doubt most on here will agree with your hyperinflation ideas. Also, in the future, if you are going to post comments like "Today's conservative estimate of 9% real inflation", without links, noone is going to take you seriously........
Here ya go FinanceDude:

John Williams' ShadowStats.com

Quote:
The CPI chart on the home page reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab here reflects the CPI as if it were calculated using the methodologies in place in 1980. In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.
In short, the current CPI is a wholly manipulated government number, removing from the current basket of measurements anything that doesn't reflect the required narrative so as to keep masses with wealth to protect happy with a 3-4% returns.
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Old 10-01-2012, 09:57 AM   #60
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Here ya go FinanceDude:

John Williams' ShadowStats.com

In short, the current CPI is a wholly manipulated government number, removing from the current basket of measurements anything that doesn't reflect the required narrative so as to keep masses with wealth to protect happy with a 3-4% returns.
Good old shadow stats. So, if the "real" annual CPI is 2%-3% higher than the published cpi and has been that way for the past decade, the "real" GDP is about 25% bigger than the one we all are living. Don't ya' think someone would have noticed by now?
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