Roth conversion

[Terryjm51]

Hello all,
First let me say thanks to all who post on the website frequently.
Ok quick run down 53 Dw 52
In the last couple of years I have max out megcorp savings which is around 50k including their match.
I save roughly $800 a month in aftertax into my tr price.

I was TOLD that when I leave megacorp and roll over my 401k to an Ira that my aftertax can be rolled to a roth!
I am leaving megacorp when I am between 55-59 just all depends how well with my stress level.
Question: When I roll the after tax into a roth do I have to wait 5years before I can touch the money ?



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[Gatordoc50]

You were given incorrect information. You can rollover a traditional 401k to a traditional IRA tax free or a Roth 401k to a Roth IRA tax free. You can also convert a traditional 401k to a Roth but that is a taxable event. The only way to get your after tax account into a Roth would be with qualified contributions of 5500 plus 1000 catch up per year. There are many Roth conversion calculators on the web to guide you as to whether you should convert,and if so, how much per year.

 

[dallas27]

You were given incorrect information. You can rollover a traditional 401k to a traditional IRA tax free or a Roth 401k to a Roth IRA tax free. You can also convert a traditional 401k to a Roth but that is a taxable event. The only way to get your after tax account into a Roth would be with qualified contributions of 5500 plus 1000 catch up per year. There are many Roth conversion calculators on the web to guide you as to whether you should convert,and if so, how much per year.

op is talking about after tax contributions to his 401k, which he indeed can move to roth, if he actually made after tax contributions.


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[pb4uski]

No Gatordoc, they changed that recently. Currently, you can roll after-tax 401k balances into a Roth account. The IRS issued a memo allowing that last year. Prior to last year, it was unclear so there was some tax risk if you did it.

See http://www.kiplinger.com/article/re...4-new-path-to-a-tax-free-roth-conversion.html

However, the recent Obama budget proposes to close down this loophole. I can see the logic as the after-tax 401k rolled into a Roth is a huge runaround the Roth contribution limits.

On the OP's question, I think you do have to wait 5 years to withdraw the contributions without penalty. So if you need the money to live on, just take it in cash, pay the tax and invest the cash, rather than roll it into your Roth.

See http://fairmark.com/retirement/roth-accounts/roth-distributions/distribution-overview/

 

[jim584672]

Hello all,
First let me say thanks to all who post on the website frequently.
Ok quick run down 53 Dw 52
In the last couple of years I have max out megcorp savings which is around 50k including their match.
I save roughly $800 a month in aftertax into my tr price.

I was TOLD that when I leave megacorp and roll over my 401k to an Ira that my aftertax can be rolled to a roth!
I am leaving megacorp when I am between 55-59 just all depends how well with my stress level.
Question: When I roll the after tax into a roth do I have to wait 5years before I can touch the money ?

https://www.kitces.com/blog/irs-not...r-tax-401k-contributions-for-roth-conversion/
...should be helpful.

You need to wait 5 years to withdraw the converted amount, not earnings, without penalty. You can be under 59.5 as well.

 

[2B]

You were given incorrect information.

The OP is in a plan that lets a participant contribute well over the IRA limits. He indicated he is maxing out the contributions at $50k/yr (bravo to OP). He has two different accounts. Exxon-Mobil has this type of system and other companies surely do. Unfortunately, I'm not an expert on rollover rules. Hopefully, we'll have an expert on this topic show up.

Unfortunately, the OP didn't say who told him about the Roth rollover. If it was a company benefits expert, I suspect it is correct. If it was Joe down the hall, I'm not so confident.

I'm personally surprised at being able to roll the after tax account into a Roth. It seems like a questionable double dip but I certainly can't say I see the logic in the myriad tax rules available. I may have an opportunity to talk with someone later today that knows about these types of plans. If I do, I'll repost later today or tomorrow.

 

[BrianB]

We just did this with DW's 401k to ira rollover. Details in here:

Isolating Basis for a Roth Conversion - Fairmark.com Fairmark.com

Conversions are subject to a 5 yr wait to withdraw without penalty if you're under 59.5 but if you have a Roth with regular contributions those can be taken first. See the following about "laddering" Roth money:

Stocks — Part XX: Early Retirement Withdrawal Strategies and Roth Conversion Ladders from a Mad Fientist

Hope this helps! I would bookmark both Fairmark and JHCollins as these sites have lots of good info!

 

[kaneohe]

This doesn't answer your 5 yr question but might be of interest:
Isolating Basis for a Roth Conversion - Fairmark.com Fairmark.com

You might want to post your question at the fairmark.com forum (retirement subforum). If you get an answer from Alan S.......you're good to go.

 

[Gatordoc50]

Wow. You can rollover a 401k to a Roth without paying tax and convert taxable to nontaxable? I know you can rollover a 401k to a Roth and pay tax. That is basically a conversion. This is surprising.

 

[kaneohe]

Wow. You can rollover a 401k to a Roth without paying tax and convert taxable to nontaxable? I know you can rollover a 401k to a Roth and pay tax. That is basically a conversion. This is surprising.

OP is talking about rolling over the after tax portion of 401K. Taxes paid already. see the fairmark article which gives more details.

 

[pb4uski]

Wow. You can rollover a 401k to a Roth without paying tax and convert taxable to nontaxable? I know you can rollover a 401k to a Roth and pay tax. That is basically a conversion. This is surprising.

It was new and surprising to me when I first retired too. I actually found out about it after I had taken my after-tax 401k in cash for spending, but fortunately my balance was not very large so it wasn't a big mistake.

Like I said, it wasn't totally clear until last year so there was some tax risk associated with doing it prior to last year but it worked out for those who did.

What I was surprised at was that I never received anything to include the growth of the after-tax 401k in my taxes (for example, if the check I received was $10k and my after-tax contributions were $8k I would have expected the $2k difference to be taxable in the year I received it or in the year it is rolled over to the Roth (like a conversion is taxable).

 

[Gatordoc50]

We just did this with DW's 401k to ira rollover. Details in here: Isolating Basis for a Roth Conversion - Fairmark.com Fairmark.com Conversions are subject to a 5 yr wait to withdraw without penalty if you're under 59.5 but if you have a Roth with regular contributions those can be taken first. See the following about "laddering" Roth money: Stocks — Part XX: Early Retirement Withdrawal Strategies and Roth Conversion Ladders from a Mad Fientist Hope this helps! I would bookmark both Fairmark and JHCollins as these sites have lots of good info!

Ok. That makes sense. Similar to converting a nondeductible TIRA to a Roth. Only the earnings are taxable.

 

[travelover]

I did this several years ago when it was still a grey area. Don't know about the 5 year rule, as I plan to leave it alone for at least 5 years.

I second reading Alan S. comments at Fairmark. He is very well informed and credible.

 

[jim584672]

I wish they would have clarified this years ago. I would have been maxing out my pre/after contributions, oh well, too late now.

 

[pb4uski]

I wish they would have clarified this years ago. I would have been maxing out my pre/after contributions, oh well, too late now.

+1

 

[stepford]

I wish they would have clarified this years ago. I would have been maxing out my pre/after contributions, oh well, too late now.

Me too. At least I'll stuff in the max during my OMY. Anyone know whether the $52K total contribution limit for 2014 is being increased for 2015?

Assuming one maxes out ones pre-tax + catch up contributions that still leaves $28K/yr after tax that can be converted to Roth on retirement. One year of this won't make a huge difference to my retirement assets, and I'll still be doing traditional taxable conversions every year from 55 to 70, but for those earlier on in the careers it could really help.

 

[sengsational]

...
On the OP's question, I think you do have to wait 5 years to withdraw the contributions without penalty. So if you need the money to live on, just take it in cash, pay the tax and invest the cash, rather than roll it into your Roth.

See Distribution Overview - Fairmark.com Fairmark.com

In the text on that link, above, puts Roth money into various withdrawl buckets, to be pulled out in a specific order across all Roth accounts. I'm confused about this.

• Regular contributions
• Taxable portion of first conversion
• Nontaxable portion of first conversion
• Each subsequent conversion, in order, with the taxable portion coming out first for each conversion
• Earnings (any increase in value occurring inside the Roth IRA)

Given that someone started their Roth account five* or more years ago, the first bucket comes out tax and penalty free, no matter your age, right?

My question comes on the conversion money. How can you have a "taxable portion" in a Roth account? I thought everything in a Roth already had taxes paid on it. Should that be "formerly taxable portion"?

For example, say you converted $10,000 from a tIRA that had 10% non-deductable contributions. So when you converted, $1,000 went in tax-free, and you had to pay tax on $9,000. So you paid tax on the $1,000 a long time ago, and you just paid tax on the $9,000. So why is the conversion split-up into taxable and non-taxable portions? And what difference would it make to the tax calculation in the year you pulled it out?


* calculated by tax year, so wall-clock time can be less...not the point.

 

[pb4uski]

I admit that taxable/nontaxable pieces are confusing.... I was focusing on the

If withdrawn before the first day of the fifth year after the year of the conversion: no tax, but will be subject to 10% early withdrawal penalty if you’re under age 59½ unless an exception applies.

 

[Terryjm51]

Stepford yes the $52 is being raised I believe to $53k.

 

[jim584672]

Trying to understand..
-----
Taxable portion of a conversion

Applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions.

*If withdrawn before the first day of the fifth year after the year of the conversion: no tax, but will be subject to 10% early withdrawal penalty if you’re under age 59½ unless an exception applies.

*Beginning on the first day of the fifth year after the year of the conversion can be withdrawn at any time with no tax and no penalty.

*Special rules apply to withdrawals of amounts converted in 2010.
-----
Example:
All Roth IRAs aggregated:
1999 contributed $2,000
2000 contributed $2,000
2001 contributed $2,000
2008 conversion $20,000
Accounts are now worth 40,000.

So lifetime contribs/convs is $26,000. So withdrawing anything over $26,000 would have a 10% penalty if you’re under age 59½?

 

[Terryjm51]

Hit the go button to soon. Thanks all for the threads to read. WOw this can get very complicated.
When I did talk to tr price sounds like there is company match to the after tax monies and so forth. I asked when rolled over how do I ear mark what's what in whosville. She was a little clueless
You all have been a big help. Think I will ask vanguard this week for clarification.
However i am not clear on the 59.5 i hope to retire at 56,57 and not touch any money until DW retires. That will put me around 59-60. but you never know and I want to understand my position.

 

[kaneohe]

In the text on that link, above, puts Roth money into various withdrawl buckets, to be pulled out in a specific order across all Roth accounts. I'm confused about this.
Given that someone started their Roth account five* or more years ago, the first bucket comes out tax and penalty free, no matter your age, right?

My question comes on the conversion money. How can you have a "taxable portion" in a Roth account? I thought everything in a Roth already had taxes paid on it. Should that be "formerly taxable portion"?

For example, say you converted $10,000 from a tIRA that had 10% non-deductable contributions. So when you converted, $1,000 went in tax-free, and you had to pay tax on $9,000. So you paid tax on the $1,000 a long time ago, and you just paid tax on the $9,000. So why is the conversion split-up into taxable and non-taxable portions? And what difference would it make to the tax calculation in the year you pulled it out?


* calculated by tax year, so wall-clock time can be less...not the point.

sengsational........this reply specifically pertains only to TIRAs/Roth which I am more familiar with....
First....by first bucket, I assume you mean orginal contributions? If so, you can withdraw at any time w/o tax/penalty. There is no 5 yr clock.

Re: your main question.....again this English thing......the words are "taxable portion of first conversion"......you paid tax on 9K of that conversion......that's the taxable portion....9K. So after all the original contributions are withdrawn,
the next funds that come out are the 9K and if withdrawn before the 5 yr conversion clock is up,you pay a penalty on that withdrawal. The next part that come out is the 1K nontaxable part of that conversion. No penalty for that so there is a difference between the 2 portions of the conversion.

 

[kaneohe]

-----
Example:
All Roth IRAs aggregated:
1999 contributed $2,000
2000 contributed $2,000
2001 contributed $2,000
2008 conversion $20,000
Accounts are now worth 40,000.

So lifetime contribs/convs is $26,000. So withdrawing anything over $26,000 would have a 10% penalty if you’re under age 59½?

Yes plus tax, since you are > 5 yrs past 2008 conversion. If you had withdrawn anything over 6K while in the 5 yr window after the conversion,
and assuming that the 20K conversion had been taxable, you would have been subject to that 10% penalty on any part of that 20K withdrawn (after the first 6K contributions).

 

[Midpack]

Great thread! I didn't realize the rule had changed, and both DW and I have a mix of pretax and after-tax money in our TIRAs. Gives me a good reason to open Roth IRAs now without creating a taxable event, and begin (taxable) pretax conversions next year. Thanks!

 

[Greencheese]

I'll be doing an after tax 401k rollover into my Roth this year but I do wonder how long the process will be open given the backlash/misinformation against Roth's by the general public.