Roth conversion question

[homestead]

Never done a roth conversion and am wondering.
We are drawing social security now and only have a small pension and a little
taxable dividends income. Even though we didn't need a distribution from
my ira I recently took a 23k distribution because I calculated that amount
with all our deductions would result in paying no federal or state taxes.
I am wondering if I can convert that distribution now to a roth and also pay
no taxes on it? Or is it too late since I already took the distribution? If I
can it would save even more on taxes long term with those funds being in a roth.

[pb4uski]

Too late. What you can do next time is rather than take a distribution, do a Roth conversion... transfer the same amount from your tIRA to a Roth IRA. In both cases there the amount of the distribution/conversion is taxable but with the conversion it grows tax free.

However, at your income level if you invest the $23k you took out in equities that provide qualified dividends and long-term capital gains, then those are tax-free as well so not a big mistake.

[RetireAge50]

Can you just do a do over? I thought there was a 60 day rule or something like that.

[pb4uski]

Sorry, my bad... there may be a way... I mis-interpreted that the OP did this last year since he said he didn't pay taxes on it... now I see he says recently... so if it is within the 60 day window he could return it and then later do a Roth conversion and accomplish his objective.

[Sunset]

Quote:

Originally Posted by pb4uski Sorry, my bad... there may be a way... I mis-interpreted that the OP did this last year since he said he didn't pay taxes on it... now I see he says recently... so if it is within the 60 day window he could return it and then later do a Roth conversion and accomplish his objective.

Correct me if I'm wrong but,
I'm thinking he could even return part of it (in case he spent some), and then later do the Roth conversion with the amount he returned, so the tax effect is the same.

[kaneohe]

Quote:

Originally Posted by Sunset Correct me if I'm wrong but, I'm thinking he could even return part of it (in case he spent some), and then later do the Roth conversion with the amount he returned, so the tax effect is the same.

Why can't he just stick it in the Roth now instead of returning it/do it later?

[bob boag]

I have $3M in tIRAs that RMD in 10 years. But I have zippo in taxable wealth. I would have to pay the Roth conversion tax from the IRAs. But I hear that this is a poor choice and better to let it compound unmolested in the tIRA and take the hit at RMD.

Is this true? Or should I convert each year up to the top of my tax bracket?

[RunningBum]

Quote:

Originally Posted by kaneohe Why can't he just stick it in the Roth now instead of returning it/do it later?

Right. You have 60 days to complete a Roth conversion. See the 3rd item in https://www.irs.gov/retirement-plans...th-conversions

You could also return the distribution within 60 days, but if the goal is to put it in a Roth, I don't know why you wouldn't go that way.

If it's beyond 60 days, I don't see a way, but as pb4 said, invested properly this will probably also result in 0 taxes.

[pb4uski]

Quote:

Originally Posted by RunningBum Right. You have 60 days to complete a Roth conversion. See the 3rd item in https://www.irs.gov/retirement-plans...th-conversions You could also return the distribution within 60 days, but if the goal is to put it in a Roth, I don't know why you wouldn't go that way. If it's beyond 60 days, I don't see a way, but as pb4 said, invested properly this will probably also result in 0 taxes.

Learn something new every day... I never knew that you had 60 days to complete the conversion but it make perfect sense given the 60 day window to return a distribution.

[RunningBum]

Quote:

Originally Posted by bob boag I have $3M in tIRAs that RMD in 10 years. But I have zippo in taxable wealth. I would have to pay the Roth conversion tax from the IRAs. But I hear that this is a poor choice and better to let it compound unmolested in the tIRA and take the hit at RMD. Is this true? Or should I convert each year up to the top of my tax bracket?

Seems better to start your own thread on this rather than distract from the OP's different question but I think it's pretty much a wash rather than a poor choice if you have to pay taxes out of the conversion.

[pb4uski]

Quote:

Originally Posted by Sunset Correct me if I'm wrong but, I'm thinking he could even return part of it (in case he spent some), and then later do the Roth conversion with the amount he returned, so the tax effect is the same.

True, but I'm not sure this is the case since the OP said that he didn't need the money and was just trying to take advantage of 0 taxes.

[pb4uski]

Quote:

Originally Posted by bob boag I have $3M in tIRAs that RMD in 10 years. But I have zippo in taxable wealth. I would have to pay the Roth conversion tax from the IRAs. But I hear that this is a poor choice and better to let it compound unmolested in the tIRA and take the hit at RMD. Is this true? Or should I convert each year up to the top of my tax bracket?

I would think you are better off converting to the top of your current tax bracket now even if you have to take some distribution to pay the tax IF your current tax bracket is lower as the tax bracket that you expect to be in once any pensions and SS start.

[kaneohe]

Quote:

Originally Posted by bob boag I have $3M in tIRAs that RMD in 10 years. But I have zippo in taxable wealth. I would have to pay the Roth conversion tax from the IRAs. But I hear that this is a poor choice and better to let it compound unmolested in the tIRA and take the hit at RMD. Is this true? Or should I convert each year up to the top of my tax bracket?

It is a generally a poor choice if you are < 59.5 y.o. since you then pay a 10% EWP as well as tax on the IRA withdrawal. If you are 10 yrs from RMD, that may not apply to you. However using TIRA funds to pay taxes is not as good as paying from taxable since you remove funds from the IRA tax shelter. If you have no other choice, the basic question remains: what tax rate do you pay now vs what do you pay later if you don't convert? If the rates are the same, there is a slight advantage to converting. If the rate will be higher later, it is more advantageous to convert. If the rate will be lower later, it does not make sense to be a higher rate now.

[upset264]

There is no early withdrawal penalty on conversions.


Sent from my iPhone using Early Retirement Forum

[kaneohe]

Quote:

Originally Posted by upset264 There is no early withdrawal penalty on conversions. Sent from my iPhone using Early Retirement Forum

sorry, I worded that poorly. Yes, no EWP on conversion but if you use part of the TIRA withdrawal to pay the taxes, then that part is taxed and also penalized if it is early (< 59.5y.o.).

[homestead]

Quote:

Originally Posted by RunningBum Right. You have 60 days to complete a Roth conversion. See the 3rd item in https://www.irs.gov/retirement-plans...th-conversions You could also return the distribution within 60 days, but if the goal is to put it in a Roth, I don't know why you wouldn't go that way. If it's beyond 60 days, I don't see a way, but as pb4 said, invested properly this will probably also result in 0 taxes.

OP: Sounds like I can just use the distribution and rollover directly into the roth. Probably have to specify that it was a rollover when I deposit in the roth. I just took the distribution a couple weeks ago. Thanks!

bob boag try using the orp calculator to see what roth conversions would do to your nestegg.