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Roth Conversions in Fire-how many accounts??
Old 07-17-2014, 08:32 AM   #1
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Roth Conversions in Fire-how many accounts??

I've been doing some long range planning to manage the tax impacts of SS and RMDs at 70 and will probably do recurring yearly Roth conversions from my 401k and IRA accounts once in FIRE and initially in a lower tax bracket.

I have done 2 modest Roth conversions already, and per some advice I got, they were each done to unique accounts in case I decided to re-characterize them and 'roll them back'. And, it helps to identify when the accounts meet the 5yr rule for withdrawing from them.

So...my question/comment - for anyone here who has been doing something similar - do you end up with a long list of unique Roth accounts and does it become tedious/time consuming to review & manage accounts as they start to grow in number year by year?
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Old 07-17-2014, 09:40 AM   #2
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There is a time limit to recharacterize, so after that is past you can merge the roth accounts.
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Old 07-17-2014, 09:42 AM   #3
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I certainly have a long list of accounts (31 specifically for Roth conversions), some with $0 in them. However, they are reusable, so I don't expect to grow the list more than maybe one per year. The Roth accounts I recharacterized last year went into a new tIRA and many have $0 now. I used some of them for this year's Roth conversions. Because none of them has losses this year, I haven't had to Roth convert any additional shares, yet. They may have to wait until next year. They are all at the same place and tracked in Quicken, so it's not much work.

I do have a bunch of Roth accounts with non-zero balances that remain from last year. One of these days I'll call and see if they can be combined. So the hassle of multiple accounts is less than the trouble of a phone call to combine them I would say...
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Old 07-17-2014, 08:00 PM   #4
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I use one ROTH account and have been converting into it from a T-IRA. I had to recharacterize once and did a partial recharacterization. Vanguard made it pretty simple, though I had to do it over the phone.

I know there are advantages to multiple accounts, but the complexity turns me off.
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Old 07-17-2014, 08:24 PM   #5
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When one is ready or needs to withdraw from a Roth, how do you specify which shares to sell given the minimum 5 yr 'rule'?

I was told that is one of the reasons to do Roth conversions by separate accounts for a given year that you convert. It makes it 'easier' to know which shares meet the 5 yr minimum.
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Old 07-17-2014, 08:59 PM   #6
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How does converting from 401k to ROTH work?

401k is all pretax so any kind of redemption would trigger taxes?
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Old 07-17-2014, 09:07 PM   #7
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How does converting from 401k to ROTH work?

401k is all pretax so any kind of redemption would trigger taxes?
I haven't converted from a 401k, but if rollovers are allowed it should be possible. There would be taxes paid on the conversion. The conversion amount would be normal income for tax purposes, conversion or no.

401k's can have post-tax money in them, which may be converted directly to a Roth without the tax burden, as far as I know.
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Old 07-17-2014, 09:51 PM   #8
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I have been combining Roth accounts after the period for re-characterization has passed.
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Old 07-17-2014, 11:05 PM   #9
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Originally Posted by BBQ-Nut View Post
When one is ready or needs to withdraw from a Roth, how do you specify which shares to sell given the minimum 5 yr 'rule'?

I was told that is one of the reasons to do Roth conversions by separate accounts for a given year that you convert. It makes it 'easier' to know which shares meet the 5 yr minimum.
This article spells out the 5-year rules clearly. From that article:

For convenience purposes, because the Roth rules aggregate together all Roth accounts under IRC Section 408A(d)(4)(A), there is no need to keep Roth contributions and conversions in separate accounts, or to otherwise try to separate out multiple types of contributions. The aforementioned ordering rules (principal first, then conversions on a FIFO basis, then earnings) apply in the aggregate across all accounts.

That's not to say that you can't keep separate accounts, just that you don't need to. If you keep a ledger or spreadsheet listing how much was contributed and converted when (into one or many accounts), then that should be sufficient to demonstrate compliance with the 5-year rules.
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Old 07-18-2014, 01:03 AM   #10
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The fact that the 5-year requirements are aggregated across IRAs effectively means that once the 5-year rule has been satisfied once for a taxpayer (i.e., if you've already had a Roth for at least 5 tax years), it's been satisfied for good; in turn, this means that recent contributions may actually be eligible for withdrawal as a qualified distribution even if they've been in the account for less than 5 years, as long as the taxpayer overall has met the 5-year requirement with respect to any Roth IRA.

Understanding The Two 5-Year Rules For Roth IRA Contributions And Conversions | Kitces.com
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Old 07-18-2014, 08:27 AM   #11
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I open a separate account for each year and also another if I re-characterize. Then, when the re-characterization window closes, I combine that account into one main one. I keep them all at Fidelity and it is an easy phone call to combine.
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Old 07-18-2014, 08:30 AM   #12
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Quote:
Originally Posted by walkinwood View Post
....I know there are advantages to multiple accounts, but the complexity turns me off.
+1 I don't care to refine things that much.
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Old 07-18-2014, 02:43 PM   #13
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I used most of my accounts in 2013. Must have done about 20 Roth conversions, each one a Roth account containing the shares of only one mutual fund or EFT, and some with the same fund/EFT but a different conversion price.

I converted a lot of EM shares, since they had done poorly the year before. They continued their poor performance during 2013. If they lost more than 10% of the value I originally Roth converted at, then I did another Roth conversion with additional shares at the new lower price. When tax time in 2014 rolled around, I recharacterized the accounts that were worth less than what I had converted them at. A very simple thing to do when different shares are kept in different accounts.

This way I can convert a bunch of stuff at the start of the year (in case they do nothing but go up in price all year). If some share prices drop like a rock I can convert more into a separate account at the lower price and plan on recharacterizing the original Roth conversion. I can even sell the Roth shares, buy the same shares in the tIRA, and convert those shares. I was very active in 2013 as the little Roth accounts dropped in value. So far in 2014 all I have is the 11 original Roth conversions, all using accounts from 2013 that had been recharacterized. Only one account has a 1% loss, so no action to take yet. A big market drop and I'll be active once more.

This takes advantage of that sort of free-lunch "look back" recharacterization feature to minimize your Roth conversion taxes (or really to transfer the maximum number of shares for the same amount of taxes).
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Old 07-18-2014, 11:13 PM   #14
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This article spells out the 5-year rules clearly......
Thanks scrinch!
I read and re-read that article. I found this conclusion about the 5 year rule on conversions very interesting:

Quote:
On the other hand, as noted earlier, if the individual is otherwise exempt from the early withdrawal penalty (e.g., by being over age 59 1/2), the withdrawal of conversion principal is penalty-free (over 59 1/2) and tax-free (as it was already taxed at conversion). Thus, for those who are already over age 59 1/2 (or totally disabled), the Roth conversion 5-year rule is essentially a moot point, and only the 5-year rule for contributions remains relevant.
I bolded text for emphasis.

I'll need to study PUB 590 and see if I can tease that same conclusion out of it.
I wiki'd the author, bio sounds good, can't say I've heard of him before, but that is not surprising.
Would really like to see it in official IRS documents though.
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Old 07-18-2014, 11:58 PM   #15
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I'll need to study PUB 590 and see if I can tease that same conclusion out of it.
Found it.
In PUB 590, drilling down under "ROTH IRA "
then "Are Distributions Taxable?"
then in "Additional Tax on Early Distributions", read text and then read the "Exceptions".

So if one has reached age 59 1/2, the 5 year rule on conversion amounts does not apply!

I'm going to try to read my date of manufacture data plate, it's scuffed-up and well-worn, but I think it shows I'll be > age 59 1/2
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