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Slowly morphing an account from Taxable to Roth - Questions
Old 07-28-2013, 11:23 PM   #1
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Slowly morphing an account from Taxable to Roth - Questions

I avoided using the word "convert", since that makes one think of IRA -> Roth, which this is not.

The Background - Some years ago I received an unexpected inheritance. I decided to keep it as Separate Property, as defined by the laws of my state. I set it up as Transfer On Death (mine) to our kids. To keep it as Separate Property, all income as defined by the state that comes from it becomes Shared Property, and should not be co-mingled so as not to lose the Separate Property status. I have it invested in a moderate allocation fund (MorningStar-speak), one that is income-oriented. So the quarterly dividends are paid to me (us) as cash (Shared), and the capital gains (Separate) are reinvested in the fund. This is a Taxable account, of course. We use the dividends as one of our income streams.

Thinking of the future - When I and DW are on SS, income from a Roth is not counted in the SS 32k rule on taxation of SS benefits. And when we get on to RMD's, a Roth would not incure taxes like the RMD's.
So I was thinking... what if I was to create another Separate Property account as a ROTH, that parallels the existing account, and every year as long as I can, do a trustee transfer of $6,500 from Taxable account to the parallel Roth account?

This alone doesn't seem to be a problem. But then there is the quarterly distribution to me of the dividends. I have been reading IRS PUB 590 on all IRA's. I am over 59 1/2 YOA now, so distributions from a Roth incur no penalty due to age... but then there is that ill-defined "5 year rule" in there. I have had a different Roth account in existence for well over 5 years. But this new Separate Property Roth account might only be in existence 2 months or so before the first dividend distribution would occur.

Would the distribution from a newly-created Roth invoke a penalty, or is the fact that I have a different Roth that has been in existence for well over 5 years cover me? It's not clear to me at all.

I may or may not do this, I'm just thinking. I probably will not be able to convert all of it to Roth, not enough years @ 6.5k/yr. before DW ceases any employment, and that would end the wages income the IRS says is needed to make a contribution to a Roth.

Am interested in your thoughts, and the Roth 5 year rule issue.

EDIT: That's "An" account, not "and" in the thread title. Can't edit the title...
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Old 07-29-2013, 03:38 AM   #2
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I was able to edit the title for you.

However, I'll leave it to others to give advice on this particular subject.
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Old 07-29-2013, 05:42 AM   #3
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Not answering your specific question, but just wished to point out that to move money from a taxable account to a Roth or T-IRA, you would need to have earned income for that year.
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Old 07-29-2013, 06:20 AM   #4
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His wife's earned income counts if they file jointly, I think.
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Old 07-29-2013, 08:22 AM   #5
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yes, 59.5 and 5 yrs on the oldest Roth you own and you're ok. Even if less than 5 yrs, you're considered to be withdrawing contributions first, then conversions, and finally earnings................and this is considering all the Roths together...........so any contributions to the other Roth are considered to be coming out first. (the ordering rules).

from kawill on the fairmark.com forum on the tax/penalty for Roth distributions


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

btw........very clever combination of spousal IRA and separate/community property ideas.
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Old 07-29-2013, 11:08 PM   #6
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Quote:
I was able to edit the title for you.
Thanks, Alan

Quote:
His wife's earned income counts if they file jointly, I think.
Correct!

Quote:
Originally Posted by kaneohe View Post
yes, 59.5 and 5 yrs on the oldest Roth you own and you're ok............
Thank You kaneohe!!!
I don't know why the IRS hasn't updated PUB 590 to clarify this 5 year issue. The addition of one or two sentences would do it.
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