Another ROTH question

[BTravlin]

My DW has a small ROTH IRA that was started 3 years ago. We are now looking at starting a new 403b ROTH account for her. It is my understanding that you pay no penalties for early withdrawals provided the money has been invested for a minimum of 5 years. Now the question. I understand you can withdraw penalty free from any of your ROTH accounts provided the first one established is at least 5 years old. Is this correct?

In other words, can we make penalty free withdrawals from the new ROTH account 2 years from now since her initial ROTH account will have been established for 5 years by then?

Basically, we are 401k and 403b rich but relatively free cash poor. We're looking at cutting her contributions to the 403b and saving more in ROTH so we will have another option for spendable cash when we FIRE 3 years from now.

 

[martyb]

You can withdraw your actual contributions to a Roth IRA at any time without any penalties...I believe. There are penalties involved with early withdrawal of any earnings.

This is one reason (in fact, the biggest reason) that some people use their Roth IRA as their short-term or emergency stash. That is pretty much what I do. I can get the money easily & it also earns while it's sitting there.

 

[kaneohe]

see this wonderful table by KAWill posted fairmark.com site earlier :
(after every yes or no, imagine a semicolon that is missing)
The Table asks if you are under/over age 59.5;
If you are under age 59.5, there is a 5 yr. clock for each conversion
that must be met for that withdrawal to be tax & penalty free;

If you are over 59.5 and your first Roth IRA is over 5 yrs old, go for it.


Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


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.

 

[panacea]

Careful- the rules are different for Roth and converted Roth. No penalty on any contributions for contributory Roth. For converted Roth 5-yr clock starts jan of year of first conversion. Fairmark is a good resource and also IRS.gov.

 

[kaneohe]

Careful- the rules are different for Roth and converted Roth. No penalty on any contributions for contributory Roth. For converted Roth 5-yr clock starts jan of year of first conversion. Fairmark is a good resource and also IRS.gov.

see above table ......post from Fairmark (KAWill)

Each conversion has its own 5 yr clock that applies when a "youngster";
when not a "youngster", the 5 yr clock for 1st Roth applies (not necessarily
conversion".

 

[ronocnikral]

also, the roth ordering rules are such that you first withdraw contributions, then conversions in the order they occurred then earnings. I am under the impression that you just have a basis, so it doesn't matter what account you draw from, you just have to keep track the amount of contributions, conversions and earnings and the amount withdrawn from each?

 

[kaneohe]

also, the roth ordering rules are such that you first withdraw contributions, then conversions in the order they occurred then earnings. I am under the impression that you just have a basis, so it doesn't matter what account you draw from, you just have to keep track the amount of contributions, conversions and earnings and the amount withdrawn from each?

correct on all counts.......see p.2 lines 22 & 24 here
http://www.irs.gov/pub/irs-pdf/f8606.pdf where you report Roth withdrawals
They ask for basis in contributions and basis in conversions but nowhere is there any question about a specific account since they are considered one for this purpose.

The ordering rules (not specifically stated) are actually in the KAWill table above so, in addition to what you stated, there is an internal ordering within each conversion if you had non-deductible contributions.......the taxable (deductible) part comes out first which is subject to penalties if <59.5 yrs
old.

 

[ronocnikral]

The ordering rules (not specifically stated) are actually in the KAWill table above so, in addition to what you stated, there is an internal ordering within each conversion if you had non-deductible contributions.......the taxable (deductible) part comes out first which is subject to penalties if <59.5 yrs
old.

Thanks. I don't get the conversion taxable and non-taxable part. Say I got caught up in a Roth conversion this year (which I did). B/c of contribution limits based on income, we weren't able to contribute after we had earlier in the year when it looked like it made more sense. So, we took our small amount of a contribution, recategorized as a non-deductible IRA and then recategorized again as a RIRA. In KAWill's table, does this count as taxable portion? If so, what is an example of a non-taxable? If it is vice versa, some examples would greatly help me understand.

Thanks.

 

[kaneohe]

Thanks. I don't get the conversion taxable and non-taxable part. Say I got caught up in a Roth conversion this year (which I did). B/c of contribution limits based on income, we weren't able to contribute after we had earlier in the year when it looked like it made more sense. So, we took our small amount of a contribution, recategorized as a non-deductible IRA and then recategorized again as a RIRA. In KAWill's table, does this count as taxable portion? If so, what is an example of a non-taxable? If it is vice versa, some examples would greatly help me understand.

Thanks.

Suppose you had a 50-50 mix of deductible/non-deductible TIRA when you made a Roth conversion(considering all TIRAs you own including rollover IRAs from your company plans). When you do the Roth conversion and fill out
F8606 which determines the taxable part of the conversion, you would end up showing that half the conversion is taxable. Ex: you convert 10K and find 5K is taxable. (remember that this calculation also considers your TIRAs as 1 single IRA so you cannot select a particular account that has
non-deductible contributions, convert that account and consider it a non-taxable conversion). Then when you use the ordering rules, the first 5K
of this conversion is considered a taxable conversion, so you will pay a penalty for early withdrawal if you are less than 59.5 yrs old. The second 5K withdrawal would be penalty free.

 

[ronocnikral]

Thanks. I think I understand now, if I contributed to a traditional account (IRA or IRA via 401k) which was deductible, and recategorizing by paying a tax on the entire amount I am recategorizing today, Roth ordering rules say I would have to take it after contributions and before any conversions from non-deductible accounts (like what I did this year). And under certain situations (<59.5 and conversion less than 5 year old) I would have to pay tax and penalty on it.

Thanks again for putting up with my slowness.

 

[kaneohe]

ronocnikral...................I can't say that I can read everything that's going on in your gray matter but I think you get the general idea. The main complication is that there
are "physical" IRAs and then there is the "IRS" idea(s) of IRAs and the complexity comes when you have deductible and non-deductible contributions co-existing at the same time.
If that is the case, you can certainly convert a certain "physical" non-deductible IRA
as you apparently did, but in the view of the IRS, you will have converted a pro-rated portion including both deductibble and non-deductible components.
.........so if you had any deductible IRAs at the time you recharacterized your Roth
and then did a Roth conversion of that "physical" non-deductible IRA, then you had
a taxable component to that conversion.

 

[BTravlin]

see this wonderful table by KAWill posted fairmark.com site earlier :
(after every yes or no, imagine a semicolon that is missing)
The Table asks if you are under/over age 59.5;
If you are under age 59.5, there is a 5 yr. clock for each conversion
that must be met for that withdrawal to be tax & penalty free;

If you are over 59.5 and your first Roth IRA is over 5 yrs old, go for it.


Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


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.

DW would be under 59.5 when we might start withdrawing funds from the ROTH, which is a regular ROTH, and not a conversion. So if I'm reading the table correctly, we can make withdrawals without a penalty since we will have met the 5 year holding period by virtue of the first ROTH account established..

 

[kaneohe]

DW would be under 59.5 when we might start withdrawing funds from the ROTH, which is a regular ROTH, and not a conversion. So if I'm reading the table correctly, we can make withdrawals without a penalty since we will have met the 5 year holding period by virtue of the first ROTH account established..

You can withdraw your contributions first tax & penalty free but earnings will
be subjected to both tax/penalty if under age 59.5. (you can skip the conversion lines if you have no conversions but must follow them if you have conversions, even if you are drawing from a different account that doesn't contain conversions).

 

[ronocnikral]

my understanding is that BTravlin has a small IRA which is probably more contribution than earnings (as almost all Roth accounts are). Those contributions will be taken up first regardless of what other trickeration he has up his sleeve.

If the question is if they contribute to a Roth 403b and rollover into a Roth IRA when his wife separates, can they tap before 59.5 without tax and penalty? the clock is on the Roth IRA where you will be rolling over to. IF you don't have one (which isn't the case here), then a new 5 year clock is started at rollover. The basis in the roth 401k/403b is transferred to the Roth IRA and earnings are transferred as earnings. The basis can be tapped at any time. If over 59.5, the entire Roth 401k/403b is a qualified distribution and then entire amount becomes basis in the IRA account. The IRA account must be at least 5 years old before earnings can be withdrawn tax free. I believe a roth 401k/403b rollover to roth IRA has a 5 year "cooling period" and it isn't treated as a conversion.

But, if BTravlin's wife will be near age 55 when they are thinking of pulling the plug, it will probably be wise to wait until then and take distributions straight from the 403b plan if they can live with the 403b plan....

 

[kaneohe]

ronocnikral.........good catch......I guess I was following martyb's lead and we kind of moved OP's post somewhat off course. Everything I posted related to
Roth IRAs and I completely forgot (maybe never even noticed) that OP wanted to discuss the Roth 403B too . Glad you caught that and brought the thread back on course. Don't know too much about Roth qualified plans and conversions so will defer to you.........

 

[kaneohe]

here is a somewhat related thread from fairmark.com

Fairmark Forum :: Retirement Savings and Benefits :: 401k After Tax Rollover to Roth by Fidelity

sounds like things aren't fully developed for Roth qualified plans to IRA transfers.

 

[BTravlin]

And here I thought there would be a relatively easy answer to this question. Hah! Not where the tax code is concerned.

All of your answers now prompt another question. Is there any reason/advantage to go with the 403b Roth in the first place? Should we just take the after tax funds and invest them in our regular Roth instead?

 

[kaneohe]

and now, here's your homework.......come back and tell us

https://www.google.com/#hl=en&sugex....,cf.osb&fp=f7ca2225f0f18e44&biw=1003&bih=670

btw....you might want to post your question at the fairmark forum that's one of the first links on the google search

http://fairmark.com/rothira/roth401k/compare-ira.htm

 

[BTravlin]

Looks like the higher contribution limits are the main advantage which isn't a factor in her case. I think we'll just take the after tax dollars and put them in her regular Roth IRA. I think, all things being equal, I prefer getting government employer out of the picture to simplify matters.

 

[ronocnikral]

here is a somewhat related thread from fairmark.com

Fairmark Forum :: Retirement Savings and Benefits :: 401k After Tax Rollover to Roth by Fidelity

sounds like things aren't fully developed for Roth qualified plans to IRA transfers.

I just did a Roth 401k to Roth IRA rollever with vanguard and this was not my experience. All my basis (for both Roth and pre-tax dollars) and their associated earnings were rolled straight over into the appropriate IRA. maybe there was more to the rollever than vanguard led onto?