Do I need an existing Roth IRA to convert from IRA

[photoguy]

Do I need an existing Roth IRA to do conversions from a trad IRA (or can we open one as part of the conversion even in a year with no earned income)? Also, would there be any advantage to opening multiple roth IRAs while we still have earned income?

I think the answer to both questions is no but I'm not entirely sure.

 

[Onward]

You don't need an existing Roth to do a conversion.

You don't need earned income in the year you do your conversion.

Multiple Roths might make re-characterization neater.

 

[Animorph]

I Roth convert each single fund into its own new Roth account., and I convert more than I need. Then at tax time you can select the Roth accounts with the best value versus conversion tax cost and recharacterize the excess accounts back to tIRA's. One of the few times you can "look into the future" and pick the best result.

 

[photoguy]

Thanks for the confirmation.

With multiple roths are you trying to select the account that dropped the most during the year so that they are more likely to experience higher growth in the future?

 

[Animorph]

Thanks for the confirmation.

With multiple roths are you trying to select the account that dropped the most during the year so that they are more likely to experience higher growth in the future?

I convert the funds that have performed the worst over the last few years. I also convert whatever I have a lot of. Both at the start of the year. If a converted fund goes down by 10%, I convert some more. At the end of the year I convert a bunch of cash (cash for expenses the next year or two but still in an IRA) in binary amounts down to $1k or so. At tax time I look at all the conversions and pick the ones that fit under my conversion limit ($250k AGI, no AMT) and have the best current value to conversion tax value. I fill in with the cash conversions to get as close to the tax target as I can (within $1k or so). Whatever doesn't fit is recharacterized. If some of the cash remains as a Roth account, I might pick up shares of a fund that has reached a new low and sell the same number shares in the tIRA.

Yes, I'm hoping that the shares will start going up after the conversion. But at least I will have converted them at pretty much the lowest value during the conversion year.

The multiple Roths are not strictly necessary, but they are simpler than asking your broker to run through the IRS calculations to figure out the growth that occurred between the conversion and recharacterization. Which I believe includes everything in the account, not just specific shares.

Edit: It also doesn't cost me anything to create the multiple accounts.

 

[scrinch]

How does the "keep it for 5 years" rule work with multiple Roth conversions over multiple years? With a single Roth account, does the account only have to be open for 5 years before you can begin withdrawing Roth funds, or does each rollover have to stay for 5 years in the Roth account?

 

[Animorph]

How does the "keep it for 5 years" rule work with multiple Roth conversions over multiple years? With a single Roth account, does the account only have to be open for 5 years before you can begin withdrawing Roth funds, or does each rollover have to stay for 5 years in the Roth account?

Each conversion has its own 5 year period. However, the way the 5 year period is determined lumps all the conversions for one year into the same 5 year delay. After I do my taxes and determine the Roth accounts I will keep, I'll put all the funds in the new Roth accounts into yet another new Roth account for 2013 conversions. That will clean up the mess. Similarly, all the recharacterized Roth accounts will go into a new tIRA, where they will wait out the 30 day recharacterization wait before they can be converted again. Then I will reuse all of the accounts for the next year.

It's been a while since I looked at the 5 year rule. If I remember correctly, your first Roth account starts the conventional 5 year clock. Each rollover/conversion has a separate 5 year clock. But if you're older than 59.5 the clocks don't matter much.

 

[Animorph]

Post #29 from here is a good link to the 5 year rule:

http://www.early-retirement.org/forums/f28/aa-during-3-years-high-spending-69532-2.html#post1388039

 

[scrinch]

Post #29 from here is a good link to the 5 year rule:

http://www.early-retirement.org/forums/f28/aa-during-3-years-high-spending-69532-2.html#post1388039

Thanks for the link. I missed that thread, and SEARCH led me to many, many threads that didn't have the answer.

 

[springnr]

Why is there so much concern for the five year rule?

If this site is correct, the five year rule only applies to earnings, not the funds put into the Roth. Am I reading this wrong?

When ROTH IRA Withdrawals Are Tax Free And When They Are Not

 

[photoguy]

Thanks Animorph. I can see you take optimization to whole new level

 

[kaneohe]

Why is there so much concern for the five year rule?

If this site is correct, the five year rule only applies to earnings, not the funds put into the Roth. Am I reading this wrong?

When ROTH IRA Withdrawals Are Tax Free And When They Are Not

You may want to re-read the section on conversions.

 

[springnr]

You may want to re-read the section on conversions.

Appears my fingers did not cooperate fully in getting my thoughts into my post above? I meant to include the caveat, if you are older than 59 1/2.


My post are still being approved, so I should just make some happy happy gibberish post to get past that milestone, as I would have hopefully caught that blunder upon seeing the post.

Edit to add:
Well this posted immediately, so either I passed the milestone, or it is post with links that need approved.

 

[kaneohe]

Why is there so much concern for the five year rule?

If this site is correct, the five year rule only applies to earnings, not the funds put into the Roth. Am I reading this wrong?

When ROTH IRA Withdrawals Are Tax Free And When They Are Not

You are correct if you are talking > 59.5 y.o. Since contributions and conversions come out first and earnings last, as long as you don't pull everything out at once, there is a good chance that by the time you get to earnings , you will have aged the Roth closer to or past the 5 yr clock on the first Roth opening..........or if you plan ahead the first Roth will already be 5 yrs old by the time you get to 59.5.

 

[springnr]

Appreciate the reply/assurance.

I'm still drinking from the fire hose while getting up to speed.
I'm RE just not real positive on the FI part yet.

 

[kaneohe]

I thought it was spelled FI RE , not RE FI
Welcome to the forum.

 

[misanman]

For someone over 59 1/2, is the five year rule satisfied for all conversions on the basis of the first conversion? Or does each conversion come with it's own 5 year waiting period? I did conversions in 2012, 2013, and 2014 and am wondering if I'm released from all restrictions in January of 2016 or if I'm only released only from the restrictions related to the conversion done in 2012?

 

[Animorph]

Note that "qualified" distributions do not have any penalties. However, nonqualified distributions only "may" have penalties. There are no penalties if you meet one of the exceptions, even if the distribution is not qualified. As always, don't listen to us, read it from the source.


Here is a quote from Publication 590 (2012):

Publication 590 (2012), Individual Retirement Arrangements (IRAs)

"
Additional Tax on Early Distributions


If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.
Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions , later, to determine the recapture amount, if any.
The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions , earlier.
For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2012, and makes a regular contribution for 2011 on the same date, the 5-year period for the conversion begins January 1, 2012, while the 5-year period for the regular contribution begins on January 1, 2011.
Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.
You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions.

Other early distributions. Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Exceptions. You may not have to pay the 10% additional tax in the following situations.

• You have reached age 59½.
• You are totally and permanently disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the distribution to buy, build, or rebuild a first home.
• The distributions are part of a series of substantially equal payments.
• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
• You are paying medical insurance premiums during a period of unemployment.
• The distributions are not more than your qualified higher education expenses.
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution.

Most of these exceptions are discussed earlier in chapter 1 under Early Distributions . "

So a <5 year withdrawal is not a "qualified distribution", but using the age 59.5 exception it also does not incur a tax penalty, I think. Lots of "may" qualifications in there confusing the issue.