Converting t-IRA dollars into Roth IRA dollars

[mpeirce]

My understanding is that if you convert it into a roth account that has already met the 5 year test, and you are over 59 1/2, you do not have a waiting period on the conversion. Vanguard has indicated the same when answering my specific question about conversions. If this is not correct, it may affect the timing of conversions.

VW

This is what my CPA told me.

Because of this both DW and I did ROTH conversions the first year (to get both our clocks ticking). After that we've just been converting her IRA since she is already past 59 ½ and I'm not.

 

[bingybear]

My understanding is that if you convert it into a roth account that has already met the 5 year test, and you are over 59 1/2, you do not have a waiting period on the conversion. Vanguard has indicated the same when answering my specific question about conversions. If this is not correct, it may affect the timing of conversions.

VW

For contributions, yes. Conversions, no.

see here

The Second 5-Year Rule, For Roth Conversions
As the name implies, the second 5-year rule applies not to (new) Roth contributions, but to Roth conversions from traditional pre-tax retirement accounts, and determines whether Roth conversion principal will be penalty-free.

To meet the 5-year rule for Roth conversions, again the measuring period is five tax years, which essentially means any Roth conversion is deemed to have occurred as of January 1st of that year (Treasury Regulation 1.408A-6, Q&A-5(b)). Notably, since conversions must occur by December 31st in a given year, their 5-year period will always start in the calendar year in which the conversion occurs; for instance, any conversion between January 1st and December 31st of 2013 will count as a 2013 conversion, but anything in 2014 will count as a 2014 conversion (by contrast, a new contribution as late as April 15th of 2014 could still be counted towards the 2013 tax year).

Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once. When withdrawals occur from conversion amounts, they are deemed to be withdrawal on a first-in, first-out basis under IRC Section 408A(d)(4)(B)(ii)(II), which effectively means the oldest conversions (most likely to have finished their 5-year requirement) are withdrawn first, and the most recent conversions are withdrawn last. (Overall, the ordering rules from Roth IRAs stipulate that withdrawals are after-tax contributions first, conversions second, and earnings third.)

 

[pb4uski]

My understanding is that the above 5 year thing is N/A where one is over 59 1/2. Not sure if it applies to your age when you convert or the age when you withdraw.

IOW, if you do a conversion at age 58 in year 2016, can you withdraw it penalty free in 2018 after you are 59 1/2 even though the conversion is not 5 years old?

It would seem to me that if you do a converison at/after 59 1/2 that there would be no 5 year clock.

 

[CardsFan]

For contributions, yes. Conversions, no.

see here

However, further down in the same article, we have:

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.

So, the real answer is.... it depends

 

[kaneohe]

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

the beauty of this chart is that someone else has already done the hard work and it is just a flowchart for the user. no thinking (which can be dangerous) required

 

[GrayHare]

Another way taxes could be simplified is by IRS publications having more tables like kaneohe's. Many times I've poured through wordy IRS instructions only to discover the final paragraph reveals that because of age or filing status or somesuch the paragraphs above don't apply to my situation.

 

[cathy63]

Another way taxes could be simplified is by IRS publications having more tables like kaneohe's. Many times I've poured through wordy IRS instructions only to discover the final paragraph reveals that because of age or filing status or somesuch the paragraphs above don't apply to my situation.

This flow-chart from IRS pub 590-B may also help.

 

[VanWinkle]

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

the beauty of this chart is that someone else has already done the hard work and it is just a flowchart for the user. no thinking (which can be dangerous) required

Exactly!!

VW

 

[pb4uski]

This flow-chart from IRS pub 590-B may also help.

Not sure how helpful the chart above is... for example, contributions can be withdrawn at anytime without penalty and the chart is not helpful for a situation like that.

 

[JoeWras]

Not sure how helpful the chart above is... for example, contributions can be withdrawn at anytime without penalty and the chart is not helpful for a situation like that.

To me, that's the point. A lot of IRS pubs don't clarify, they confuse more.

 

[kaneohe]

Another way taxes could be simplified is by IRS publications having more tables like kaneohe's. Many times I've poured through wordy IRS instructions only to discover the final paragraph reveals that because of age or filing status or somesuch the paragraphs above don't apply to my situation.

not my table.......in the post further up, credit is given to kawill of the fairmark.com site who developed the table. I have tried to sell it to IRS w/ notice to kawill that if he gets famous, I will be coming around for my commission and I will be rich . So far, I am not but I am spreading the table like Johnny Appleseed and if enough of us pound on IRS, perhaps they will relent and incorporate the table in their publication.

It is quite a job to make a table like kawills. The hardest part is that you have to really understand things so that you can use a few words rather than a thousand and still be comprehensive enough to cover all situation. IRS pubs and most articles have thousands of words and while they may be complete, you have to read thoroughly so you don't get confused.

 

[kaneohe]

Not sure how helpful the chart above is... for example, contributions can be withdrawn at anytime without penalty and the chart is not helpful for a situation like that.

Agree w/ this. However,it has improved.......when I tried to use it some yrs ago, all I found was that withdrawing contributions was not a qualified distribution. I went through the process of calculating the tax due before I discovered that there was no tax. There was nothing in the instructions either.

Now, at least in the first paragraph on withdrawals in Pub 590B,IRS tells you that w/d of contributions is not taxed and even that chart you are talking about has this: (which suggests no tax )

The distribution from the Roth IRA is
not a qualied distribution. The
portion of the distribution allocable
to earnings may be subject to tax
and it may be subject to the 10%
additional tax

 

[Sunset]

Agree w/ this. However,it has improved.......when I tried to use it some yrs ago, all I found was that withdrawing contributions was not a qualified distribution. I went through the process of calculating the tax due before I discovered that there was no tax. There was nothing in the instructions either.

Now, at least in the first paragraph on withdrawals in Pub 590B,IRS tells you that w/d of contributions is not taxed and even that chart you are talking about has this: (which suggests no tax )

The distribution from the Roth IRA is
not a qualied distribution. The
portion of the distribution allocable
to earnings may be subject to tax
and it may be subject to the 10%
additional tax

Except that the chart Bold stuff says nothing about contributions being free and clear, so it's not really helpful.

That's the problem with tax clerks making logic flow charts.

 

[kaneohe]

Except that the chart Bold stuff says nothing about contributions being free and clear, so it's not really helpful.

That's the problem with tax clerks making logic flow charts.

That's true but it hints at that by saying that earnings are potentially taxable and subject to penalty but says nothing about contributions/conversions.
If you foolishly assumed that only earnings were taxable (& subject to penalty) for a non-qualified distribution, you'd be correct most of the time (but not always).

Mostly I was pointing out that this statement was an improvement from past yrs. when the only thing on the flowchart was the unqualified distribution comment.

 

[HadEnuff]

Here's a somewhat more complex set of rules by kawill of the fairmark.com site. Withdrawals are considered to be in the order listed:
contributions first, then conversions oldest first (within each conversion the taxable portion of conversion first), and then earnings come out last.
The decision depends on your age at withdrawal and there is either a 5 yr clock on conversions for the spring chickens or for the older wiser folks there is a 5 yr clock on your oldest Roth (even if not in existence anymore). If you are over 59.5 y.o. and opened your first Roth over 5 yrs. ago, there is no waiting.......
And if over 59.5 y.o. but first Roth is less 5 yrs old, you can still take out your contributions/conversions. Just the earnings are an issue.

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.

Great information! Thanks.

 

[HadEnuff]

From reading the above posts, it seems to me that if I were to convert, say, 20K, into a Roth, and 3 years down the road I decided I needed the 20K, and I took a 20K distribution, but left the earnings in the Roth,

there would be no tax and no penalty.

Right?

I am over 59 1/2 years old, BTW

 

[JoeWras]

So all this talk has me considering a small conversion this year to start the 5 year clock. I'm 54 now. The clock will be expired at 59 1/2.

I've resisted doing my first conversion since I'm in the high tax bracket. However, just for simplicity, I may start it now with the smallest conversion I can do to open the account at Vanguard. I think $1k? BTW, I have a very high post-tax basis in my IRA so the taxable amount would probably be less than $500.

 

[pb4uski]

From reading the above posts, it seems to me that if I were to convert, say, 20K, into a Roth, and 3 years down the road I decided I needed the 20K, and I took a 20K distribution, but left the earnings in the Roth,

there would be no tax and no penalty.

Right?

I am over 59 1/2 years old, BTW

After you are 59 1/2 you can take it all out without tax or penalty if you want... no need to leave the earnings in the account.... however, OTOH if you have other resources to use you would want to keep you Roth growing tax-free.

 

[pb4uski]

So all this talk has me considering a small conversion this year to start the 5 year clock. I'm 54 now. The clock will be expired at 59 1/2.

I've resisted doing my first conversion since I'm in the high tax bracket. However, just for simplicity, I may start it now with the smallest conversion I can do to open the account at Vanguard. I think $1k? BTW, I have a very high post-tax basis in my IRA so the taxable amount would probably be less than $500.

You certainly want to get the Roth account established. Once you retire if you are in a lower tax bracket, then your post-tax basis will allow you to do more low tax cost Roth conversions.

 

[JoeWras]

After you are 59 1/2 you can take it all out without tax or penalty if you want... no need to leave the earnings in the account.... however, OTOH if you have other resources to use you would want to keep you Roth growing tax-free.

But doesn't the 5 year rule still hold for earnings? Agree with above assuming the account is already in place for 5 years.

 

[VanWinkle]

But doesn't the 5 year rule still hold for earnings? Agree with above assuming the account is already in place for 5 years.

If the roth is established at the time of the conversion, the 5 year rule applies. Contributions = no tax Earnings can't be taken without penalty.

If the roth is an existing roth that has qualified for the 5 year rule, then you can take contributions and earnings without tax or penalty(as long as you are (59 1/2)

 

[HadEnuff]

After you are 59 1/2 you can take it all out without tax or penalty if you want... no need to leave the earnings in the account.... however, OTOH if you have other resources to use you would want to keep you Roth growing tax-free.

Are you saying that since I'm over 59 1/2 there is no 5 year wait on recently converted Roth funds. None at all?

 

[pb4uski]

Yes, if you are over 59 1/2 then you can take out any amounts penalty free and tax free... as long as the account is over 5 years old.

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

 

[PatrickA5]

Yes, if you are over 59 1/2 then you can take out any amounts penalty free and tax free... as long as the account is over 5 years old.

To clarify, I believe it means as long as "any" Roth account is 5 years old. You could have an old Roth (over 5 years) and a new Roth. You can still take money from the new Roth since the IRS considers all Roth IRAs as one big Roth IRA and you met the 5 year period with the old one.

I only have a couple of months until I'm 59 1/2 at which time I can forget about all of these rules!

 

[PatrickA5]

Here's a somewhat more complex set of rules by kawill of the fairmark.com site. Withdrawals are considered to be in the order listed:
contributions first, then conversions oldest first (within each conversion the taxable portion of conversion first), and then earnings come out last.
The decision depends on your age at withdrawal and there is either a 5 yr clock on conversions for the spring chickens or for the older wiser folks there is a 5 yr clock on your oldest Roth (even if not in existence anymore). If you are over 59.5 y.o. and opened your first Roth over 5 yrs. ago, there is no waiting.......
And if over 59.5 y.o. but first Roth is less 5 yrs old, you can still take out your contributions/conversions. Just the earnings are an issue.

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.

You turned me on to this chart years ago at Fairmark. I've printed it out and given it to numerous people over the years. Very helpful. Your commission check is in the mail and will be taxable.