Annual IRA distribution V.S Roth conversion

[Out-to-Lunch]

lol. Great learning experience for me.

Great!

Of course, this only comes into play if you will have already withdrawn a sum exceeding the total of your 2022-2026 back-door conversions.

 

[G-Man]

Great!

Of course, this only comes into play if you will have already withdrawn a sum exceeding the total of your 2022-2026 back-door conversions.

correct. I have to withdraw the back-door conversion dollars first before withdrawing any of the earnings dollars.

 

[rrs26ja]

I totally agree. I have been doing Roth conversions to the top of the 22% bracket and will do so until I am 73. After that what I need to take out will be more than the RMD so I am good. When I run the numbers with my investment guys they say what is left for my son is going to be the Roth so he will pay no taxes.

 

[gauss]

This can get very complicated and confusing. My first Roth was opened in 2022 and I started contributing to my wife and I Roth IRA by doing backdoor Roth conversions. I will continue this approach through 2025. This year, I will be 58 and my wife will be 61. Can you help answer the following questions below based on my situation (wife and I):

2022 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty?
When are growth dollars (earnings) available to Withdraw without 10% penalty?
When are conversion dollars available to Withdraw without paying taxes?
When are growth dollars (earnings) available to Withdraw without paying taxes?

2023 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty?
When are growth dollars (earnings) available to Withdraw without 10% penalty?
When are conversion dollars available to Withdraw without paying taxes?
When are growth dollars (earnings) available to Withdraw without paying taxes?

2024 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty?
When are growth dollars (earnings) available to Withdraw without 10% penalty?
When are conversion dollars available to Withdraw without paying taxes?
When are growth dollars (earnings) available to Withdraw without paying taxes?

2025 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty?
When are growth dollars (earnings) available to Withdraw without 10% penalty?
When are conversion dollars available to Withdraw without paying taxes?
When are growth dollars (earnings) available to Withdraw without paying taxes?

Be Careful. You will need to ask these questions independently for your Roth IRA and your wife's Roth IRA. They are not combined.

Also the answers to the first two questions given about conversion dollars being available to you now don't seem correct to me. Conversions generally have a 5-year waiting period of the Roth withdrawal is non-qualified (ie any Roth withdrawal before the owner is both 59 1/2 and the owners first Roth IRA was opened at least 5 years ago).

I didn't review all the answers after the first two seemed questionable.

It is possible that I am missing something in that it has been a long tiring day for me.


-gauss

 

[Out-to-Lunch]

Also the answers to the first two questions given about conversion dollars being available to you now don't seem correct to me. Conversions generally have a 5-year waiting period of the Roth withdrawal is non-qualified



It is possible that I am missing something in that it has been a long tiring day for me.

Not all conversions are treated the same. Conversions where you had to pay a tax to convert ("Taxable conversions") require a 5-year waiting period to avoid the penalty. Non-taxable conversions, like those under consideration here, do not require a 5-year wait.
https://www.bogleheads.org/wiki/Roth_IRA#cite_note-23

 

[G-Man]

Not all conversions are treated the same. Conversions where you had to pay a tax to convert ("Taxable conversions") require a 5-year waiting period to avoid the penalty. Non-taxable conversions, like those under consideration here, do not require a 5-year wait.
https://www.bogleheads.org/wiki/Roth_IRA#cite_note-23

I assume the non-deductible conversion like what I'm doing for the backdoor Roth conversion is considered a non-taxable conversion according to the chart mentioned on bogleheads.com. Can you please confirm.

Below is a link on how I'm executing the backdoor Roth conversion.
https://www.empower.com/the-currenc...no earnings,your current ordinary income rate).

 

[gauss]

Not all conversions are treated the same. Conversions where you had to pay a tax to convert ("Taxable conversions") require a 5-year waiting period to avoid the penalty. Non-taxable conversions, like those under consideration here, do not require a 5-year wait.
https://www.bogleheads.org/wiki/Roth_IRA#cite_note-23

Well okay (conversions are complicated) , but what about the growth/earnings dollars mentioned in item 2 and 4? I think the rules on earnings/growth are more straight forward.

I was under the impression that earnings would never be tax & penalty free unless the distribution was "qualified" (ie usually met by the owner being age 59 1/2 AND the their first Roth IRA being opened at least five years ago).

The last section of IRS form 8606, which addresses non-qualified Roth distributions, would seem to confirm this (ie that the earnings would be taxable in a non-qualified distribution). By earnings I am referring to what is left in the Roth IRA after all the contribution basis (8606 line 22) and conversion basis (8606 line 24) have been distributed.

-gauss

 

[G-Man]

Ok. Here is a recap and the answers to my questions based on the feedback so far.

- My wife and I first Roth was opened in 2022 and I started contributing to my wife and I Roth IRA by doing backdoor Roth conversions. These are non-deductible contribution/conversion dollars.
- This year, I will be 58 and my wife will be 61


Me

2022 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty? NOW
When are growth dollars (earnings) available to Withdraw without 10% penalty? Year 2026 - Jan 1 - When I turn 59 1/2 and when all of my conversion dollars have been withdrawn
When are conversion dollars available to Withdraw without paying taxes? NOW
When are growth dollars (earnings) available to Withdraw without paying taxes? Year 2027 - Jan 1 - Over age 59 1/2 and five years or more since opening first Roth IRA and when all of my conversion dollars have been withdrawn

2023 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty? NOW.
When are growth dollars (earnings) available to Withdraw without 10% penalty? Year 2026 - Jan 1 - When I turn 59 1/2 and when all of my conversion dollars have been withdrawn
When are conversion dollars available to Withdraw without paying taxes? NOW
When are growth dollars (earnings) available to Withdraw without paying taxes? Year 2027 - Jan 1 - Over age 59 1/2 and five years or more since opening first Roth IRA and when all of my conversion dollars have been withdrawn

2024 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty? After you make the conversion
When are growth dollars (earnings) available to Withdraw without 10% penalty? Year 2026 - Jan 1 - When I turn 59 1/2 and when all of my conversion dollars have been withdrawn
When are conversion dollars available to Withdraw without paying taxes? After you make the conversion
When are growth dollars (earnings) available to Withdraw without paying taxes? Year 2027 - Jan 1 - Over age 59 1/2 and five years or more since opening first Roth IRA and when all of my conversion dollars have been withdrawn

2025 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty? After you make the conversion.
When are growth dollars (earnings) available to Withdraw without 10% penalty? Year 2026 - Jan 1 - When I turn 59 1/2 and when all of my conversion dollars have been withdrawn
When are conversion dollars available to Withdraw without paying taxes? After you make the conversion.
When are growth dollars (earnings) available to Withdraw without paying taxes? Year 2027 - Jan 1 - Over age 59 1/2 and five years or more since opening first Roth IRA and when all of my conversion dollars have been withdrawn



Wife

2022 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty? NOW
When are growth dollars (earnings) available to Withdraw without 10% penalty? NOW and when all of her conversion dollars have been withdrawn
When are conversion dollars available to Withdraw without paying taxes? NOW
When are growth dollars (earnings) available to Withdraw without paying taxes? Year 2027 - Jan 1 - Over age 59 1/2 and five years or more since opening first Roth IRA and when all of her conversion dollars have been withdrawn

2023 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty? NOW.
When are growth dollars (earnings) available to Withdraw without 10% penalty? NOW and when all of her conversion dollars have been withdrawn
When are conversion dollars available to Withdraw without paying taxes? NOW.
When are growth dollars (earnings) available to Withdraw without paying taxes? Year 2027 - Jan 1 - Over age 59 1/2 and five years or more since opening first Roth IRA and when all of her conversion dollars have been withdrawn

2024 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty? After she make the conversion.
When are growth dollars (earnings) available to Withdraw without 10% penalty? After she make the conversion and when all of her conversion dollars have been withdrawn
When are conversion dollars available to Withdraw without paying taxes? After she make the conversion.
When are growth dollars (earnings) available to Withdraw without paying taxes? Year 2027 - Jan 1 - Over age 59 1/2 and five years or more since opening first Roth IRA and when all of her conversion dollars have been withdrawn

2025 Backdoor Roth conversion
When are conversion dollars available to Withdraw without 10% penalty? After she make the conversion.
When are growth dollars (earnings) available to Withdraw without 10% penalty? After she make the conversion and when all of her conversion dollars have been withdrawn
When are conversion dollars available to Withdraw without paying taxes? After she make the conversion.
When are growth dollars (earnings) available to Withdraw without paying taxes? Year 2027 - Jan 1 - Over age 59 1/2 and five years or more since opening first Roth IRA and when all of her conversion dollars have been withdrawn

 

[G-Man]

This has been a long winded one....
Has never seemed all that complicated to me...

"Withdrawal rules for Roth IRAs are more flexible than those for traditional IRAs and 401(k)s. Account holders can always withdraw their contributions without incurring taxes or penalties. People over 59½ who've held their accounts for at least five years can withdraw contributions and earnings with no tax or penalty."

I agree. Maybe this exercise is a moot point because I don't plan to take any withdrawals from my Roth IRA for at least 20 years. I just wanted to know the rules around treatment of Roth conversions.

 

[almost there]

I thought the same, Roth funds will be the last used in my Ret. And may never be needed at all.
But now, being over 59 1/2. I just realized I can do a Roth conversion with what's left in my trad IRA rather than taking normal IRA distributions.
To 75 when my RMD starts. So, unless the tax laws change. Its going to be more conversions for the next 13 years. Rather than regular IRA distributions.
As its a wash tax wise. Same / Same. Why not? As there is zero downside.
And with any luck, the Trad Ira balance will be zero prior to 75.

 

[Out-to-Lunch]

Well okay (conversions are complicated) , but what about the growth/earnings dollars mentioned in item 2 and 4? I think the rules on earnings/growth are more straight forward.

I was under the impression that earnings would never be tax & penalty free unless the distribution was "qualified" (ie usually met by the owner being age 59 1/2 AND the their first Roth IRA being opened at least five years ago).

The last section of IRS form 8606, which addresses non-qualified Roth distributions, would seem to confirm this (ie that the earnings would be taxable in a non-qualified distribution). By earnings I am referring to what is left in the Roth IRA after all the contribution basis (8606 line 22) and conversion basis (8606 line 24) have been distributed.

-gauss

Yes, see posts #48 and 49.