Benefit of Segregating Roth Conversions?

[Splash]

I retired in 2017 and did my first Roth Conversion. I am planning to do significant Roth Conversions in 2018 and each of the next several years.

In researching old threads, some folks recommended putting each Roth conversion into a separate account. I can see that might simplify things if a recharacterization is done. However, now that recharacterizations are no longer available, are there any benefits to segregating each conversion into it's own account?

 

[pb4uski]

I think that may have had something to do with the old horse race strategy.

I have done Roth conversions the last 5 years... all to the same account.... so no benefits that I know of.

 

[bada bing]

If you are younger than 54.5, there is a strategy for getting penalty free access to IRA funds before age 59.5. There is a 5 year "conversion clock" on each individual conversion. If you have satisfied 5 years elapsed since conversion you can draw out the original conversion (not the accrued gains though) penalty free.

Once you are 59.5, the "conversion clock" doesn't apply, so there is no benefit to keeping conversions made after age 54.5 segregated.

 

[gauss]

If you are younger than 54.5, there is a strategy for getting penalty free access to IRA funds before age 59.5. There is a 5 year "conversion clock" on each individual conversion. If you have satisfied 5 years elapsed since conversion you can draw out the original conversion (not the accrued gains though) penalty free.

Once you are 59.5, the "conversion clock" doesn't apply, so there is no benefit to keeping conversions made after age 54.5 segregated.

+1

And if you plan to withdrawal any of these conversions before age 59 1/2 you do have to keep track of the history of all of your conversions, the amounts, and the dates. You can view the last section of page 2 IRS Form 8606 for details.

I never thought to setup separate Roth accounts for each conversion. I did spend lots of time documenting all my conversions however.

-gauss

 

[kaneohe]

If you are younger than 54.5, there is a strategy for getting penalty free access to IRA funds before age 59.5. There is a 5 year "conversion clock" on each individual conversion. If you have satisfied 5 years elapsed since conversion you can draw out the original conversion (not the accrued gains though) penalty free.

Once you are 59.5, the "conversion clock" doesn't apply, so there is no benefit to keeping conversions made after age 54.5 segregated.

Even if you segregate conversions, each conversion soon becomes "contaminated" w/ earnings so , as Gauss noted, you need to keep good records anyway. Pooling the conversions together is not a problem since the ordering rules say contributions come out first, then conversions and finally earnings.

 

[corn18]

As others have said, the IRS doesn't care if you have 100 Roth accounts or 1. You must keep very accurate track of conversion dates and amounts of each type of what was converted. I have a spreadsheet that I keep track of everything. I also line up the ordering rules in case I need to make withdrawals. I am 52 and my oldest Roth is 3 years old. I have this for both me and my wife by date and amount.

Ordering (BD=BackDoor MBD=MegaBackDoor)
2015 BD Conversion Taxable 603.29 (Tax=No, Penalty=Yes)
2015 BD Conversion Non Taxable 11,000.00 (Tax=No, Penalty=No)
2016 BD Conversion Non Taxable 6,500.00 (Tax=No, Penalty=No)
2016 MBD Conversion Taxable 71.08 (Tax=No, Penalty=Yes)
2016 MBD Conversion Non-Taxable 15,011.62 (Tax=No, Penalty=No)
2017 BD Conversion Taxable 22.98 (Tax=No, Penalty=Yes)
2017 BD Conversion Non Taxable 6,500.00 (Tax=No, Penalty=No)
2017 MBD Conversion Taxable 1,062.63 (Tax=No, Penalty=Yes)
2017 MBD Conversion Non-Taxable 16,581.86 (Tax=No, Penalty=No)
2018 BD Conversion Non Taxable 6,500.00 (Tax=No, Penalty=No)
2018 MBD Conversion Non-Taxable 19,070.44 (Tax=No, Penalty=No)
All Gains 7,723.06 (Tax=Yes, Penalty=Yes)

I have to take them out in this order, I cannot cherry pick. All of this is in one Roth account. My wife has the same thing.

 

[Kelor]

There is no 5 year conversion clock for each conversion. The IRS rules state very clearly that it's 5 years from the original.

 

[gauss]

Kelor, For a non-qualified distribution (ie younger than age 59 1/2 or first ROTH IRA setup less than 5 years ago) I am quite sure you are mistaken.

Care to provide a source for your comment?

-gauss
IRS Certified Volunteer Tax Preparer

 

[corn18]

Kelor, For a non-qualified distribution (ie younger than age 59 1/2 or first ROTH IRA setup less than 5 years ago) I am quite sure you are mistaken.

Care to provide a source for your comment?

-gauss
IRS Certified Volunteer Tax Preparer

You are correct. Until you reach 59.5, each conversion carries its own 5 year clock. It's not until you hit 59.5 that the 5 year rule is for the oldest of all Roth accounts.

ORDER OF DISTRIBUTIONS

Regular contributions
Taxable portion of first conversion
Nontaxable portion of first conversion
Each subsequent conversion, in order, with the taxable portion coming out first for each conversion
Earnings (any increase in value occurring inside the Roth IRA)

TAXES AND PENALTIES

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*

 

[audreyh1]

Oh god, what a tracking nightmare!

After 59.5 it doesn't matter?

Or you still have a 5 year clock running?

So the simplest thing would be to wait 5 years after your last conversion to withdraw funds even if older than 59.5?

 

[corn18]

Oh god, what a tracking nightmare!

After 59.5 it doesn't matter?

59.5 AND your oldest Roth is more than 5 years old.

 

[gauss]

Distributions after age 59 /12 are Qualified if your first Roth IRA was opened at least 5 years ago.

Qualified distributions are free of taxes/penalties and record-keeping/documentation.

-gauss

 

[corn18]

Roth IRA's were never meant for FIRE, but if you keep good records, they can be a great source of funds to bridge to a pension or SS. That's my plan.

 

[gauss]

Mine too!

Seemed easier than setting up a 72(t) SEPP withdrawal scheme.

-gauss

 

[audreyh1]

Distributions after age 59 /12 are qualified if your first Roth IRA was opened at least 5 years ago.

Qualified distributions are free of taxes/penalties and record-keeping/documentation.

-gauss

Oh - you only need to track 5 years from your first Roth conversion then, assuming that is when you opened your first Roth IRA.

Our Roth IRAs would likely go to heirs. But then again - who knows.

 

[gauss]

Correct - as long as you are over age 59 1/2.

 

[Fedup]

I have my Roth account since 2003, same with my husband. In fact, I put both of ours in 5 year CD at the time to make sure it’s longer than 5 years. Now I don’t have to worry about it. Don’t plan to use it until the TIRA is gone. Very simple, there is no need to keep track of anything.
Remember, it’s one Roth account. There is no need to keep track of which chunk of conversion.

 

[corn18]

I have my Roth account since 2003, same with my husband. In fact, I put both of ours in 5 year CD at the time to make sure it’s longer than 5 years. Now I don’t have to worry about it. Don’t plan to use it until the TIRA is gone. Very simple, there is no need to keep track of anything.
Remember, it’s one Roth account. There is no need to keep track of which chunk of conversion.

That works if you are over 59.5.

I started doing Roth conversions at age 49. It will be 7 years before I am fully qualified and no longer have to keep track of anything. I plan to retire at 55, so I have 4.5 years of doing this right via good record keeping. Once I hit 59.5, I won't have to track anything.

 

[Fedup]

That works if you are over 59.5.

I started doing Roth conversions at age 49. It will be 7 years before I am fully qualified and no longer have to keep track of anything. I plan to retire at 55, so I have 4.5 years of doing this right via good record keeping. Once I hit 59.5, I won't have to track anything.

It’s one Roth IRA account. So if you opened your Roth IRA 7 years ago, you should be good. You don’t have to worry about 59.5 even.

Roth IRA is not the same as Roth 401k, maybe two different things.

 

[corn18]

It’s one Roth account. So if you opened your Roth 7 years ago, you should be good. You don’t have to worry about 59.5 even.

That is wrong. I you do a conversion at age 50 and your oldest Roth is 20 years old, that conversion has a 5 year clock. If you do another conversion at 51, that conversion has its own 5 year clock. Read the ordering rules and taxes I posted.

 

[Jerry1]

Okay, help me with this, because this thread is worry me to the point of not making any conversions.

I am currently 57 and 8 months.

I opened my one and only ROTH in 2017 for the 2016 tax year. I contributed to it, no conversion. I made another contribution in 2018 for the 2017 tax year. I also plan to make a contribution is 2019 for the 2018 tax year.

In 2019, I also plan on starting conversions. I expect to convert from my IRA to my one ROTH for five years (until the tax law sunsets and the brackets reset). After that time, I will be over 59 1/2. Is there any need to prepare a detailed inventory of contributions and are there any limits on the withdraws (which I assume unlikely) given that my only ROTH will be over 5 years old? Sounds like at the very least, I'll have to segregate conversions from contributions and not take withdraws from conversions until they are 5 years old. To me, that would suggest at least setting up a different account for my conversions to keep them separate from my contributions.

 

[corn18]

If you are over 59.5 and you opened your first Roth more than 5 years ago, then all withdrawals are qualified which means tax and penalty free (and worry free).

 

[Fedup]

That is wrong. I you do a conversion at age 50 and your oldest Roth is 20 years old, that conversion has a 5 year clock. If you do another conversion at 51, that conversion has its own 5 year clock. Read the ordering rules and taxes I posted.

You are right, if you withdrawal before 59.5, there are penalties. It must be after age 59.5. You can withdraw penalty free your contribution only.

 

[gauss]

I have my Roth account since 2003, same with my husband. In fact, I put both of ours in 5 year CD at the time to make sure it’s longer than 5 years. Now I don’t have to worry about it. Don’t plan to use it until the TIRA is gone. Very simple, there is no need to keep track of anything.
Remember, it’s one Roth account. There is no need to keep track of which chunk of conversion.

This is only true if you are over 59 1/2 when you take your distribution.

Given that this is an Early Retirement board, you need to keep this age restriction in mind when discussion penalty/tax-free distribution from Roth IRAs.

If anyone still does not believe me (we have had 2 in this thread so far), please tell me how you would complete IRS Form 8606 part 3 without the conversion details if you are under age 59 1/2.

-gauss

 

[gauss]

Okay, help me with this, because this thread is worry me to the point of not making any conversions.

I am currently 57 and 8 months.

I opened my one and only ROTH in 2017 for the 2016 tax year. I contributed to it, no conversion. I made another contribution in 2018 for the 2017 tax year. I also plan to make a contribution is 2019 for the 2018 tax year.

In 2019, I also plan on starting conversions. I expect to convert from my IRA to my one ROTH for five years (until the tax law sunsets and the brackets reset). After that time, I will be over 59 1/2. Is there any need to prepare a detailed inventory of contributions and are there any limits on the withdraws (which I assume unlikely) given that my only ROTH will be over 5 years old? Sounds like at the very least, I'll have to segregate conversions from contributions and not take withdraws from conversions until they are 5 years old. To me, that would suggest at least setting up a different account for my conversions to keep them separate from my contributions.

Jerry,

If you don't plan to take any distributions until 2022 (ie 5 years after your first Roth IRA was opened and after you are age 59 1/2), then no detailed records are required. All you distributions at that point will be Qualified. At this point you are home free!

If on the other hand, you need to take distributions before 2022, then the distributions will be Non-Qualified and you will need to complete IRS Form 8606 part 3 with your tax return.

If this is the case, then at a minimum, you will need to know your cumulative "contribution basis" in all of your Roth IRAs as required on line 22 IRS 8606. Conversions do not effect this figure (fortunately). These are only the yearly contributions.

On the other hand, you will need to know the details of all of your conversions (ie line 24 of IRS 8606) only after you have already withdrawn all of your "contribution basis".

Said differently, all the contributions come out first and then all the conversions -- and then any "growth" comes out last.

Again, this only comes into effect for Non-Qualified distributions (generally under age 59 1/2 or first Roth IRA setup less than 5 years ago).

Hope this helps.

-gauss