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Annual IRA distribution V.S Roth conversion
Old 03-01-2024, 10:32 PM   #1
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Annual IRA distribution V.S Roth conversion

This may be a bone head question.. But...

Why not just do Roth conversions every year, rather than taking IRA distributions' into a taxable account?
Seems it would be the same hit Tax wise?

If I needed it during the year, taking from a Roth account or taxable account would be the same right? Regarding taxes.

The bonus would be if I didn't use it all, it would be in a Roth rather than a taxable account. (Am aware of the 5 year rule).
My Ret. funds are now 50% in Roth and 50% in a Taxable IRA due to conversions, and starting 2 Roths in 1998.

I am probably missing something, just not sure what?
Just occurred to me out of the Blue. Am sure I am missing something.
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Old 03-01-2024, 11:11 PM   #2
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You can until RMD age. At the RMD age , the amount required cannot be for a roth conversion. After you have taken the RMD, then more can be withdrawn to do a Roth Conversion.

I think the law is this way to encourage folks to spend money, or at least be able to tax them the next year on the interest gained from the previous year(s) RMD withdrawal that is unspent.
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Old 03-01-2024, 11:27 PM   #3
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You can until RMD age. At the RMD age , the amount required cannot be for a roth conversion. After you have taken the RMD, then more can be withdrawn to do a Roth Conversion.

I think the law is this way to encourage folks to spend money, or at least be able to tax them the next year on the interest gained from the previous year(s) RMD withdrawal that is unspent.


Thanks! Thats what I was thinking, but have never seen it brought up here. Or thought about it before. Going forward my Roth Conv. or Dist. will be taxed at 22%. (At the current rates anyway)
My RMD starts at 75. So it looks like 12-13 yrs it will be conversions rather than distributions.
Not sure why, but the thought of this just makes me happy.
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Old 03-01-2024, 11:59 PM   #4
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Originally Posted by almost there View Post
This may be a bone head question.. But...

Why not just do Roth conversions every year, rather than taking IRA distributions' into a taxable account?
Seems it would be the same hit Tax wise?

If I needed it during the year, taking from a Roth account or taxable account would be the same right? Regarding taxes.

The bonus would be if I didn't use it all, it would be in a Roth rather than a taxable account. (Am aware of the 5 year rule).
My Ret. funds are now 50% in Roth and 50% in a Taxable IRA due to conversions, and starting 2 Roths in 1998.

I am probably missing something, just not sure what?
Just occurred to me out of the Blue. Am sure I am missing something.
Not sure I understand the concept and advantage? Please explain more.
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Old 03-02-2024, 12:14 AM   #5
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Not sure I understand the concept and advantage? Please explain more.
To me there are several. Random list. Am sure I missed a few.

I believe tax rates are going higher in the future.

I might live another 30-40 yrs. The growth will be tax free.
Under current law anyway.

I look at my old 401K / IRA as money in jail, waiting to be taxed.
This way, I control the amount / rate I am taxed.

Would rather leave a Roth to my heirs than a taxable IRA.
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Old 03-02-2024, 12:18 AM   #6
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To me there are several. Random list. Am sure I missed a few.

I believe tax rates are going higher in the future.

I might live another 30-40 yrs. The growth will be tax free.
Under current law anyway.

I look at my old 401K / IRA as money in jail, waiting to be taxed.
This way, I control the amount / rate I am taxed.

Would rather leave a Roth to my heirs than a taxable IRA.
Example, my son is in the 37% tax bracket.
How are you paying the taxes on the Roth conversion?

I'm interested in this concept because most of my retirement portfolio is tax-deferred (401k).
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Old 03-02-2024, 12:26 AM   #7
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How are you paying the taxes on the Roth conversion?

I'm interested in this concept because most of my retirement portfolio is tax-deferred (401k).
Roth conv. is taxed the same as an 401k/IRA distribution. At 59 1/2.
Taxed as income.

Am a novice, not an expert. Just letting you know the way I understand it.

The inheritance part was part in error. But, would still rather pass on a Roth than a Trad IRA.
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Old 03-02-2024, 12:32 AM   #8
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Roth conv. is taxed the same as an IRA distribution. At 59 1/2.
Taxed as income.
So, you are paying the taxes from the Roth conversion amount itself and not from a taxable account. For example, if you are converting $50k and your tax bracket is 22%, your net Roth conversion amount deposited in your Roth account is $39k rather than $50k if you were paying taxes from a taxable account.
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Old 03-02-2024, 12:39 AM   #9
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So, you are paying the taxes from the Roth conversion amount itself and not from a taxable account. For example, if you are converting $50k and your tax bracket is 22%, your net Roth conversion amount deposited in your Roth account is $39k rather than $50k if you were paying taxes from a taxable account.

Am not sure it really matters if you check the box to withhold tax as you make the transfer. I have always paid for my Roth conversions at the end of the year from a taxable account. And transferred the whole amount to Roth.
But yes, that 50k conv. would cost me 11k in tax. Same as a regular IRA distribution.

2023, I converted to the top of the 22% bracket with conversions.
My goal, is to be in the 12% bracket. One day...
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Old 03-02-2024, 03:59 AM   #10
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You are not missing anything. If most folks are withdrawing from an IRA before their RMD age, then they are probably spending that withdrawal that year and thus the Roth conversion would not make a difference.
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Old 03-02-2024, 05:18 AM   #11
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In both cases you end up with taxes on the withdrawal (Taxable Distribution). Before RMD requirement, it's either spend the withdrawal or take advantage of the Roth conversion possibility.

It's also up to you whether you pay taxes from available external funds, or convert less of your IRA to Roth. In the second case, with current tax rate of 22%, that means for each dollar converted, you only put $.88 into the Roth.
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Old 03-02-2024, 05:58 AM   #12
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You are not missing anything. If most folks are withdrawing from an IRA before their RMD age, then they are probably spending that withdrawal that year and thus the Roth conversion would not make a difference.
Not seeing any advantage waiting for RMD to kick in myself. Is there a reason? Thanks.
Taking a larger dist. later in life is not a plus in my mind.

Am now thinking about trying to deplete the trad IRA with conversions prior to RMD age.
Should be doable over the next 13 years.
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Old 03-02-2024, 06:36 AM   #13
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Not seeing any advantage waiting for RMD to kick in myself. Is there a reason? Thanks.
Taking a larger dist. later in life is not a plus in my mind.

Am now thinking about trying to deplete the trad IRA with conversions prior to RMD age.
Should be doable over the next 13 years.
I'm in the same boat. I have a large tax-deferred account and will spend down some of the tax-deferred account to pay for expenses and do some Roth conversions as well before RMD kicks in (age 75). I have 17 years before I reach 75.
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Old 03-02-2024, 06:42 AM   #14
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I'm in the same boat. I have a large tax-deferred account and will spend down some of the tax-deferred account to pay for expenses and do some Roth conversions as well before RMD kicks in (age 75). I have 17 years before I reach 75.
You can convert now, but 10% penalty if used prior to 59 1/2 right?
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Old 03-02-2024, 08:47 AM   #15
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To the OP: you are not missing anything. There are a number of people on this board who do just as you describe (viz., convert their intended annual withdrawal, then spend from Roth). Not a huge advantage, but in times of 5% MM's, it saves a bit. Could be savings of ~2% of your annual spend.

Edit: Oops, I think I made the same mental error that people are prone to on Roth conversions. I think you could realize savings on the taxes of ~2% of your annual spend, so something more like 0.5% of your annual spend. (This depends on many assumptions, but probably in the ballpark.)
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Old 03-02-2024, 08:57 AM   #16
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Quote:
Originally Posted by almost there View Post
This may be a bone head question.. But...

Why not just do Roth conversions every year, rather than taking IRA distributions' into a taxable account?
Seems it would be the same hit Tax wise?

If I needed it during the year, taking from a Roth account or taxable account would be the same right? Regarding taxes.

The bonus would be if I didn't use it all, it would be in a Roth rather than a taxable account. (Am aware of the 5 year rule).
My Ret. funds are now 50% in Roth and 50% in a Taxable IRA due to conversions, and starting 2 Roths in 1998.

I am probably missing something, just not sure what?
Just occurred to me out of the Blue. Am sure I am missing something.
Not bonehead at all. That is my plan when/if my taxable account money is exhausted. I'll just continue to do Roth conversions to the top of my target tax bracket and then use Roth withdrawals for spending. To the extent of my spending it is the equivalent of just taking a tIRA withdrawal.

A nuance of a difference is for the short time that the Roth conversion for that year sits in the Roth before being withdrawn for spending then the income on that money is tax-free... and for the year any excess would end up in the Roth.
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Old 03-02-2024, 09:33 AM   #17
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Not bonehead at all. That is my plan when/if my taxable account money is exhausted. I'll just continue to do Roth conversions to the top of my target tax bracket and then use Roth withdrawals for spending. To the extent of my spending it is the equivalent of just taking a tIRA withdrawal.

A nuance of a difference is for the short time that the Roth conversion for that year sits in the Roth before being withdrawn for spending then the income on that money is tax-free... and for the year any excess would end up in the Roth.
Ok. This sounds like a strategy I could implement as well. So, exhaust your taxable account first, then do Roth conversions and live off the Roth conversion dollars. The taxes would be paid out of the Roth conversion dollars and not from a taxable account. Is that the strategy?
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Old 03-02-2024, 10:09 AM   #18
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Originally Posted by pb4uski View Post
Not bonehead at all. That is my plan when/if my taxable account money is exhausted. I'll just continue to do Roth conversions to the top of my target tax bracket and then use Roth withdrawals for spending. To the extent of my spending it is the equivalent of just taking a tIRA withdrawal

A nuance of a difference is for the short time that the Roth conversion for that year sits in the Roth before being withdrawn for spending then the income on that money is tax-free... and for the year any excess would end up in the Roth.
Is the Roth conversion if over 59.5 all tax free immediately upon withdrawal (earnings included)?
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Old 03-02-2024, 10:23 AM   #19
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Ok. This sounds like a strategy I could implement as well. So, exhaust your taxable account first, then do Roth conversions and live off the Roth conversion dollars. The taxes would be paid out of the Roth conversion dollars and not from a taxable account. Is that the strategy?
It's a bit of a personal choice, but I am doing roth conversions up to the top of the 0% tax bracket until I start medicare in a couple of years at which time I'll max out the 12% tax bracket. I'll pay the income taxes for the conversion out of a taxable account with the goal of cramming as much into the Roth as possible in order to maximize tax free growth.

My wife started Medicare this week, so the value of ACA subsides just got cut in half... therefore I may convert up to the 10% or 12% bracket earlier than originally planned... I still have some spreadsheeting to do on that option.

That's all assuming the current tax laws stay relatively unchanged. The distant drumbeats of the Treasury needing more tax $ and looking at 401Ks/Roths are starting to rumble again: https://www.bloomberg.com/opinion/ar...would-you-save
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Old 03-02-2024, 11:00 AM   #20
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Originally Posted by pb4uski View Post
Not bonehead at all. That is my plan when/if my taxable account money is exhausted. I'll just continue to do Roth conversions to the top of my target tax bracket and then use Roth withdrawals for spending. To the extent of my spending it is the equivalent of just taking a tIRA withdrawal.

A nuance of a difference is for the short time that the Roth conversion for that year sits in the Roth before being withdrawn for spending then the income on that money is tax-free... and for the year any excess would end up in the Roth.
I'm doing this exact thing for the same reasons.

My taxable account is not drained, but practically locked up - LT gains are ~ 2/3 of the balance so will hold it for my estate.

From my tIRA, I "withdraw" about 25% of next year's spending, and "convert" the remainder. It goes into ST fixed income in my Roth and I draw from the Roth during the year as needed. Picked up a not-small amount of tax-free interest last year. Won't be as attractive a plan if/when rates drop.
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