Any reason NOT to convert the remainder of my IRA to a Roth?

[Dtail]

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Originally Posted by REWahoo Maybe this will explain it better as it is confusing: https://www.investmentnews.com/the-m...ax-rule-169866 Bottom line: if you do a Roth conversion after the age of 59 1/2 into a Roth account established five or more years ago, you can withdraw funds from that Roth at any time with no tax or penalties.

This is why a Roth account should be established asap, so once one hits 59.5 and if you had an initial Roth opened by 54.5, you are good to go.
Of course most folks here typically leave Roth spending as a last option.

[thefist]

I don't think I saw this written here yet. If your conversion amount bumps you into a higher tax bracket, then perhaps add a year or 2 to the full conversion.

[Yoheadden]

One thing to consider when doing Roth Conversions into your 60s. Medicare premiums are based on your earnings from 2 years earlier. So in the year you turn 63, if possible, it would be beneficial to keep your earnings lower.

Another tool that might be beneficial for some situations is a QLAC (Qualifed Longevity Annuity Contract). You can invest the lesser of $135,000 or 25% of your tIRA. The distributions aren’t tax free, but you can reduce RMDs until later when possible other accounts are spent down.

[Born2Fish]

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Originally Posted by Whisper66 After 59-1/2, there is no 5 yr rule. Ed Slott's website IRAHelp.com is an excellent resourse for any IRA questions IMHO. For example, see https://www.irahelp.com/slottreport/...-distributions .......... 3. Contributions are always available tax and penalty free. Not only do your contributions come out first, they are always available tax and penalty free. This means that if you need to tap your Roth IRA, you can easily access contributions without adverse tax consequences. 4. Converted funds may be subject to penalty. Converted funds are always distributed tax-free. This makes sense since you already paid taxes when you converted them. However, amounts that were taxable at conversion may be subject to the 10% early distribution penalty if you are under the age of 59½ at the time of the distribution and the conversion was less than five years ago. This five-year clock begins separately for each conversion you do. What if you are over age 59 ½ when you take converted dollars from your Roth IRA? Then, you have no worries about this five-year clock.

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Originally Posted by RunningBum Well, there is still the 5 year rule on when the Roth was opened, even if 59.5: 5. Qualified distributions of earnings are tax-free. Earnings are not subject to tax if the distribution is a qualified distribution. Your distribution is qualified if it is made after you have owned any Roth IRA account for five years AND you are over the age of 59½, or are dead, or disabled, or taking the funds for a first-time home purchase.

I am getting a little confused about the various 5-year periods and tax/penalty assessment for ROTH conversions.

Assume the following scenario:
I did a Roth conversion of $17k from my TDA tIRA on December 1, 2020 at the age of 62. Prior to that date I never had a ROTH IRA account.

My roof is severely damaged by a hurricane in September, 2021. At that time my ROTH account value is $18k.

1. Can I withdraw $17k (principal) from my ROTH IRA without paying a penalty or tax?
2. If I withdraw $17,500 from the ROTH IRA will the $17k be penalty and tax free, while the $500 is earnings and would incur a 10% penalty but no tax due.

[Whisper66]

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Originally Posted by Born2Fish .....Assume the following scenario: I did a Roth conversion of $17k from my TDA tIRA on December 1, 2020 at the age of 62. Prior to that date I never had a ROTH IRA account. My roof is severely damaged by a hurricane in September, 2021. At that time my ROTH account value is $18k. Can I withdraw $17k (principal) from my ROTH IRA without paying a penalty or tax? If I withdraw $17,500 from the ROTH IRA will the $17k be penalty and tax free, while the $500 is earnings and would incur a 10% penalty but no tax due.

See full repost of a great summary of the rules from another discussion at end of this note. Sounds like you fit in the 2nd to last category. So you can withdraw $17k no tax, no penalty. The amounts you withdraw above that amount are earnings that will be taxed but no penalty.

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

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Originally Posted by Whisper66 Kaneohe has posted this easy to understand post several times over the years on these boards. I've found it the easiest to understand. See if this makes sense to you..... "I like this table by kawill: The table is written in accordance w/ the ordering rules....contributions first, then conversions (oldest first and within each conversion, the taxable part first), then finally earnings. The table also makes clear that there are 2 types of 5 yr clocks........conversion clocks and age of first Roth clock. Once you turn 59.5, the conversion clock doesn't matter. 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"

[Out-to-Lunch]

Quote:

Originally Posted by Born2Fish I am getting a little confused about the various 5-year periods and tax/penalty assessment for ROTH conversions. Assume the following scenario: I did a Roth conversion of $17k from my TDA tIRA on December 1, 2020 at the age of 62. Prior to that date I never had a ROTH IRA account. My roof is severely damaged by a hurricane in September, 2021. At that time my ROTH account value is $18k. Can I withdraw $17k (principal) from my ROTH IRA without paying a penalty or tax? If I withdraw $17,500 from the ROTH IRA will the $17k be penalty and tax free, while the $500 is earnings and would incur a 10% penalty but no tax due.

I believe you got #1 correct, and #2 inverted. You can withdraw the principal tax- and penalty-free. If you withdraw any of the earnings before 5 years of having a Roth, you pay ordinary income taxes (but no penalty if you are older than 59.5).

https://fairmark.com/retirement/roth...tion-overview/

Quote:

EARNINGS Applies only after all amounts other than earnings have been withdrawn. If withdrawn before the first day of the fifth year after the year you first established a Roth IRA, taxable as ordinary income; also subject to the 10% early withdrawal penalty if you’re under age 59½ unless an exception applies. Beginning on the first day of the fifth year after the year you first established a Roth IRA, can be withdrawn with no tax and no penalty if you’re over age 59½ or otherwise meet the requirements for a qualified distribution (death, disability, first-time homeowner). Otherwise, withdrawals of earnings continue to be taxable as ordinary income and, unless an exception applies, subject to the 10% early withdrawal penalty.

[Born2Fish]

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Originally Posted by Out-to-Lunch I believe you got #1 correct, and #2 inverted. You can withdraw the principal tax- and penalty-free. If you withdraw any of the earnings before 5 years of having a Roth, you pay ordinary income taxes (but no penalty if you are older than 59.5). https://fairmark.com/retirement/roth...tion-overview/

Whisper, Out-to-lunch,

Thanks!

[vchan2177]

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Originally Posted by mountainsoft I've been doing Roth conversions the last few years and the balance in my traditional IRA is getting fairly low. I figure I could probably convert the remaining balance next year if all goes as planned. Is there any reason NOT to convert the rest and close out the traditional IRA? Just based on taxes, it's basically break even. We should be in the same tax bracket after retiring as we are now (12%). But there are other advantages to having Roth in retirement, including: 1. Offers some protection against future (likely) tax increases. 2. Reduces our taxable income which "may" reduce how much of our social security gets taxed. 3. Reduces our taxable income which would allow us to qualify for property tax deductions. 4. Reduces our taxable income so we would qualify for healthcare subsidies. 5. One less account to manage. Not a big issue, but less is always better. I'm not seeing any downside to doing away with the tIRA completely, so is there any reason NOT to do this?

Another possible drawback is doing the conversion too soon and missing out on the compounding effect of your tIRA. As long as you do the math making a comparison of an early conversion versus a late conversion, then let those numbers drive that decision.

Example, compare two situations which one converts 5 years earlier than the other guy. Both will end up with a 100% Roth conversion but the first guy had his balance reduced early to pay for the conversion while the second guy allowed his larger balance of his tIRA to compound before converting his tIRA to a Roth.

I personally like my tIRA because I was in the high tax bracket during my earning years and a tIRA allowed me to reduce my taxes each earning year. My taxes that I would have paid to Uncle Sam each earning year goes into my tIRA where it compounds. I am now retired but in a lower tax bracket and I also control how I withdraw. I use Turbotax to create different situations on what amount I should withdraw without triggering a higher tax situation. My wife is still working and owns a business. Due to COVID19, her business income was significantly reduced for 2020 so I cashed out a significant amount from my tIRA without triggering going into a higher tax bracket.

[RunningBum]

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Originally Posted by vchan2177 Another possible drawback is doing the conversion too soon and missing out on the compounding effect of your tIRA. As long as you do the math making a comparison of an early conversion versus a late conversion, then let those numbers drive that decision. Example, compare two situations which one converts 5 years earlier than the other guy. Both will end up with a 100% Roth conversion but the first guy had his balance reduced early to pay for the conversion while the second guy allowed his larger balance of his tIRA to compound before converting his tIRA to a Roth.

No, that's not right at all. You would rather have your money compounding in a Roth where growth is tax free than growing in your tIRA where it's taxed. If you pay taxes out of the conversion, it's a tie, but if you pay taxes from your taxable account and have the entire converted amount going into the Roth, the earlier you convert the better.

This is all assuming is all in the same tax bracket. The standard rule applies that you are better off converting if your current tax rate is the same or lower than you expect it to be later when you have to take RMDs.

[Dtail]

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Originally Posted by RunningBum No, that's not right at all. You would rather have your money compounding in a Roth where growth is tax free than growing in your tIRA where it's taxed. If you pay taxes out of the conversion, it's a tie, but if you pay taxes from your taxable account and have the entire converted amount going into the Roth, the earlier you convert the better. This is all assuming is all in the same tax bracket. The standard rule applies that you are better off converting if your current tax rate is the same or lower than you expect it to be later when you have to take RMDs.

Yup, the tIRA/401k is clearly useful during the working career, especially for higher earners. So I am not upset that most of my retirement monies are in tax deferred, but will make some efforts between 65 and 72 to reduce it through conversions.

[vchan2177]

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Originally Posted by RunningBum No, that's not right at all. You would rather have your money compounding in a Roth where growth is tax free than growing in your tIRA where it's taxed. If you pay taxes out of the conversion, it's a tie, but if you pay taxes from your taxable account and have the entire converted amount going into the Roth, the earlier you convert the better. This is all assuming is all in the same tax bracket. The standard rule applies that you are better off converting if your current tax rate is the same or lower than you expect it to be later when you have to take RMDs.

OK...I ran some numbers and you are correct in that it is a tie...assuming 8% growth for both accounts and the same tax bracket comparing early conversion versus later conversion. However, the words..."earlier you convert, the better" may not apply if it is a tie....when both will be Roth accounts having nearly the same value.

It appears it depends mostly on your tax bracket at the time of conversion and your tax bracket during retirement. I was a high earner during my working years in a very high tax bracket. After retirement, my tax bracket is less so a tIRA worked for me. The RMD did not affect me because I re-married a woman 20 years younger than me so my RMD is reduced because the age of your spouse is a factor in determining your RMD. My wife has a Roth IRA because her income is less than my income during my working years so in her case, a Roth IRA works better for her.

[JDARNELL]

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Originally Posted by vchan2177 The RMD did not affect me because I re-married a woman 20 years younger than me so my RMD is reduced because the age of your spouse is a factor in determining your RMD.

This is a great reason to marry a younger mate in the event of CINC house kicks the bucket. In fact I am going to use this in our discussions on estate planning. lol.

Of course if I do I won't be around to have to worry about RMDs.

[vchan2177]

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Originally Posted by JDARNELL This is a great reason to marry a younger mate in the event of CINC house kicks the bucket. In fact I am going to use this in our discussions on estate planning. lol. Of course if I do I won't be around to have to worry about RMDs.

What is funny is that IRS publication 590-B includes a Table II calculation to determine the RMD for a couple with a 115 years old guy (or gal) who is married to a spouse who is only 20 years old. It looks like the 20 years spouse will make out like a bandit...simply because the RMD is so low.

[JDARNELL]

Quote:

Originally Posted by vchan2177 What is funny is that IRS publication 590-B includes a Table II calculation to determine the RMD for a couple with a 115 years old guy (or gal) who is married to a spouse who is only 20 years old. It looks like the 20 years spouse will make out like a bandit...simply because the RMD is so low.

I think they refer this to the Anna Nicole Smith table.