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

[Whisper66]

Seems to be conflicting opinion on the required holding period for ROTH conversions after 59-1/2. Is it from account creation, from each conversion year or does it apply at all after 59-1/2? thanks

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/6-rules-tax-free-roth-ira-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.

 

[RunningBum]

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/6-rules-tax-free-roth-ira-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.

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.

 

[cat4ever]

The 5-year holding requirement that mountainsoft refers to in post #9 is for the Roth IRA account must be 5 years old, not for conversions into the Roth IRA account.

Maybe I'm mis-interpreting what you're saying, but I'm pretty sure each Roth Conversion you do gets its own 5 year rule clock, regardless how old the account you put it in is.

 

[Whisper66]

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.

Thanks, you are correct. Guess I haven't worried too much about the earnings since the first withdrawals are assumed to be the contributions and not the earnings. By the time I withdraw all my contributions and finally get around to pulling earnings, they will have been there well over 5 yrs. Thanks for correcting this.

 

[Out-to-Lunch]

Maybe I'm mis-interpreting what you're saying, but I'm pretty sure each Roth Conversion you do gets its own 5 year rule clock, regardless how old the account you put it in is.

This is true until you turn 59.5. After 59.5, each conversion does not need to be held 5 years, provided you established a Roth IRA 5 tax years ago.

 

[Al in Ohio]

We have decided to start doing QCDs at $1000/month because we have plenty of money in our tIRAs and because of the tax (or is that non-tax) advantages.
For us, that means leaving $100K in my tIRA as my trophy wife is 9 years younger.
Her expected death age is 95 so we will leave about $200K in her tIRA.
Isn’t is nice that financial planning is so simple in the USA?

I have a trophy wife and plan to leave her $1M in her tIRA. Can your wife live off only $200k? What if she outlives you by a decade?

 

[Al in Ohio]

Seems to be conflicting opinion on the required holding period for ROTH conversions after 59-1/2. Is it from account creation, from each conversion year or does it apply at all after 59-1/2? thanks

My understanding it thst it’s 5 years holding from day of that specific conversion. It definitely does not effect money already in the Roth account prior.

 

[Ole Red 29]

thanks for the feedback and links. As I understand it, since I am over 59-1/2, the only clock I have to worry about is the age of my account, and only for my earnings.

 

[davebarnes]

I have a trophy wife and plan to leave her $1M in her tIRA. Can your wife live off only $200k? What if she outlives you by a decade?

1. No. But, she should be able to live off the $2M in her Roth IRA.
2. She statistically will. She is very healthy.

 

[REWahoo]

Maybe this will explain it better as it is confusing:

Once Roth IRA funds have been held for five years and the Roth owner is 59½ years old, there are no more tax rules to know because all distributions will be tax- and penalty-free forever, including distributions to beneficiaries.

These distributions, known as “qualified distributions,” are the holy grail for Roth IRAs. The confusion sets in when converted funds are withdrawn before the five-year and 59½-year-old requirements are met.

The trick to understanding this is to know that there are two different five-year clocks.

Clock #1: Penalty-free distributions from Roth conversions

The first five-year clock only applies under age 59½. If the account owner is already 59½ or older, this rule can be ignored.

Clock #2: Tax-free distributions of Roth earnings

The second five-year Roth clock deals with tax-free earnings. This holding period starts when the first Roth IRA account is established and does not restart for each Roth IRA contribution or conversion.

The holding period begins on Jan. 1 of the tax year for which the first dollar of any Roth IRA money is contributed, even if that first contribution was made 10 years ago ...

https://www.investmentnews.com/the-most-misunderstood-roth-conversion-tax-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.

 

[aja8888]

1. No. But, she should be able to live off the $2M in her Roth IRA.
2. She statistically will. She is very healthy.

Her new husband will appreciate your efforts!

 

[Out-to-Lunch]

Maybe this will explain it better as it is confusing:







https://www.investmentnews.com/the-most-misunderstood-roth-conversion-tax-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.

Thank you, REWahoo. That is the clearest presentation of that confusing subject that I have seen.

I kinda wish that one of the 5-year rules was 4 or 6 or 5.5 years. That would probably cut down on the confusion.

 

[2177V]

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?

One downsize: You may not take advantage of the fact that the government does not begin taxing your income until you reach a certain threshhold: Click the following link to understand these thresholds:

https://www.thebalance.com/are-you-required-to-file-a-tax-return-3192868

Example: Married file jointly and over 65, the threshold is $24,800. If your regular (non-Roth) IRA income per year is less than $24,800 and you have no other income, then you should pay no taxes because this amount is less than the standard deduction.

You should always consult a CPA to verify that a partial ROTH conversion leaving a certain amount remaining in your regular (non-Roth) IRA and ensuring your taxible income does not exceed the threshhold is going to work for you.

I hate to see people do a 100% Roth conversion, pay a bunch of taxes upfront doing a 100% Roth conversion and then later they did not realize that they can pay less taxes upfront by doing only a partial Roth conversion and end up having the same effect of paying no taxes.

 

[Doc0]

I left about 400K in the TIRA. I use it as different risk pool. It's risked at about 5.5% real and I expect to withdraw about 30K/yr (which is above RMD until about my age 87.) On down years I'll take out just RMD and supplement my income with post tax money. The Roth is the most valuable money I own and I won't spend it till the TIRA and post tax are gone. When I'm dead my wife can supplement from the Roth tax free as needed and she can cut back to the simple RMD to reduce her "single" taxes. The TIRA can be used for LARGE medical expenses like LTC under certain circumstances. At 30K/yr given my projected taxable SS I should stay in the 12% bracket till I'm 87. I pay a little more taxes but the trade off is I get to compound the Roth a far longer time unmolested. My analysis is "soak the rich" doesn't start till the 3rd bracket, so be in the second bracket regarding ordinary income as long as possible politically is a pretty safe bet, from a tax perspective.

 

[mountainsoft]

One downsize: You may not take advantage of the fact that the government does not begin taxing your income until you reach a certain threshold

My wife's pension will put us above the minimum thresholds, so no avoiding taxes completely.

I have been doing partial Roth conversions for the last few years. I should be able to convert the remaining traditional balance with one more conversion.

 

[Dtail]

Maybe this will explain it better as it is confusing:







https://www.investmentnews.com/the-most-misunderstood-roth-conversion-tax-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]

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/6-rules-tax-free-roth-ira-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.

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]

.....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.

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

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]

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.

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-accounts/roth-distributions/distribution-overview/

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]

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-accounts/roth-distributions/distribution-overview/

Whisper, Out-to-lunch,

Thanks!

 

[2177V]

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]

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]

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.