End of 2nd QTR loss question

[NgineER]

I agree with the above analysis. You also stated in this thread that "We cannot touch the money anyway for 5 years." This is not true if you opened any Roth IRA more than 4 years ago.

I think you are wrong, I believe that each Roth conversion has its own five year clock. It doesn't matter how long you've had the account open.

 

[N02L84ER]

I think you are wrong, I believe that each Roth conversion has its own five year clock. It doesn't matter how long you've had the account open.

Not once you are over age 59.5.

 

[COcheesehead]

Not once you are over age 59.5.

Conversions have a 5 year rule even after 59.5.
https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp

From the article:
Can You Take Money Out of a Roth IRA Before 5 Years?
The Roth IRA five-year rule says you cannot withdraw earnings tax free until it’s been at least five years since you first contributed to a Roth IRA account.1 This rule applies to everyone who contributes to a Roth IRA, whether they’re 59½ or 105 years old.

Does the 5-Year Rule Apply to Roth Conversions After Age 59½?
Yes. Even if you’re over age 59½ when you withdraw, some of your withdrawals could get included in taxable income, thanks to the five-year rule. You won’t owe the 10% penalty in that case, but you’ll still owe tax on any withdrawals above the amount contributed.1

 

[N02L84ER]

Conversions have a 5 year rule even after 59.5.
https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp

From the article:
Can You Take Money Out of a Roth IRA Before 5 Years?
The Roth IRA five-year rule says you cannot withdraw earnings tax free until it's been at least five years since you first contributed to a Roth IRA account.1 This rule applies to everyone who contributes to a Roth IRA, whether they're 59½ or 105 years old.

Does the 5-Year Rule Apply to Roth Conversions After Age 59½?
Yes. Even if you're over age 59½ when you withdraw, some of your withdrawals could get included in taxable income, thanks to the five-year rule. You won't owe the 10% penalty in that case, but you'll still owe tax on any withdrawals above the amount contributed.1

The key phrase is:
until it's been at least five years since you first contributed to a Roth IRA
Note that it says "first contributed". It is not saying the most recent conversion.

 

[N02L84ER]

This is the table I reference when deciding what is and is not taxable with Roths.


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

No Taxes
No Penalties

 

[COcheesehead]

Some considerations not discussed so far about Roth conversions.

You need to consider if increased income in the year of the rollover will effect any current or any future subsidies, mainly ACA or IRMMA.

You should also consider that you are using current dollars (worth more) to pay a potential future tax in future dollars (worth less) that may or may not be higher and may occur years down the road. Your beneficiary may also have a lower tax bracket than you.

If paying the tax from taxable, that is less dollars available to you to use today or to grow from today onward. If paying from deferred you will have to withdraw more than the tax since the withdrawal is taxable as well and also removing dollars that can grow from today onward.

So as stated above, someone will pay a tax, but do you want to take a guess at what that will be so much so that you are willing to throw down hard dollars today on that bet?

Also RMDs from IRAs in the future creates income which allows you to take tax deductions for medical expenses, business losses and charitable contributions - all which could reduce your taxes in the future. Withdrawals from a Roth are not considered income and eliminates these deductions.

 

[pb4uski]

The key phrase is:
until it's been at least five years since you first contributed to a Roth IRA
Note that it says "first contributed". It is not saying the most recent conversion.

+1 as long as the Roth account is more than 5 years old then if you're over 59-1/2 you can convert today and withdraw tomorrow if you want to.

 

[pb4uski]

....So as stated above, someone will pay a tax, but do you want to take a guess at what that will be so much so that you are willing to throw down hard dollars today on that bet? ...

In our case, absolutely... we pay a combination of 0%, 10% and 12% today... average of 11.5%. If we wait until later we will be paying a combination of 12% and 22%... 18% on average.. so we're likely saving 6.5%... or saving $6,500 on each $100,000 converted.

If rates revert to 2017 rates then we'll save even more. If one of us dies we'll save even more. If DD inherits it then she'll save and if DS inherits it then it is probably a push.

... Also RMDs from IRAs in the future creates income which allows you to take tax deductions for medical expenses, business losses and charitable contributions - all which could reduce your taxes in the future. Withdrawals from a Roth are not considered income and eliminates these deductions.

Even with aggressive Roth conversions we'll still have plenty of tIRA left... so if we need income for any of the purposes that you describe then it is easy enough to generate such income.

 

[COcheesehead]

In our case, absolutely... we pay a combination of 0%, 10% and 12% today... average of 11.5%. If we wait until later we will be paying a combination of 12% and 22%... 18% on average.. so we're likely saving 6.5%... or saving $6,500 on each $100,000 converted.

If rates revert to 2017 rates then we'll save even more. If one of us dies we'll save even more. If DD inherits it then she'll save and if DS inherits it then it is probably a push.



Even with aggressive Roth conversions we'll still have plenty of tIRA left... so if we need income for any of the purposes that you describe then it is easy enough to generate such income.

RMDs won’t begin to be a negative for us until we are in our 80’s. I am 59. Prepaying a tax now doesn’t seem like a move, considering our ACA situation, with a high probability of providing an advantage for us.

 

[harllee]

This may not apply to many people but if you are like me and want to make charitable gifts you can do charitable gifts from your IRA after age 70.5 (Qualified Charitable Distributions). The charitable gifts from you IRA reduced your RMD.

 

[pb4uski]

RMDs won’t begin to be a negative for us until we are in our 80’s. I am 59. Prepaying a tax now doesn’t seem like a move, considering our ACA situation, with a high probability of providing an advantage for us.

Can you elaborate on what you mean by this. I'm assuming that my first RMD is at 73. At that point were are both on SS and have my pension and will be in the 12% bracket absent any RMD. The RMD will push us into the 22% tax bracket in the first year of the RMD and all subsequent years... so the RMDs will be taxed at 12% and 22% based on the current tax tables... and average out to 18%.

I would think that RMDs would have a similar impact on you of increasing your income dramatically at 73 and onwards... I don't understand why there is no negative impact until you are in your 80s.

 

[COcheesehead]

Can you elaborate on what you mean by this. I'm assuming that my first RMD is at 73. At that point were are both on SS and have my pension and will be in the 12% bracket absent any RMD. The RMD will push us into the 22% tax bracket in the first year of the RMD and all subsequent years... so the RMDs will be taxed at 12% and 22% based on the current tax tables... and average out to 18%.

I would think that RMDs would have a similar impact on you of increasing your income dramatically at 73 and onwards... I don't understand why there is no negative impact until you are in your 80s.

We have a lot of tax free income with a muni ladder. We live off that now. When we have to take RMDs, we’ll switch to living off that or in combination with our taxable account/SS. I use the Fidelity retirement tool to show us what is possible.
The RMDs don’t push us past our current withdrawal rate until we are in our 80’s. Then taxation will matter more than now. I can wait to pay then.

 

[Gearhead Jim]

The ~20% decline in our equity holdings is noticeable but not frightening. Some day it will come back, and we won't need to sell equities before then.
Our fixed income is all CD's and I bonds, so no (nominal) losses there.

The scary thing is the ~8% "loss" due to inflation, because that will never come back and may continue for some number of years.