how to bypass the 20% 401k withholding

[GrayHare]

Step 1: If your traditional 401k allows partial rollovers to a traditional IRA, do such a rollover. Step 2: Convert the Step 1 tIRA to Roth. Step 3: Withdraw the rollover amount from the Roth IRA. You'll owe taxes on the amount converted to Roth, but payment is not due until the next April 15 at which time you can deduct against it.

[pjm-7]

This may or may not work so smoothly. See IRS pub. 590. The ordering rules for distributions for Roth IRA's is:


1. Regular contributions
2. Conversions and rollover contributions
3. Earnings on contributions.


Also, you must meet the 59.5 age and five year requirement.


Like most folks I'm not fond of the 20% mandatory withholding but can live with it until I'm over 59.5. The excess withholding is refundable with the return is filed. Also, this looks like more paperwork and tracking than I want to deal with.

[GrayHare]

There is no age requirement to withdraw basis from a Roth IRA without penalty. The 5-year rule clock begins when the Roth IRA account was first opened, so for Step 2 use an account at least that old.

[jarts98]

There is a separate five-year rule requirement for each Roth conversion (in order to avoid the penalty for accessing the principal of the conversion).

[kaneohe]

see this table by kawill from the fairmark.com site:
OP's scheme works if > 59.5 y.o; otherwise there is penalty because conversion hasn't aged 5 yrs: Of course if you have other prior funds in the Roth exceeding the value of the rollover, you might be withdrawing contribution basis or overaged conversion basis rather than new conversion basis and might be ok. The ordering rules say contribution basis comes out first, then conversion basis oldest first in the same order as table below.

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

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.

[GrayHare]

Sources vary on whether amounts converted from tIRA to Roth are subject to a penalty if those dollars are withdrawn before the 5-year clock (and before age 59.5). I see Kawill (above) and Kitces say they are subject to the penalty, but Forbes and Kiplinger say no if the Roth account is at least 5 years old.

[GrayHare]

Ed Slott's site is in the Kitces camp, that the 10% penalty on converted dollars applies.
https://www.irahelp.com/slottreport/...ira-conversion

As Slott is an IRA guru I expect his stuff to be correct. So, what Forbes and Kiplinger may be referring to is the ability to withdraw penalty-free an amount equal to the converted -- provided that amount is less than contributions.

[kaneohe]

Quote:

Originally Posted by GrayHare Ed Slott's site is in the Kitces camp, that the 10% penalty on converted dollars applies. https://www.irahelp.com/slottreport/...ira-conversion As Slott is an IRA guru I expect his stuff to be correct. So, what Forbes and Kiplinger may be referring to is the ability to withdraw penalty-free an amount equal to the converted -- provided that amount is less than contributions.

GrayHare........do you links to the Forbes/Kiplinger articles?

[karluk]

Quote:

Originally Posted by kaneohe GrayHare........do you links to the Forbes/Kiplinger articles?

Yes, indeed, it would be very helpful to document this assertion, especially for people who read this thread in the future to not be left in uncertainty, under the impression that multiple respected authorities are at odds over the conversion rules. My understanding agrees with Kitces, et al., that there is a separate five year clock for each conversion, but if you have sources with other opinions, by all means include a link and let's see what they say.

[GrayHare]

Quote:

Originally Posted by kaneohe GrayHare........do you links to the Forbes/Kiplinger articles?

Forbes: "If you've converted traditional IRA money and moved it into a Roth account, that also counts as 'basis' and you need to add it to your contribution base."

The Forbes reference seems to be behind a paywall. If the link to it below does not work, websearch for "The Roth IRA Mistake".

http://www.forbes.com/sites/ashleaeb...&hl=en&ct=clnk

Kiplinger: "Next, you dip into converted amounts (always tax-free -- and penalty-free, too, if you are older than 59 1/2 or the account has been open for at least five years)."

http://www.kiplinger.com/article/ret...nversions.html

[karluk]

Thanks, GrayHare. The link to the Forbes article didn't work for me, but the one to Kiplinger did, and I agree that they are fairly clearly stating a distribution rule that is at odds with what I believe to be correct. Pretty sad. Either I am hopelessly misinformed about Roth IRA conversion rules, or a respected financial publication is having trouble getting its facts straight.

Perhaps the members of this forum can clarify the situation, but I personally don't care enough to pursue the subject. I am already over 59 1/2, so I should be exempt from the 10% penalty regardless of when I made my conversions (plus, I don't expect to make significant withdrawals from my Roth IRA any time soon.)

[kaneohe]

GrayHare.....thanks for the links. I couldn't see the Forbes article either.
The Kiplinger link appears to be correct re: the 59.5 y.o. threshold but the reference to Roth being 5 yrs old probably should reference a 5 yr conversion clock instead. The Forbes link is correct that the conversion is added to basis but the conversion basis is tracked separately from contribution basis and needs to add a 5 yr clock.

This is actually an interesting and probably fairly common incidence.....how do
we "laymen", in the presence of conflicting inputs from "experts", decide who to believe......in the news or for financial info like this. How do we "laymen" somehow decide that we trust Ed Slott or Alan S. who posts on Ed Slott's forum irahelp.com under a slightly different alan name. I don't know how but somehow we do. Incidentally Alan S. blessed that table created by kawill.

[Rothman]

If you think about it if there was no 5 year clock there would never be a reason to pay the 10% penalty. I would be a little surprised about financial institutions getting it wrong but based on research I did this year on SS withdrawal choices I concluded there is a lot of bad information out there, you just hope people don't look at one source and act.


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[brukster]

Kitces has this to say:

https://www.kitces.com/blog/understa...d-conversions/

Quote:

Accordingly, it's also worth noting that because the 5-year rule for Roth conversions merely leaves the withdrawal of conversion principal potentially subject to the early withdrawal penalty, any other exceptions to the early withdrawal penalty can still shelter the Roth conversion amount from the penalty. Thus, withdrawals within 5 years of conversion by someone who is already over age 59 1/2 are not subject to the early withdrawal penalty, regardless of the 5-year conversion rule, simply because being over age 59 1/2 itself is an exception to the penalty!

[jim584672]

I always thought each Roth conversion starts its own 5 year clock. I know there is a general 5 year clock for your first Roth account established as well.

For a Roth conversion ladder the conversion amount (not earnings) is withdraw-able after 5 years, even if you are under 59.5 without penalty.

[Rothman]

Choate describes the complexity of pre 59 1/2 conversions well, they can be confusing because there are TWO of everything
There are TWO separate parts of the Roth IRA, the contributions and the earnings
There are TWO different taxes to worry about, the income tax and the 10% penalty
There are TWO completely different 5 year holding periods


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[kaneohe]

that's why I like that kawill table (above) so much........no thinking required.

[hnzw_rui]

Quote:

Originally Posted by jim584672 I always thought each Roth conversion starts its own 5 year clock. I know there is a general 5 year clock for your first Roth account established as well. For a Roth conversion ladder the conversion amount (not earnings) is withdraw-able after 5 years, even if you are under 59.5 without penalty.

This is correct. Each conversion is subject to a 5-year clock. Once the 5-year clock is up, basis is available to withdraw without taxes or penalty.