Roth conversion

[sengsational]

sengsational........this reply specifically pertains only to TIRAs/Roth which I am more familiar with....
First....by first bucket, I assume you mean orginal contributions? If so, you can withdraw at any time w/o tax/penalty. There is no 5 yr clock.

Re: your main question.....again this English thing......the words are "taxable portion of first conversion"......you paid tax on 9K of that conversion......that's the taxable portion....9K. So after all the original contributions are withdrawn,
the next funds that come out are the 9K and if withdrawn before the 5 yr conversion clock is up,you pay a penalty on that withdrawal. The next part that come out is the 1K nontaxable part of that conversion. No penalty for that so there is a difference between the 2 portions of the conversion.

Thank you for the response. Starting to make a bit of sense now. So for someone who pulls more than their original contribution total before the "5 year conversion clock", the law does not assess a penalty on the $1,000 of "old money", but does assess a penalty on the "new money". After the conversion clock ticks past 5, then both portions of the conversion become the same (come out tax free after 59 1/2).

 

[Shawn]

Assuming one maxes out ones pre-tax + catch up contributions that still leaves $28K/yr after tax that can be converted to Roth on retirement. One year of this won't make a huge difference to my retirement assets, and I'll still be doing traditional taxable conversions every year from 55 to 70, but for those earlier on in the careers it could really help.

Catch-up contributions do not count against the IRS 415c limit, which is $53K for 2015. So depending on the 401k plan, an employee can make up to $35K in after-tax contributions, in addition to $18K in pre-tax and $6K in catch-up contributions (for those 50 or older). Note that employer contributions to the 401k and employee contributions to a DB plan do count against the $53K limit.

Some plans offer in service withdrawals of after-tax contributions (and their taxable earnings). Employees don't need to wait until they leave the company or retire. They can roll after-tax contributions into a Roth IRA on an annual basis. Regular rollovers help minimize the build-up of taxable earnings. My 401k allows this option, and I've been taking advantage of it since 2010 (and staging after-tax money since 2007). According to Fidelity, the IRS ruling from last year isn't applicable here so I can continue to do this with limited tax consequences. I currently have almost $450K in my Roth IRA, almost all of it originating from backdoor 401k and tIRA contributions.

 

[kaneohe]

Thank you for the response. Starting to make a bit of sense now. So for someone who pulls more than their original contribution total before the "5 year conversion clock", the law does not assess a penalty on the $1,000 of "old money", but does assess a penalty on the "new money". After the conversion clock ticks past 5, then both portions of the conversion become the same (come out tax free after 59 1/2).

almost........I thought we were talk pre-65 withdrawals here..........
in that case, the conversion clocks matter and what you said is true and
"new money" comes out before "old money".

After 59.5, another clock comes into play.....the age of the oldest Roth.....if > 5 yrs, everything is qualified...no tax or penalty on anything; if < 5 yrs, earnings are taxed but
no penalty.

This is the table by kawill from fairmark.com that I love because you don't need to remember or think . The table also is listed in terms of the ordering rules, the order in which withdrawals are made. The only other thing you need to know is the ordering rules for conversions. The oldest conversions come out first. Within each conversion, taxable part first, then nontaxable . :

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.

 

[Terryjm51]

Re: Roth conversion
Posted by: Alan S., February 16, 2015 12:58AM
If you roll only the after tax 401k funds to a Roth IRA, you do not have any waiting period to withdraw those funds tax and penalty free. The waiting period only applies to amounts that were pre tax when you rolled them to the Roth, and you would not have any such pre tax amounts.

Earnings on the rollover in the Roth IRA will not be tax free until your Roth IRA is qualified. The Roth IRA will be qualified after you hit 59.5 if you have also met the 5 year holding period.



Sent from my iPhone using Early Retirement Forum

 

[sengsational]

Re: Roth conversion
Posted by: Alan S., February 16, 2015 12:58AM
If you roll only the after tax 401k funds to a Roth IRA, you do not have any waiting period to withdraw those funds tax and penalty free. The waiting period only applies to amounts that were pre tax when you rolled them to the Roth, and you would not have any such pre tax amounts.

Earnings on the rollover in the Roth IRA will not be tax free until your Roth IRA is qualified. The Roth IRA will be qualified after you hit 59.5 if you have also met the 5 year holding period.

That sounds like the result from your original question in post 1:

Question: When I roll the after tax into a roth do I have to wait 5years before I can touch the money ?

A rather complicated answer (necessarily so) to a simple question. But we ARE dealing with the IRS here

 

[Midpack]

Great thread! I didn't realize the rule had changed, and both DW and I have a mix of pretax and after-tax money in our TIRAs. Gives me a good reason to open Roth IRAs now without creating a taxable event, and begin (taxable) pretax conversions next year. Thanks!

Not that there was any misinformation in the thread, but I mistakenly took this to mean I could separate pretax and after-tax money for Roth conversion from our TIRAs. Seems all the same since all our funds came from 401k's - 3+ years ago. My Vanguard rep tells me otherwise, this only applies if you're rolling over directly from a 401(k) (& possibly other employer plans?) into a Roth IRA. For us, it's still a taxable event, essentially using after-tax as "cost basis" as it has been. Darn...

 

[pb4uski]

Good point Midpack.

I don't think it works for pre-tax and after-tax money co-mingled in TIRAs, just for 401ks where there are separate subaccounts for pre-tax and after-tax balances being transferred to a TIRA and Roth, respectively.

 

[Animorph]

I'm doing a partial rollover of DW's 401k/Roth 401k right now. There was no way to separate the pre-tax amounts from the taxed amounts for a partial rollover, according to a long chat with the help center. In fact, we've never known exactly what the Roth account was invested in since they never broke it out. It didn't seem to be a simple percentage of the account. So I'm doing a rollover into a Roth IRA and then I'll call the brokerage and either correct or recharacterize some of that into a tIRA. Hopefully I'll be able to separate out the taxed/pre-tax at that point. Then I'll have to figure it all out a tax time. Not a big problem because I'll be doing Roth conversions anyway, but doing mine first I hope since I'm older.

 

[sengsational]

Since I don't have great fund selection and also since my 401k fiduciary (Hewitt) does a bad job of reporting (they report Roth 401k and regular 401k as a single total, except at one summary level), I thought I'd explore getting the Roth 401k money out. The investigation was precipitated by this thread, so...

When I (a 55 year old) run the initial steps of the conversion (Roth 401k to existing old Roth), the web site tells me that there's taxable money that "might" generate penalties*. But I was thinking that Roth 401k to Roth should be tax and penalty free. The non-taxable funds add-up to about what my contributions (all in 2013) have been (79% of the total), and the rest (taxable) must be the gains. So you can't roll the gains without tax impact?


*

Penalties May Apply! Because you converted savings to a Roth 401(k) account in the last 5 years, any portion of this payment that represents the converted amounts may be subject to an additional 10% penalty.

 

[sengsational]

Since the above post, I've read the fine-print that they want you so sign-off on before making any conversions.

From what I can tell, if I pulled money completely out of the Roth 401k, I would owe no 10% penalty on the gains, due to the age 55 rule. But if I rolled money into a Roth IRA, I would get hit with the 10% penalty on the gains, since the age 55 rule doesn't apply to rollovers. "Designated Roth Account" means Roth 401k.

Special Tax Notice Regarding Plan Payments From a Designated Roth Account.

If I do a rollover to a Roth IRA, will the 10% additional income tax apply to early distributions from the IRA?
If you receive a payment from a Roth IRA when you are under age 59½, you will have to pay the 10% additional income tax on early distributions on the earnings paid from the Roth IRA, unless an exception applies or the payment is a qualified distribution. In general, the exceptions to the 10% additional income tax for early distributions from a Roth IRA listed above are the same as the exceptions for early distributions from a plan. However, there are a few differences for payments from a Roth IRA, including:

• There is no special exception for payments after separation from service. [my comment: that means no age 55 rule]
• ....
• ....

If I don't do a rollover, will I have to pay the 10% additional income tax on early distributions?
If a payment is not a qualified distribution and you are under age 59½, you will have to pay the 10% additional income tax on early distributions with respect to the earnings allocated to the payment that you do not roll over (including amounts withheld for income tax), unless one of the exceptions listed below applies. This tax is in addition to the regular income tax on the earnings not rolled over.
The 10% additional income tax does not apply to the following payments from the Plan:

• Payments made after you separate from service if you will be at least age 55 in the year of the separation
• ....
• ....

 

[Gatordoc50]

Not that there was any misinformation in the thread, but I mistakenly took this to mean I could separate pretax and after-tax money for Roth conversion from our TIRAs. Seems all the same since all our funds came from 401k's - 3+ years ago. My Vanguard rep tells me otherwise, this only applies if you're rolling over directly from a 401(k) (& possibly other employer plans?) into a Roth IRA. For us, it's still a taxable event, essentially using after-tax as "cost basis" as it has been. Darn...

My bad. I misread the OPs post. I thought he was saying he had a separate taxable account that he was contributing 800 dollars a month to that he was going to convert to a Roth. My misinterpretation got this thread off on the wrong foot.

 

[kaneohe]

I'm doing a partial rollover of DW's 401k/Roth 401k right now. There was no way to separate the pre-tax amounts from the taxed amounts for a partial rollover, according to a long chat with the help center..

I don't know the dirty details since I don't have either of these but I have the general feeling that there is some difference between having after tax funds in a 401K and having a Roth 401K. Perhaps that might explain your situation.

The new development this yr about being to send 401K funds to TIRA and Roth w/o taxation is about normal 401K w/ pretax and aftertax funds, not a 401K
and a Roth 401K. For more, you might want to get Alan S..'s opinion at
fairmark.com (retirement forum) or bogleheads.org