Roth Conversion and Withdrawal

[goneboarding]

Hey all ,

I am considering converting some of my IRA funds to a Roth this year. I plan to do the same in 2022 and 2023, if my current situation sustains. Let's say DW and I decide to convert $80,000 each year.

I am over the requisite 59.5 age threshold and don't expect to have any earned income in 2021.

1. Is there a five year wait time before we can start taking distributions from my Roth conversion? If so, then for the money converted in 2021, when can I withdraw without penalty - 2026 or 2027?
2. If the above is true, is it advisable to create a separate account for each year's Roth conversion... to avoid any IRS complications.

Cheers,
GB

 

[Dash man]

Hey all ,

I am considering converting some of my IRA funds to a Roth this year. I plan to do the same in 2022 and 2023, if my current situation sustains. Let's say DW and I decide to convert $80,000 each year.

I am over the requisite 59.5 age threshold and don't expect to have any earned income in 2021.

1. Is there a five year wait time before we can start taking distributions from my Roth conversion? If so, then for the money converted in 2021, when can I withdraw without penalty - 2026 or 2027?
2. If the above is true, is it advisable to create a separate account for each year's Roth conversion... to avoid any IRS complications.

Cheers,
GB

There is a five tax year period from the opening of your first Roth before you can withdraw without paying taxes on the earnings. You can withdraw Roth contributions at any time. Earnings withdrawn in less than five tax years (Jan 1-Dec31) are taxable. There is no penalty being over 59 1/2.

 

[SecondCor521]

1. Provided your first Roth was opened 5 years ago or more (probably), then no.
2. No. The IRS tracks dollars converted; doesn't matter one whit what happens inside the Roth once the dollars are in there.

As an aside, you don't take distributions from your Roth conversion. You take distributions from your Roth IRA. IRS rules dictate that it's contributions dollars first, then Roth conversion dollars second (oldest to newest), then all other dollars last.

 

[Dash man]

Hey all ,

I am considering converting some of my IRA funds to a Roth this year. I plan to do the same in 2022 and 2023, if my current situation sustains. Let's say DW and I decide to convert $80,000 each year.

I am over the requisite 59.5 age threshold and don't expect to have any earned income in 2021.

1. Is there a five year wait time before we can start taking distributions from my Roth conversion? If so, then for the money converted in 2021, when can I withdraw without penalty - 2026 or 2027?
2. If the above is true, is it advisable to create a separate account for each year's Roth conversion... to avoid any IRS complications.

Cheers,
GB

There’s no reason to create separate accounts for each tax year, just separate accounts for you and your wife if applicable. Open a Roth for the first time anytime in 2021 and you can withdraw earnings anytime in 2026, but you can withdraw the conversion contributions anytime because you have to pay the tax in the year of the conversion.

 

[goneboarding]

Thanks for the clarification, all! So...

DW and I already have a Roth account each, created some 15 years ago.
So, I can use my existing Roth account to receive the funds from my regular IRA. Paying the necessary taxes in the year of conversion, of course. Same for my wife.
Since I am over 59.5, all funds in the account (contribution, conversion, earnings) are immediately available without restriction.

Please correct anything I may have misunderstood.

Thanks!

 

[Dash man]

Thanks for the clarification, all! So...



DW and I already have a Roth account each, created some 15 years ago.

So, I can use my existing Roth account to receive the funds from my regular IRA. Paying the necessary taxes in the year of conversion, of course. Same for my wife.

Since I am over 59.5, all funds in the account (contribution, conversion, earnings) are immediately available without restriction.



Please correct anything I may have misunderstood.



Thanks!

Correct. You can also open a new Roth if you prefer, as the five year clock is from the opening of the first Roth.

 

[skyking1]

Interesting, so you can open a second roth and draw conversions back out immediately if you want. I never considered that.

 

[Dash man]

Interesting, so you can open a second roth and draw conversions back out immediately if you want. I never considered that.

We opened our first Roth IRAs years ago at USAA, which have since moved to Schwab. DW’s 401k is with Fidelity, so for simplicity when doing Roth conversions from her 401k, she open a new Roth IRA with Fidelity. If desired, she could withdraw all the funds tax free if she desired because she’s over 59 1/2.

https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp

 

[pb4uski]

Correct. You can also open a new Roth if you prefer, as the five year clock is from the opening of the first Roth.

Since he has had a Roth for over 5 years and is over 59 1/2, there is no 5-year clock for him... he can take it all out the day after the conversion if he wants to.

 

[SecondCor521]

Interesting, so you can open a second roth and draw conversions back out immediately if you want. I never considered that.

The other poster can remove the conversions immediately because they are over 59.5 and their first Roth was opened more than 5 years ago.

Opening a second Roth IRA has nothing to do with it. The IRS considers all Roth IRAs with the same owner to be one single large Roth IRA for tax purposes (*) so there is no tax benefit to multiple IRA accounts.

(*) Well, technically one could do a SEPP from one Roth IRA and have a second in reserve, but SEPPs from Roth IRAs are a colossally bad idea, so practically speaking this exception can be ignored.

 

[mebden]

Ok I have a question about this I have a after tax 401k plan is that considered a Roth Account since its after tax money as it doesn't give it a name?

 

[Dash man]

Ok I have a question about this I have a after tax 401k plan is that considered a Roth Account since its after tax money as it doesn't give it a name?

Call it Fred. It’s just a 401k that allows after tax contributions. Should you choose to roll the 401k into an IRA, the after tax contributions can go into a Roth IRA, but not the earnings. Earnings have to go into a tIRA.

 

[SecondCor521]

Ok I have a question about this I have a after tax 401k plan is that considered a Roth Account since its after tax money as it doesn't give it a name?

It's an after-tax 401(k).

Since all that fancy stuff came along after I FIREd, I am not up to snuff on them. It *might* be that there are some differences between an after-tax 401(k) and a Roth 401(k), because both of those types of accounts can exist at a single employer. What those differences are I have no idea, but they might have to do with contribution limits(?) The idea of rolling the after-tax into a Roth IRA sounds right. The part about earnings having to go into the trad IRA also sounds right.

 

[mebden]

It's an after-tax 401(k).

Since all that fancy stuff came along after I FIREd, I am not up to snuff on them. It *might* be that there are some differences between an after-tax 401(k) and a Roth 401(k), because both of those types of accounts can exist at a single employer. What those differences are I have no idea, but they might have to do with contribution limits(?) The idea of rolling the after-tax into a Roth IRA sounds right. The part about earnings having to go into the trad IRA also sounds right.

Ok so if anyone out has an idea what I'm aloud to do with this money I'd appreciate it as if I cant roll the whole amount including the profits over to my after tax account I have with TD Ameritrade I'm better of leaving it where its at till I retire as I wont have to pay taxes on it

 

[Dash man]

Ok so if anyone out has an idea what I'm aloud to do with this money I'd appreciate it as if I cant roll the whole amount including the profits over to my after tax account I have with TD Ameritrade I'm better of leaving it where its at till I retire as I wont have to pay taxes on it

As I said earlier, the after tax contributions to a 401k can be rolled into a Roth IRA. The earnings must be rolled into a tIRA along with pretax contributions.

I’ve done it and it’s very easy.

 

[MarieIG]

I rolled my Roth 401(k) initial contributions, with growth, into a Roth IRA. It was reported as a non-taxable event.

 

[mebden]

As I said earlier, the after tax contributions to a 401k can be rolled into a Roth IRA. The earnings must be rolled into a tIRA along with pretax contributions.

I’ve done it and it’s very easy.

I think I'm understanding what your saying Dash but the account is at $50000 and if I rolled it over to my traditional 401K I'd have to pay taxes on it when I with draw it and if I leave it where its at I'd get it all tax free once I hit the 59 1/2 age

 

[mebden]

I rolled my Roth 401(k) initial contributions, with growth, into a Roth IRA. It was reported as a non-taxable event.

I thought that was how it was done as its all after tax money so it should be able to stay in a non taxed fund like the Roth IRA I have with TD Ameritrade

 

[Dash man]

I think I'm understanding what your saying Dash but the account is at $50000 and if I rolled it over to my traditional 401K I'd have to pay taxes on it when I with draw it and if I leave it where its at I'd get it all tax free once I hit the 59 1/2 age

You can split the rollover to go into both your tIRA (pretax contributions and all earnings) and your Roth IRA (after tax contributions).

When I rolled my 401k into IRAs, I had a regular 401k that had pretax and after tax contributions, and a Roth 401k component. The regular 401k after tax contributions and Roth 401k contributions plus earnings went into my Roth IRA. My regular 401k contributions, earnings and after tax earnings all went into my Traditional IRA. There were no taxable events.
Just tell the brokerage you want to rollover the funds to what you want to do and they can handle it.

If you would get it all tax free at 59 1/2, then it must be in a Roth 401k. Ask your administrator if you’re not sure.

 

[mebden]

You can split the rollover to go into both your tIRA (pretax contributions and all earnings) and your Roth IRA (after tax contributions).

When I rolled my 401k into IRAs, I had a regular 401k that had pretax and after tax contributions, and a Roth 401k component. The regular 401k after tax contributions and Roth 401k contributions plus earnings went into my Roth IRA. My regular 401k contributions, earnings and after tax earnings all went into my Traditional IRA. There were no taxable events.
Just tell the brokerage you want to rollover the funds to what you want to do and they can handle it.

Yes, Dash I already transferred the before tax money out to my traditional IRA the money left in the account is all after tax money so the last time I checked with them they said tell us when you want that transferred into my Roth Ira I have with them

 

[Dash man]

Yes, Dash I already transferred the before tax money out to my traditional IRA the money left in the account is all after tax money so the last time I checked with them they said tell us when you want that transferred into my Roth Ira I have with them

Sounds like you have it handled then! Good luck!

 

[purplesky]

Ok so if anyone out has an idea what I'm aloud to do with this money I'd appreciate it as if I cant roll the whole amount including the profits over to my after tax account I have with TD Ameritrade I'm better of leaving it where its at till I retire as I wont have to pay taxes on it

It sounds like you are trying to do a MEGA BACK DOOR ROTH.

I do it every year with my after tax 401k contributions. Taxes on earnings are withheld and paid to the IRS. Its a super easy way to add additional money to a roth IRA.

Ask your 401k if they allow after tax account inservice distributions? Many 401k plans do not.

Tax Form 1099-R will be used by your 401k to report the transaction.

The sooner the better is the deal with a Mega Back door Roth!

 

[mebden]

It sounds like you are trying to do a MEGA BACK DOOR ROTH.

I do it every year with my after tax 401k contributions. Taxes on earnings are withheld and paid to the IRS. Its a super easy way to add additional money to a roth IRA.

Ask your 401k if they allow after tax account inservice distributions? Many 401k plans do not.

Tax Form 1099-R will be used by your 401k to report the transaction.

The sooner the better is the deal with a Mega Back door Roth!

The after tax money is sitting in an old employers retirement account I just moved the before tax money over to my traditional IRA but still have the after tax money sitting in the old plan I need to move it out next to my Roth IRA

 

[purplesky]

The after tax money is sitting in an old employers retirement account I just moved the before tax money over to my traditional IRA but still have the after tax money sitting in the old plan I need to move it out next to my Roth IRA

So contact the old employer 401k plan and ask if they allow direct after tax 401k account to roth IRA account distributions?

Make sure you speak with a phone rep who knows what a Mega backdoor Roth is?

If you can still login to this old 401k you should be able to see whether they allow a Mega back door Roth Ira under the plan information.

 

[dmpi]

Ok I have a question about this I have a after tax 401k plan is that considered a Roth Account since its after tax money as it doesn't give it a name?

A 401K can have after-tax dollars but that is different than a Roth Account. The difference is the gains made by the after-tax dollars is still taxable. In a Roth account the gains are nontaxable. If I was you the first chance I get I would convert 401K after-tax dollars into a Roth 401K or Roth IRA. When you make that conversion you only have to pay the tax on the gains and not the original amount. After that you'll never have to pay tax on that again. If you're going to do a Roth conversion, after tax dollars should be the first dollars you convert.