Roth conversion for dummies

[Truckinalong]

"You’ll need the money in five years or less. Money converted from an IRA to a Roth IRA falls under a Roth five-year rule: If you don’t wait five years to withdraw it, you could owe taxes and a 10% penalty."

This throws a kink in my plan I think? I planned on pulling plug in a couple years. I intended to manage ACA subsidies with rolling my 401K to IRA and converting to Roth and using roth distributions as my income in combination with some bond fund income.

This makes it sound like I would need to wait 5 years and the income I generate alone from bond fund would kick me to medicaid?

[RetireBy90]

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Originally Posted by mountainsoft I would probably start converting whichever account has the lowest balance. That way you would be able to eliminate one of the traditional IRA's sooner. Otherwise, I don't think it matters which account you convert first. You could even convert a little of each traditional IRA if you wish, as long as the total is less than the $20K you are trying to stay under.

I would suggest you convert your IRA first as wife has 5 years without RMDs after yours. That is, if I remember your 62, you have 10 years to convert and wife has 15 years. Of course you would need to consider total amounts in each tIRA and if you plan to have all IRA/401K funds converted by age 72.

[Dash man]

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Originally Posted by bobbyr I have used my advisor a fair amount for consultation and have a sense of loyalty with her (explaining why i haven't moved) including advice related to my mother's LTC insurance and several other items where I have enlisted her help... I know I can get a lot of the advice I get through other means (like here), but I just like having that person if I need her. For me it is some peace of mind that I feel is worth the fee. BTW, I actually did move my wifes roth (10% of our portfolio) from EJ and explained to her I wanted to compare performance against fees...I left it in Vanguard. I just haven't move my own $s over. Thank you for your input

My sister-in-law had EJ and was paying 1.65% annual fees not counting load fees on the mutual funds. Schwab or Fidelity will give you the same advice for half that fee if you need your hand held.

[lordjust]

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Originally Posted by RetireAge50 Our situation is close to yours as we have about 36k in income with our pensions currently. We also have cash available and deferred accounts (401k, IRA’s, etc.). In our case we have not done any Roth conversions. Although we are well under the “cliff” the slope of the hill before the “cliff” is very steep (marginal rate close to 27%).

Wouldnt RetireAge50's situation of multiple IRA's fall under the prorata rule i mentioned?

Assuming you have an existing tIRA with $5k and you then move your 401k into a second tIRA. Doesnt this affect your Roth conversion ? This is why i expressed concern regarding the full conversion of a 401k into a tIRA for the future purpose of a back door Roth. Or are others not discussing this because OP didnt mention other IRAs existing?

This appears to apply based on the "mind the rules section"

https://www.nerdwallet.com/blog/inve...-how-to-guide/

So wouldnt the OP want to shift a small percentage of his 401k to a tIRA and then move it to a Roth once per year?

I may be muddying the waters a bit with two different circumstances but others may find this applicable for the Roth conversions.

[bobbyr]

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Originally Posted by mountainsoft Personally, I would move all the accounts to Vanguard equivalents. That will make conversions easier, and it will be easier to manage if everything is in one location. As long as the money goes directly from Edward Jones to Vanguard you won't pay any taxes. https://investor.vanguard.com/401k-r...w-to-roll-over

thanks, with so many people suggesting this, I am leaning towards making that move

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If your income is $30K and you want to stay under $50K for health care, I would probably convert less than $20K to be safe. Maybe 15K to 17K to give you a little wiggle room. Worst case you might have to do an additional year of Roth conversions.

good advice

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Ideally, you should pay the taxes on the Roth conversion from taxable savings and not from the IRA balance.

agree, that's the plan

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You could get a joint family marketplace plan until you start Medicare. Then your wife could get a single marketplace plan until she can get Medicare.

i am pretty uneducated on the marketplace options, going to study that soon

[pb4uski]

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Originally Posted by lordjust Wouldnt RetireAge50's situation of multiple IRA's fall under the prorata rule i mentioned?...

The pro-rata rule only applies to tIRAs that are a mix of pre-tax/deductible and post-tax/nondeductible contributions.

The vast majority of tIRAs are only pre-tax/deductible contributions so in most cases the prorate rule isn't in play.

But you make a fair point that if your tIRA is a mix then a portion of the conversion would not be taxable.

The pro-rata rule is in play for backdoor Roths which was the subject of the article that you linked, but here we are talking about plain Roth conversions.

[lordjust]

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Originally Posted by pb4uski The pro-rata rule only applies to tIRAs that are a mix of pre-tax/deductible and post-tax/nondeductible contributions. The vast majority of tIRAs are only pre-tax/deductible contributions so in most cases the prorate rule isn't in play. But you make a fair point that if your tIRA is a mix then a portion of the conversion would not be taxable. The pro-rata rule is in play for backdoor Roths which was the subject of the article that you linked, but here we are talking about plain Roth conversions.

I took the link from camfused prior comments ... but I didnt catch that this was strictly plain Roth conversions. thanks for the feedback pb.

[kaneohe]

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Originally Posted by Truckinalong "You’ll need the money in five years or less. Money converted from an IRA to a Roth IRA falls under a Roth five-year rule: If you don’t wait five years to withdraw it, you could owe taxes and a 10% penalty." .................

How old will you be when you want to withdraw? If > 59.5, you will be able to access the conversion funds w/o taxes/penalty (but not necessarily the earnings).

[Truckinalong]

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Originally Posted by kaneohe How old will you be when you want to withdraw? If > 59.5, you will be able to access the conversion funds w/o taxes/penalty (but not necessarily the earnings).

47-50? Plan is to spend down taxable bucket and use ROth conversion to manage income to ACA threshold.

The way I read this I am in trouble in year 1 thru 5.

[pb4uski]

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Originally Posted by Truckinalong "You’ll need the money in five years or less. Money converted from an IRA to a Roth IRA falls under a Roth five-year rule: If you don’t wait five years to withdraw it, you could owe taxes and a 10% penalty." This throws a kink in my plan I think? I planned on pulling plug in a couple years. I intended to manage ACA subsidies with rolling my 401K to IRA and converting to Roth and using roth distributions as my income in combination with some bond fund income. This makes it sound like I would need to wait 5 years and the income I generate alone from bond fund would kick me to medicaid?

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Originally Posted by Truckinalong 47-50? Plan is to spend down taxable bucket and use ROth conversion to manage income to ACA threshold. The way I read this I am in trouble in year 1 thru 5.

You can withdraw contributions without penalty anytime... so it depends on how much of your Roth represents contributions in relation to how much you need to withdraw.

After 59 1/2 you can withdraw without penalty.

[Truckinalong]

And the contribution withdrawal would count as the income to ACA then?

[camfused]

^^^ Yes. Hence the awkward years before you turn 65, when you want to qualify for ACA subsidies (by keeping your income low), yet you also want to be doing Roth conversions (and you are taxed on those amounts you pull out to do that as normal income).

[Animorph]

DW is five years younger than me. I Roth converted all of my tIRA/401k accounts before starting on hers. We'll still have a little left in her tIRA, but the RMD's for her start five years after mine would have. I don't think there's any reason to file separately.

We were able to Roth convert some of DW's 401k by transferring directly to a Roth account. So you don't have to funnel it through a tIRA first. The hassle there was working around the stupid withdrawal rules of her 401k. We were limited to quarterly withdrawals/rollovers and we had a Roth 401k component that they wouldn't initially separate out for us to roll into a Roth. Moving to a Vanguard tIRA might be easier.

Think of your HSA's as a slightly limited Roth account. You may be able to find an ACA plan that is HSA eligible as well, allowing more contributions. I would only withdraw from them if you need to control your taxable income. Normally it is good to withdraw from the Roth as your last source of funds. If you save your medical receipts you should be able to reimburse yourself for those expenses at any time in the future. That said, we'll be withdrawing from our HSA's first, before using the Roths.

Roth conversions are mostly a way to get money out of your tIRA/401k accounts at the lowest tax rate. Secondarily, paying the conversion taxes from a taxable account means you have that much more tax-free money in your retirement accounts. You need to estimate what your RMD taxes will look like in the future and what they will look like in the coming years. Because of that secondary effect, the Roth conversion benefit will be greater early on in the process. Only you can figure out your taxes and subsidies, but there might be a small chance that a larger Roth conversion in the first year might be worth giving up the ACA subsidy that year. Then go with the ACA subsidies after that. Those are the things that make it so hard to fully optimize.

[pb4uski]

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Originally Posted by Truckinalong And the contribution withdrawal would count as the income to ACA then?

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Originally Posted by camfused ^^^ Yes. Hence the awkward years before you turn 65, when you want to qualify for ACA subsidies (by keeping your income low), yet you also want to be doing Roth conversions (and you are taxed on those amounts you pull out to do that as normal income).

NO! Withdrawal of Roth contributions are not income, for ACA nor for tax.

[RetireBy90]

^^^ or was Truckingalong speaking of "contribution withdrawal" as the withdrawal from tIRA to convert to Roth. My original thought.

[pb4uski]

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Originally Posted by RetireBy90 ^^^ or was Truckingalong speaking of "contribution withdrawal" as the withdrawal from tIRA to convert to Roth. My original thought.

I interpreted it as him asking if a withdrawal of contributions from a Roth was included in ACA income... and it is not.

But you are right that the Roth conversion itself would be taxable and ACA income, though if the tIRA included nondeductible contributions then only a portion of the Roth conversion would be income for tax and ACA.

[camfused]

^^^ Yes, that is what I meant. Sorry for the confusion. Withdrawals from Roth are never taxable, as far as I know (if the money is more than 5 years old).

[pb4uski]

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Originally Posted by camfused ^^^ Yes, that is what I meant. Sorry for the confusion. Withdrawals from Roth are never taxable, as far as I know (if the money is more than 5 years old).

No, not that either. See below, its complicated. In many cases withdrawal of earnings are subject to tax. If you had said "Withdrawals of contributions from Roth are never taxable" then that would have been right.

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

[camfused]

^^^ Ok, i'll be quite now.

[Truckinalong]

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Originally Posted by pb4uski I interpreted it as him asking if a withdrawal of contributions from a Roth was included in ACA income... and it is not. But you are right that the Roth conversion itself would be taxable and ACA income, though if the tIRA included nondeductible contributions then only a portion of the Roth conversion would be income for tax and ACA.

My situation

Retire in a couple years. Roll company 401k into IRA. Bond fund income from taxable fund $30G a year, but need $50G to live. Plan is to convert $20G IRA to Roth IRA per year to obtain said $50G.

That should then be $50G in income as I see it for ACA purposes?