Roth rules

[wallygator69]

Hi,

Was seriously looking at 72-t but was very pleased to find out that you can withdraw contributions from a ROTH any time without penalty. Our IRA's are up to about 85% of our assets and still 6 years away from 59.5.....

Can I do a Roth conversion of say $20k (to get to sweet spot on the ACA subsidies for 2016) and six months later take $20k out without issue?

Thanks,

Wally

 

[Droo]

I believe that there is a 5 year rule for roth conversions, where each conversion has its own individual 5 year timer on it before it can be withdrawn penalty free. So the only money you can withdraw early from a roth IRA penalty free is:

• The principal amount of any direct roth contributions, at any time
• Any converted principal amount that was made at least 5 years ago
• Some specific exceptions like first time home buyer etc

Read the text of the second 5 year rule here: https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

The Second 5-Year Rule, For Roth Conversions
As the name implies, the second 5-year rule applies not to (new) Roth contributions, but to Roth conversions from traditional pre-tax retirement accounts, and determines whether Roth conversion principal will be penalty-free.

To meet the 5-year rule for Roth conversions, again the measuring period is five tax years, which essentially means any Roth conversion is deemed to have occurred as of January 1st of that year (Treasury Regulation 1.408A-6, Q&A-5(b)). Notably, since since conversions must occur by December 31st in a given year, their 5-year period will always start in the calendar year in which the conversion occurs; for instance, any conversion between January 1st and December 31st of 2013 will count as a 2013 conversion, but anything in 2014 will count as a 2014 conversion (by contrast, a new contribution as late as April 15th of 2014 could still be counted towards the 2013 tax year).

Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once. When withdrawals occur from conversion amounts, they are deemed to be withdrawal on a first-in, first-out basis under IRC Section 408A(d)(4)(B)(ii)(II), which effectively means the oldest conversions (most likely to have finished their 5-year requirement) are withdrawn first, and the most recent conversions are withdrawn last. (Overall, the ordering rules from Roth IRAs stipulate that withdrawals are after-tax contributions first, conversions second, and earnings third.)


Edit to add: because of this, whenever I contribute or convert to a Roth I keep track of the exact date, amount, and type of contribution (direct or conversion) so that in the future I can easily figure out how much I would be able to take out early.

 

[RunningBum]

No, conversions are not contributions.


Fairmark is my favorite site for such questions.


Distribution Overview - Fairmark.com Fairmark.com

Taxable portion of a conversion



Applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions.

• If withdrawn before the first day of the fifth year after the year of the conversion: no tax, but will be subject to 10% early withdrawal penalty if you’re under age 59½ unless an exception applies.
• Beginning on the first day of the fifth year after the year of the conversion can be withdrawn at any time with no tax and no penalty.
• Special rules apply to withdrawals of amounts converted in 2010.

You're going to have to wait ~5 years before you can withdrawal without the 10% early withdrawal penalty.

 

[kaneohe]

and here's a link to a thread containing my favorite table by kawill: kind of like a flow chart so minimal thinking required Fairmark Forum :: Retirement Savings and Benefits :: Distributions from RIRA after TIRA transfer

Note that the table is written in the ordering sequence of withdrawals:
1)original contributions
2)taxable part of oldest conversions (when you are converting pre-tax money and pay taxes)
3)non-taxable part of oldest conversion (when you are converting non-deductible contributions)
2i & 3i) repeating 2)& 3) for the next oldest conversion etc. up to the youngest
conversion
4) earnings

Note also that this table assumes you have one big Roth IRA even if you have different accounts so if you have several accounts with contributions, the contributions are considered to come out first, even if you are withdrawing from only one account.

 

[pb4uski]

....Can I do a Roth conversion of say $20k (to get to sweet spot on the ACA subsidies for 2016) and six months later take $20k out without issue?...

No, but you could do a Roth conversion and 5 years later take the money out.

If you already have a Roth and it has more than $20k of contributions in it then you could take out $20k of contributions and then do a $20k conversion to replenish the Roth.

 

[SoReady]

I believe that there is a 5 year rule for roth conversions, where each conversion has its own individual 5 year timer on it before it can be withdrawn penalty free. So the only money you can withdraw early from a roth IRA penalty free is:

• The principal amount of any direct roth contributions, at any time
• Any converted principal amount that was made at least 5 years ago
• Some specific exceptions like first time home buyer etc

Read the text of the second 5 year rule here: https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

The Second 5-Year Rule, For Roth Conversions
As the name implies, the second 5-year rule applies not to (new) Roth contributions, but to Roth conversions from traditional pre-tax retirement accounts, and determines whether Roth conversion principal will be penalty-free.

To meet the 5-year rule for Roth conversions, again the measuring period is five tax years, which essentially means any Roth conversion is deemed to have occurred as of January 1st of that year (Treasury Regulation 1.408A-6, Q&A-5(b)). Notably, since since conversions must occur by December 31st in a given year, their 5-year period will always start in the calendar year in which the conversion occurs; for instance, any conversion between January 1st and December 31st of 2013 will count as a 2013 conversion, but anything in 2014 will count as a 2014 conversion (by contrast, a new contribution as late as April 15th of 2014 could still be counted towards the 2013 tax year).

Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once. When withdrawals occur from conversion amounts, they are deemed to be withdrawal on a first-in, first-out basis under IRC Section 408A(d)(4)(B)(ii)(II), which effectively means the oldest conversions (most likely to have finished their 5-year requirement) are withdrawn first, and the most recent conversions are withdrawn last. (Overall, the ordering rules from Roth IRAs stipulate that withdrawals are after-tax contributions first, conversions second, and earnings third.)


Edit to add: because of this, whenever I contribute or convert to a Roth I keep track of the exact date, amount, and type of contribution (direct or conversion) so that in the future I can easily figure out how much I would be able to take out early.

Wow, I have not really kept good track of my Roth contributions nor my recent Roth conversions.
I thought that once you established a Roth account that the 5 year rule was associated with the "account". As an example a Roth account was established 10 years ago and Roth conversions made this year, or last, in to this account would meet the 5 year rule.
I have only made 2 Roth conversions in to my VG Roth account so I know the amount and will be sure to keep track of that, but is that all that is needed? I mean if I contribute $20k last year and $40k this year but then change or add mutual funds by rebalancing there is no way to tell which one has a certain years contributions.
Am I missing something or does Vanguard keep track of all this?

 

[pb4uski]

Changing funds or rebalancing doesn't change your contribution or conversion amounts for these withdrawal rules since withdrawal of growth/earnings is addressed separately in the rules.

 

[thefinancebuff]

Wow, I have not really kept good track of my Roth contributions nor my recent Roth conversions.
I thought that once you established a Roth account that the 5 year rule was associated with the "account". As an example a Roth account was established 10 years ago and Roth conversions made this year, or last, in to this account would meet the 5 year rule.
I have only made 2 Roth conversions in to my VG Roth account so I know the amount and will be sure to keep track of that, but is that all that is needed? I mean if I contribute $20k last year and $40k this year but then change or add mutual funds by rebalancing there is no way to tell which one has a certain years contributions.
Am I missing something or does Vanguard keep track of all this?

You have to keep track. All your Roth accounts are treated as one giant account for this purpose. Here's a post on my blog on this. There's a spreadsheet template you can use. Catch up on the records now.

http://thefinancebuff.com/roth-ira-contributions-withdrawals-spreadsheet.html

 

[SoReady]

Thanks for the response. Based on what I'm reading, if I'm over 59.5 (and I am) and my Roth account is older than 5 years then I really don't need to concern myself with much of this. Although I will start to track the conversions for my own sake.

 

[H2ODude]

We're doing conversions but the 5 year won't bother us because once we're 70.5 we'll be hitting the tiRA's for some time as they'll still be bulk of tax protected money.

But my question is as to the "keeping track of" issues. I understand (sort of) the rules as described, but does the financial institution keep track of this? Does the IRS? Or if they don't and you get audited is it just up to you to prove what and where the funds came from? Just wondering.....

 

[pb4uski]

I think technically the taxpayer is supposed to keep track of it (since the taxpayer is responsible for tax compliance) but the practical reality is that financial institutions can provide that information. As So Ready observed a couple posts above, it becomes a moot point after you are 59 1/2 and the account is over 5 years old.

 

[UpAnchor]

...Can I do a Roth conversion of say $20k (to get to sweet spot on the ACA subsidies for 2016) and six months later take $20k out without issue?

...If you already have a Roth and it has more than $20k of contributions in it then you could take out $20k of contributions and then do a $20k conversion to replenish the Roth.

Ok, I guess I'm confused. If OP has more than $20k in contributions already in his Roth (although he didn't say did) does the order of the conversion vs. withdrawal matter? If the withdrawal is being considered to come out of the $20k in contributions that were already there, why does the conversion have to constitute a "replenishment"? I would think he could convert first and then pull from contributed funds later as he wants to do. But admittedly, I was post-59.5 before getting to such a point so don't have any direct experience with the pre-59.5 challenges.

 

[pb4uski]

As I understand it, each conversion has its own time clock. I think the intent is that they don't want people who are subject to penalties for tax-deferred withdrawals doing what you proposed to avoid/side step the 10% penalty.

So yes, the order does matter.

 

[UpAnchor]

Thanks. That makes sense.

 

[Taxman59]

I thought I understood the rules, but maybe not. What happens to the $170k that was in my Roth 401K that I rolled into my Roth IRA account (about 10 years old)? Is that a contribution in 2015 or in the year I made the non-deductible contribution?

 

[gauss]

Wow, I have not really kept good track of my Roth contributions nor my recent Roth conversions.
I thought that once you established a Roth account that the 5 year rule was associated with the "account".

Anyone who plans on withdrawing Roth assets before age 59 1/2 should read the back side of IRS Form 8606 and the instructions NOW.

You will then see the record-keeping requirements in order to take penalty-free withdrawals.

When I first did this I freaked out for a bit but then realized that I could get old form 5498's directly from the IRS via an income transcript request. I was able to get them going back 10 years.

I now even take out about $10 each year from my Roth's just to force the tax software and myself to fill out parts of the back of form 8606 to track my contribution basis. I still need to manually keep track of my conversion basis separately.

Hopefully I can get to age 59 1/2 without tapping the Roth conversions (ie only contributions).

-gauss

 

[kaneohe]

I thought I understood the rules, but maybe not. What happens to the $170k that was in my Roth 401K that I rolled into my Roth IRA account (about 10 years old)? Is that a contribution in 2015 or in the year I made the non-deductible contribution?

read this Rollovers from Designated Roth Accounts - Fairmark.com Fairmark.com

and then perhaps check at the retirement forum at fairmark.com to be sure and that nothing's changed.

Sounds like the years in the Roth 401K don't count, just the yrs in the Roth.
However there seems to be a distinction between your contributions to the Roth 401K (basis) and the rest of the Roth 401K (earnings). Since basis can be withdrawn at any time, you need to determine your basis......sounds like your contributions to the Roth 401K or all of it if it was a qualified distribution.....based on your age,etc. Alan S. at fairmark.com will know.

 

[kaneohe]

...............................
But my question is as to the "keeping track of" issues. I understand (sort of) the rules as described, but does the financial institution keep track of this? Does the IRS? Or if they don't and you get audited is it just up to you to prove what and where the funds came from? Just wondering.....

As tfb shows in his linked article, it can get quite messy unless you do the record keeping esp if you have transferred funds around. Your original contributions are documented on your applications and indicate the tax year for contribution. They are also documented on 5498s the year after. If you transfer funds to another bank, that bank has no idea how much are contributions. You would need to go back to the original bank and hope they have records or hope you can find recover the 5498s. Conversions can be similarly confusing unless you keep contemporaneous records.

I would imagine that IRS has zero time &interest in proving you have basis. They would just assume 0 and make you prove otherwise.

 

[wallygator69]

Hi FOlks,

Thanks for all the help. All set!

Best Regards,

Wally

 

[wallygator69]

sorry I'm back.

In 2011, 2012 and 2013 I did Roth conversions but my accountant say Turbotax did not require Form 8606 those years. He called and confirmed with Quicken that it wasn't.

In 2014 I did a Roth conversion and that year Turbotax did an 8606.

My EX accountant says an was adamant that after 5 years I can just take conversions out without issue.

I have the data for conversion years and amounts. Should I just file the 8606's and send a letter stating that issue with Turbotax not doing the forms that year? Can I go back to 2011 and does it have the potential for opening a bag of worms?

I really appreciate the vast knowledge and help by you folks.

Merry Christmas,

Wally

 

[kaneohe]

sorry I'm back.

In 2011, 2012 and 2013 I did Roth conversions but my accountant say Turbotax did not require Form 8606 those years. He called and confirmed with Quicken that it wasn't.

In 2014 I did a Roth conversion and that year Turbotax did an 8606.

My EX accountant says an was adamant that after 5 years I can just take conversions out without issue.

I have the data for conversion years and amounts. Should I just file the 8606's and send a letter stating that issue with Turbotax not doing the forms that year? Can I go back to 2011 and does it have the potential for opening a bag of worms?

I really appreciate the vast knowledge and help by you folks.

Merry Christmas,

Wally

Can you tell that the Roth conversions were declared as income for the yrs that you did conversion? Seems like F8606 would/should have been generated if they were. Where on the 1040 was that income shown?

 

[gauss]

sorry I'm back.

In 2011, 2012 and 2013 I did Roth conversions but my accountant say Turbotax did not require Form 8606 those years. He called and confirmed with Quicken that it wasn't.

In 2014 I did a Roth conversion and that year Turbotax did an 8606.

My EX accountant says an was adamant that after 5 years I can just take conversions out without issue.

I have the data for conversion years and amounts. Should I just file the 8606's and send a letter stating that issue with Turbotax not doing the forms that year? Can I go back to 2011 and does it have the potential for opening a bag of worms?

I really appreciate the vast knowledge and help by you folks.

Merry Christmas,

Wally

#1) If you read the instructions for From 8606, you will see that it is required by the IRS every year you perform a Roth conversion. If you do not have any after-tax basis in the funds being converted then the form may be trivially easy. Did you every tell us if you have any after-tax basis in the IRAs that you Roth converted or after-tax basis in any employer plan funds (ie 401k) that you rolled over to the Roth?

#2) Do you have the forms 1099-R and 5498 for all the years that you made Roth conversions? Having these available will be very useful in straightening this out. At a minimum you should be able to calculate to the total of all your Roth conversions and the year in which they occurred.
Copies of these can be requested from the IRS going back up to 10 years although you have to request each year separately. What you need is called a tax transcript (the Wage and Income Transcript variety is the one you need). All your W2s/1099s/5498s for the year will be included in the Wage and Income Tax Transcript. The IRS provides access to request these via this page.

#3) Do you need to take Roth withdrawals prior to age 59 1/2? If you don't, then you will not need to calculate and tracck your basis in your contributions and your conversions which F8606 is designed to track.

#4) This is the type of issue that I would ask about over at fairmark.com also.

-gauss

 

[sengsational]

In 2011, 2012 and 2013 I did Roth conversions but my accountant say Turbotax did not require Form 8606 those years. He called and confirmed with Quicken that it wasn't.

That doesn't sound quite right. If you need an 8606 to do your 2016 taxes, it would seem that you would have needed one in those earlier years too. So in those earlier years, you moved "$X" out of your tIRA, put that amount into a Roth, and on that year's tax line 15a and line 15b were both the same number? "$X"?

As far as I can tell, the whole point is to keep you from having to pay tax on tIRA funds that you've already paid tax on. So if you look back and you made IRA contributions that were not deductible (ie, you already paid tax on that money), the form has you calculate what percent that is, and you get to remove that percent without paying tax on it. That same amount gets removed from your basis, and that will go on a future 8606.

So if you did Roth conversions earlier, and your tIRA had non-deductible funds, you just temporarily ripped yourself off, slightly. I must add, I'm no accountant. In fact, it's my least favorite thing. But it seems to me (shooting from the hip), is that if your basis on the 8606 in 2014 was accurate (ie high enough), you're in pretty good shape; your latest (2014) 8606 is all you need to go forward. You can skip doing 8606's some years if you don't have conversions. You get your tIRA basis from your most recent past 8606 and put it on the top of the current year 8606. So the value on line 13 of your 2014 8606 will go on line 2 of your 2016 8606 (presuming no 8606 in 2015).

Now, if the basis on the 2014 was wrong, then that's kinda bad. The IRS will expect to see that number going down over time. So if you realize that your basis is higher than what was reported earlier, that's going to be a problem. But I don't think that's your issue.

You said there were conversions, but no 8606's, and I think all that means is that you could have gotten a fraction of the money out tax-free, but you gave up that rather smallish advantage. You can still get the money out tax-free, but it will just happen later.

 

[wallygator69]

Hi Folks,

Sorry for not responding but I am not at home and have limited internet access. Also do not have data at my finger tips...

I will be back home on the 28th and can provide details.

Thanks for the help as always.

Wally

 

[wallygator69]

UGH!

All Roth Conversions were from tIRA's and we paid the taxes on the conversions.

It appears I have no cost basis ever reported to the IRS for my IRA's. Line item 6 is blank where it says enter the value of ALL your traditional SEP and Simple IRA's as of Dec. 31, 2014. This was the first time 8606 came up as a form required by Turbotax per my old accountant. I have been doing conversions on and off since 2009 with 8606. My accountant had no idea what the balances are in any of our IRA's and never asked. Again, blames Turbotax......

Do you folks think I need to get with my new accountant quick?

Thanks,

Wally

Now, if the basis on the 2014 was wrong, then that's kinda bad. The IRS will expect to see that number going down over time. So if you realize that your basis is higher than what was reported earlier, that's going to be a problem. But I don't think that's your issue.

You said there were conversions, but no 8606's, and I think all that means is that you could have gotten a fraction of the money out tax-free, but you gave up that rather smallish advantage. You can still get the money out tax-free, but it will just happen later.