Roth Conversion Accounts - Recordkeeping

[PERSonalTime]

For those of you who make annual Roth conversions over multiple years, I was wondering if you establish a new Roth account each year to help keep track of when you made the conversion in order to comply with the 5-year rule? Please explain your method of recordkeeping for these conversions.

 

[DrRoy]

No new account. They are pretty well recorded in my Fidelity account info.

 

[Alan]

No new account. I do record the conversions in a spreadsheet, including the ongoing cost basis from IRS form 8606

 

[VanWinkle]

If you are over 591/2 and have owned your Roth account for more than 5 years, no need to set up separate accounts.

Post on Bogleheads:

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

 

[jebmke]

Don't the statements have all the transactions? Mine do.

 

[ncbill]

fund your first Roth account by age 54.5, don't withdraw until age 59.5 or later, and never worry about record-keeping.

 

[Midpack]

I only established one Roth account to accept conversions, now 5 years in. I have recorded my conversions in a spreadsheet, but they are well documented at VG and in all my prior tax documents. I'm not worried about record keeping.

 

[PatrickA5]

I started a spreadsheet back in 2008 showing all conversions, contributions, distributions, rollovers, etc. Having looked at it, I'm surprised to see that we've made over $300K of conversions over the years. A bunch of that was of the annual "backdoor" conversions.

Not needed anymore for tax purposes, but I keep up the spreadsheet because I have a compulsion with keeping up my spreadsheets.

 

[Al18]

The bank/credit union/brokerage is required to keep RothIRA records for contributions and conversions, not you. You can always consult their records.

Roth conversions are always recorded on an IRS form and mailed to you on a yearly basis - I keep this info with my tax records.

 

[PERSonalTime]

If you are over 591/2 and have owned your Roth account for more than 5 years, no need to set up separate accounts.

Post on Bogleheads:

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

Got it. Thanks!?

 

[SecondCor521]

For those of you who make annual Roth conversions over multiple years, I was wondering if you establish a new Roth account each year to help keep track of when you made the conversion in order to comply with the 5-year rule? Please explain your method of recordkeeping for these conversions.

Like most others, I just have a spreadsheet keeping track of contributions and conversions.

Note that for purposes of the 5 year conversion rule, a conversion made any time throughout the year is treated as being made on January 1st. So you only need to keep track of the amount of the conversion(s) and the year(s), not the dates within the year.

Finally, having separate Roth accounts doesn't really help. For purposes of the five year rule, it is the *dollar amount* converted that is available five years later. Any earnings that happen on those converted dollars in that five year time frame go into the third bucket.

In other words, suppose you convert $10K on April 15, 2023 and put it into a separate Roth account. On 1/1/2028 (five years after 1/1/2023), let's say the account is worth $15K. You're eligible to withdraw tax- and penalty-free only the $10K converted, not the $15K it grew to in the interim. (Unless you're over age 59.5, of course).

 

[Dtail]

A related note question.
My mom had a Roth account many years ago but closed it and transferred out the monies.
I am setting up a new Roth account this year as she is 90 years old (for tax arbitrage purposes for a few of the siblings when she passes).
If she passes before the 5 year window, are the beneficiaries (over 59.5 y.o.) subject to the earnings tax component, or they can just wait until the 5 year window passes within the required 10 year distribution requirement?

 

[jollystomper]

Quicken, annual statements from Fidelity and Vanguard, and tax returns are our record keeping methods.

 

[SecondCor521]

A related note question.
My mom had a Roth account many years ago but closed it and transferred out the monies.
I am setting up a new Roth account this year as she is 90 years old (for tax arbitrage purposes for a few of the siblings when she passes).
If she passes before the 5 year window, are the beneficiaries (over 59.5 y.o.) subject to the earnings tax component, or they can just wait until the 5 year window passes within the required 10 year distribution requirement?

My understanding is that her first Roth counts. So if she opened that first Roth more than five years ago (which it sounds like is the case), then beneficiaries can withdraw anything anytime tax free within that 10 year window.

Inherited Roths are not subject to RMDs. Unless there is some specific reason otherwise, I think leaving the account untouched as long as possible to maximize tax free earnings is the way to go. If your Mom passed away today (of course I hope she doesn't - just saying for example), that would mean leaving the account until 12/31/2033.

 

[Dtail]

My understanding is that her first Roth counts. So if she opened that first Roth more than five years ago (which it sounds like is the case), then beneficiaries can withdraw anything anytime tax free within that 10 year window.

Inherited Roths are not subject to RMDs. Unless there is some specific reason otherwise, I think leaving the account untouched as long as possible to maximize tax free earnings is the way to go. If your Mom passed away today (of course I hope she doesn't - just saying for example), that would mean leaving the account until 12/31/2033.

Yes more than 5 years ago.
Agree on the 2nd point for me, but not sure what the siblings will do for themselves, so wanted to know in case it comes up.
Thanks for the response.

 

[Sunset]

..
My mom had a Roth account many years ago but closed it and transferred out the monies.
I am setting up a new Roth account this year as she is 90 years old (for tax arbitrage purposes for a few of the siblings when she passes).
...

Can you explain this tax arbitrage, and how you think it will work ?

I'm wondering if some relatives should do this, or that it doesn't really matter as inherited IRA's have a 10 year span to withdraw from in general terms.

 

[TheWizard]

My understanding is that her first Roth counts. So if she opened that first Roth more than five years ago (which it sounds like is the case), then beneficiaries can withdraw anything anytime tax free within that 10 year window.

Inherited Roths are not subject to RMDs. Unless there is some specific reason otherwise, I think leaving the account untouched as long as possible to maximize tax free earnings is the way to go. If your Mom passed away today (of course I hope she doesn't - just saying for example), that would mean leaving the account until 12/31/2033.

I think inherited Roth IRAs ARE subject to RMDs, in that the entire amount must be withdrawn in ten years.
Unclear is some needs to be withdrawn each year or not.

BUT......there are no income taxes due on those withdrawals...

 

[Dtail]

Can you explain this tax arbitrage, and how you think it will work ?

I'm wondering if some relatives should do this, or that it doesn't really matter as inherited IRA's have a 10 year span to withdraw from in general terms.

So 2 of my siblings are in a higher tax bracket than my mom. They are both still working. So by converting some of the TIRA at a marginal tax bracket of 22%, there will be tax savings for them vs them paying taxes on the inherited IRA with its forced 10 year RMD period.
I do have to balance the IRMAA aspect of it too.

 

[Dtail]

I think inherited Roth IRAs ARE subject to RMDs, in that the entire amount must be withdrawn in ten years.
Unclear is some needs to be withdrawn each year or not.

BUT......there are no income taxes due on those withdrawals...

I believe you are correct in that it must be depleted within 10 years but no forced yearly RMD's.
This rule is for non spouses.

 

[Sunset]

So 2 of my siblings are in a higher tax bracket than my mom. They are both still working. So by converting some of the TIRA at a marginal tax bracket of 22%, there will be tax savings for them vs them paying taxes on the inherited IRA with its forced 10 year RMD period.
I do have to balance the IRMAA aspect of it too.

But this will mean that the other siblings who are at a lower tax rate will effectively be paying higher taxes, than if they inherited the IRA and did it themselves.

Also, have you talked over their plans, I could see someone inherits and IRA and thereby decides to stop work a couple of years early, knocking their tax rate to near zero, and using the IRA money as a bridge.

 

[Dtail]

But this will mean that the other siblings who are at a lower tax rate will effectively be paying higher taxes, than if they inherited the IRA and did it themselves.

Also, have you talked over their plans, I could see someone inherits and IRA and thereby decides to stop work a couple of years early, knocking their tax rate to near zero, and using the IRA money as a bridge.

First part - this is true, but the differential in net rates favors the higher earners.
Plus there are a few other tradeoffs which favor the other siblings (of which I am one of them) which make it worthwhile.

Second part - this also can be true, but I went over the scenario with them and they are fine with it.
Only a certain portion of the IRA can be converted without causing larger IRMAA issues, unles mom lives past 100.

As an aside, I have full control of all investing decisions as to my mom's portfolio and the other siblings are not really interested overall in my investing decisions.

 

[CRLLS]

Definitely, Inherited Roths are, or will be subject to RMDs. They are currently forgiven. The RMD rules and calculations vary depending on many different scenarios. There is no one answer. And if you are following the other thread, https://www.early-retirement.org/forums/f28/inherited-ira-now-what-120052.html You will see the confusion.

One of the differences in how they are treated is if the Roth names the beneficiary directly or is left to the Estate/Will to distribute.

 

[SecondCor521]

Definitely, Inherited Roths are, or will be subject to RMDs. They are currently forgiven. The RMD rules and calculations vary depending on many different scenarios. There is no one answer. And if you are following the other thread, https://www.early-retirement.org/forums/f28/inherited-ira-now-what-120052.html You will see the confusion.

I don't believe the first sentence is accurate.

The new proposed regulations for inherited IRAs only require RMDs if the original owner had reached their RBD.

RBDs do not apply to Roth IRAs. Therefore, inherited Roth IRAs do not require RMDs, either now or under the proposed rules.

The other thread seems to be discussing traditional IRAs. But post #15 in that thread does mention the RBD.

Roth IRAs are subject to the 10 year SECURE act distribution period, but that is a separate rule and not an RMD.

I do agree that it does depend on the circumstances. It gets rather complicated rather fast. I mostly just know the rules as they apply to my situation.

One of the differences in how they are treated is if the Roth names the beneficiary directly or is left to the Estate/Will to distribute.

I think this is correct. Named beneficiaries generally get 10 years; going through the estate makes it 5 years. I think.

 

[gauss]

For those of you who make annual Roth conversions over multiple years, I was wondering if you establish a new Roth account each year to help keep track of when you made the conversion in order to comply with the 5-year rule? Please explain your method of recordkeeping for these conversions.

You will only need this information if you withdrawal all of roth contributions before your reach age 59 1/2 (assuming your first Roth IRA was established prior to that). For nonqualified distributions, The roth contributions are assumed to come out first and then the roth conversions begin.

I forced a pair of IRS form 8606's to be generated each year for DW and myself by taking a $10 withdrawal from each of our Roth IRAs. As such I was required to document the Roth IRA's "contrbiution basis" on line 22 of the form.

I later learned that since my 401k at work has added a Roth 401k option and allowed in-plan conversions. This allowed me to make the conversions in the 401k account and then rollover the Roth 401k funds to the Roth IRA where the majority of these funds are treated as "contribution basis" (see form 8606 instructions). At this point I stopped worrying about the Roth IRA conversions because I would never need to access them -- ie the contribution basis would not run out before I turn age 59 1/2. This solved my problem with this.

-gauss

 

[CRLLS]

I don't believe the first sentence is accurate.

The new proposed regulations for inherited IRAs only require RMDs if the original owner had reached their RBD.

RBDs do not apply to Roth IRAs. Therefore, inherited Roth IRAs do not require RMDs, either now or under the proposed rules.

The other thread seems to be discussing traditional IRAs. But post #15 in that thread does mention the RBD.

Roth IRAs are subject to the 10 year SECURE act distribution period, but that is a separate rule and not an RMD.

I do agree that it does depend on the circumstances. It gets rather complicated rather fast. I mostly just know the rules as they apply to my situation.



I think this is correct. Named beneficiaries generally get 10 years; going through the estate makes it 5 years. I think.

There is a difference between what is and what might be. According to the IRS.gov website:

Inherited Roth IRAs
Generally, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.

Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.

Fair enough to say, it is a mess of rules that are difficult to find, let alone determine what is currently in effect, proposed and in discussion, enacted but delayed implementation, etc. My head hurts when going thru this subject. I do need to get this worked out before the end of the year. I may just surrender, close out the relatively small inherited IRA and call it done. maybe that is the IRS's intended action.