Roth Conversion - Separate or Single Account

[misanman]

Sorry for a rather basic question but I'm considering a tIRA to Roth conversion and I'm wondering about the mechanics of the conversion given the 5 year restriction on tax free withdrawals.

If I did a Roth conversion each year, would those need to be to separate Roth IRA accounts? Or can I establish a single Roth IRA account and then add to it via conversions each year?

If you can have a single account with multiple conversion events, then how do you keep track of the 5-year restriction on withdrawals?

Thx

 

[ronin]

You can have a single account and convert yearly into it. This what I do. The 5 year clock begins when your first Roth account is established. Even if you have multiple accounts, the 5 year period only applies relative to the earliest one established.

 

[Alan]

I also have a single ROTH into which I do some conversions each year. The transaction history is well maintained by the brokerage so I don't see an issue in withdrawing in the future even though the latest deposits may be less than 5 years old.

 

[kaneohe]

You can only use a single Roth if you like. A commonly advocated technique is to use 2 .....one is the permanent home for aged conversions; the other is the temporary home for the newest conversion. The purpose is to simplify and control things in case you want to recharacterize all/part of a conversion.
Usually the accounting is done by the brokerage firm (my experience anyway) but if you mix recent conversions with other stuff, if you recharacterize the results take on the blended characteristic and may not be what you want/expect. Once you have aged the conversion past the deadline for recharacterization, you can move the conversion to the permanent home
and open up the temp home for the next conversion.

You are responsible for keeping track of all contributions and conversions
(amounts and dates) just in case you do early withdrawals. There are 5 yr clocks on the oldest Roth and for each conversion. You also need to know what part of each conversion is taxable /non-taxable (for non-deductible contributions). The way you keep track is the $$$ (not the investments)
via the ordering rules: first out are contributions, then the taxable part of
the oldest conversion, then the non-taxable part of the oldest conversion,
then taxable/non-taxable parts of next oldest conversion,etc, and then finally the earnings. If you violate 5 yr clocks (and age) you may be taxed (earnings) or penalized.

 

[ronocnikral]

we need to know if this is the 5 yr clock specific to a qualified or unqualified distribution. certainly more complex if this is an unqualified distribution.

form 8606 is needed to do a conversion as well, so collecting those with the 5498's should help to sort one's basis in various buckets.

 

[grasshopper]

From Bogleheads forum

Bogleheads • View topic - Confused about withdrawl of Roth Conversion

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

 

[kaneohe]

I love that table by KAWill also:

here's the other half for the youngsters since OP didn't give age


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

 

[ronocnikral]

KAWill's table is good, I especially like that the Roth Ordering rules for non-qualified distributions are built in. but one improvement I would suggest is to clarify what is meant by "taxable" and "nontaxable". If one defers taxes (nontaxable) and then pays them at conversion/distribution (taxable), which category does that fit into? Or VV, if one has a non-deferred IRA (taxable) and then converts (nontaxable), which category does it fit into?

The table would benefit by saying "taxes due @ conversion/distribution" or "no taxes due @ conversion/distribution". It was confusing for me at first.

 

[kaneohe]

KAWill's table is good, I especially like that the Roth Ordering rules for non-qualified distributions are built in. but one improvement I would suggest is to clarify what is meant by "taxable" and "nontaxable". If one defers taxes (nontaxable) and then pays them at conversion/distribution (taxable), which category does that fit into? Or VV, if one has a non-deferred IRA (taxable) and then converts (nontaxable), which category does it fit into?

The table would benefit by saying "taxes due @ conversion/distribution" or "no taxes due @ conversion/distribution". It was confusing for me at first.

ronocnikral..........yes, I can understand the possible confusion......we might need a larger sample size to confirm that perhaps the confusion is only for deep thinkers though.

the table is:
conversions: xxx; yyy (taxable portion)
I would associate " taxable portion" w/ conversions unless I thought deeper and wondered about taxable contributions. In my experience,
the contributions are usually referred to as "deductible" or "non-deductible" rather than taxable/non-taxable . Perhaps the conversions
and (taxable portion) should not be separated.

I must confess to possibly being biased since I saw that table being created
so didn't come in cold. It would be interesting to have a larger sample size though to see if that's a more general problem. Thanks for the feedback.

One other thing I noticed thanks to your comments.....you mentioned that the ordering rules were built in which is true but an uninformed reader (unlike you) would know nothing about the ordering rules so some additional words associated directly with the table would be useful. I'm sure they were there in the thread discussion but are divorced from the table itself.

 

[misanman]

I believe the KAWill table is on Fairmark but I haven't been able to find it. Would someone post a link?

Thx

 

[kaneohe]

I believe the KAWill table is on Fairmark but I haven't been able to find it. Would someone post a link?

Thx

The 2 halves (under 59.5, over 59.5) parts of the KAWill table are in this thread (one post w/ the Bogleheads link and another below it). They are
easier to read here since the original Fairmark thread has some (many) missing semicolons that make it difficult to understand. The original table was prepared in some other format and when it was copied/pasted to Fairmark , the format was lost which necessitated the semi-colons that are absent. If you still would like original post to see the discussion , development, and missing punctuation , see here
(note there are many iterations of the table so be sure to see the last one)
Fairmark Forum :: Retirement Savings and Benefits :: Roth IRA Rules - Table Approach