Roth Conversion versus simply taking an IRA distribution?

[buckskinbowman]

This probably has been covered before, but I can't find a thread.

I'm turning 60 in 2 months and have been retired since January. My wife is also 60 and still working, but plans to retire at the end of the year.

I'm wondering what the difference is between doing a Roth IRA conversion from my IRA to my Roth IRA versus just doing a regular IRA distribution and then reinvesting the money in a Roth. Aren't the tax ramifications the same? If so, why bother with all the formalities of a Roth conversion and simply take an IRA distribution and reinvest it in my Roth?

Thanks for any advice.

 

[Grace Z]

Sorry, but that will not work. You can only contribute earned income to the Roth account. Contributions cannot be made with unearned income, including distributions from other retirement accounts, dividends, or interest income. Hope that helps.

 

[neihn]

His wife still works until the end of the year. If he files married join, he still be able to contribute to Roth (earned income from the spouse)

 

[NW-Bound]

For a Roth conversion, most people do a direct transfer of assets from a traditional IRA account to their Roth account.

If you take a distribution out of an IRA into a regular brokerage or banking account, you have 60 days to rollover into a Roth.

And yes, you need earned income to put fresh money into Roth. ERs can only do Roth conversion.

PS. The OP talked about the formalities of a Roth conversion. No, for me it's as simple as a few mouse clicks.

I have both traditional IRA and Roth accounts at Schwab. I bring up the transfer page, click on the stock shares I want to transfer from IRA to Roth, click on a couple of tabs for confirmation, and it's done. Back to the account holding page, and immediately see the transferred shares now sitting in the Roth account. Painless.

I am sure other brokerages have the same online ease of use. I read that some do not do "in-kind" transfers, and require you to sell, then transfer cash, then rebuy the shares in the new account.

At the year end, Schwab will send me a tax statement. No need to talk to anybody, no paperwork required.

 

[buckskinbowman]

Thanks everyone for enlightening me! I will just do the Roth conversion through my E-Trade account. Their process seems more complicated than Schwab's, but I'll figure it out.

 

[latexman]

I will just do the Roth conversion through my E-Trade account. Their process seems more complicated than Schwab's, but I'll figure it out.

Call the E-Trade baby, and he'll walk you through it.

I loved those commercials!

 

[SecondCor521]

His wife still works until the end of the year. If he files married join, he still be able to contribute to Roth (earned income from the spouse)

Yes, but that works only up to the annual contribution limit times 2, which is somewhere around $15K. Roth conversion amounts are usually larger, and unlimited (well, they're limited to the balance in your traditional account and your willingness and ability to pay the income taxes).

OP, I've always thought that a Roth conversion is strictly better. If you don't need the extra money, it stays in the Roth and grows tax free. If you do end up discovering that you need the money after all, you can generally just remove it from the Roth tax free.

Vanguard's Roth conversion process is similar to the above, by the way, and is similarly a few mouse clicks.

Also, you can make 37 Roth conversions a year if you want; Vanguard will just report the total on one 1099-R in January the following year. You then just type in that one total in the tax software. Easy peasy.

 

[pb4uski]

....I'm wondering what the difference is between doing a Roth IRA conversion from my IRA to my Roth IRA versus just doing a regular IRA distribution and then reinvesting the money in a Roth. Aren't the tax ramifications the same? If so, why bother with all the formalities of a Roth conversion and simply take an IRA distribution and reinvest it in my Roth? ...

Yes, but that works only up to the annual contribution limit times 2, which is somewhere around $15K. Roth conversion amounts are usually larger, and unlimited (well, they're limited to the balance in your traditional account and your willingness and ability to pay the income taxes).
...Also, you can make 37 Roth conversions a year if you want; Vanguard will just report the total on one 1099-R in January the following year. You then just type in that one total in the tax software. Easy peasy.

Nailed it. Conversions are better because you don't need earned income like it sounds OP will not have next year and you can do a lot more.

Don't forget, you can to conversions either in-kind or in cash. I used to redeem investments in the tIRA, convert the proceeds to a Roth and then reinvest in the same ticker in the Roth.... not need to do that with an in-kind conversion. Finally, in many cases also no need to type in the total... I just import my tax infor from Vanguard into TurboTax, do a quick review (it's never been wrong so far) and I'm done... even easier peasy.

 

[Carpediem]

If you don't need the extra money, it stays in the Roth and grows tax free. If you do end up discovering that you need the money after all, you can generally just remove it from the Roth tax free.

Question regarding the above - I was under the impression that you had to wait 5 years before you could w/d Roth converted dollars. Not true?

 

[N02L84ER]

In addition to the above, you can only do 1 rollover of an IRA per 12 month period, so you could not "top up" a conversion later in the year when you better know your tax liabilities.


ETA: Sorry, apparently this is wrong.

 

[NW-Bound]

In addition to the above, you can only do 1 rollover of an IRA per 12 month period, so you could not "top up" a conversion later in the year when you better know your tax liabilities.

Ugh, the above once-per-year limit is for IRA to IRA rollover. It does not apply to IRA to Roth conversion, whether the conversion is direct transfer or not.

See this IRS page: https://www.irs.gov/retirement-plan...ot make more,the distribution was rolled over.

 

[Midpack]

Question regarding the above - I was under the impression that you had to wait 5 years before you could w/d Roth converted dollars. Not true?

Unfortunately it's not quite that simple. Here's are direct links to the two best posts IMO, but you can read the whole thread if you want to know more about the Roth 5 year rules.

https://www.early-retirement.org/fo...nversion-5-year-rules-112523.html#post2717255

https://www.early-retirement.org/fo...nversion-5-year-rules-112523.html#post2717207

 

[Carpediem]

Unfortunately it's not quite that simple. Here's are direct links to the two best posts IMO, but you can read the whole thread if you want to know more about the Roth 5 year rules.

https://www.early-retirement.org/fo...nversion-5-year-rules-112523.html#post2717255

https://www.early-retirement.org/fo...nversion-5-year-rules-112523.html#post2717207

Thank you! Ya know it ain't simple when there are flowcharts involved. LOL

 

[pb4uski]

Question regarding the above - I was under the impression that you had to wait 5 years before you could w/d Roth converted dollars. Not true?

Defintely not true if you are over 59-1/2... you can withdraw Roth money tax-free at anytime.

ETA: as long as the Roth account has been opened for at least 5 years... thanks for the reminder SecondCor521.

 

[SecondCor521]

Question regarding the above - I was under the impression that you had to wait 5 years before you could w/d Roth converted dollars. Not true?

As other posters have already said, it's a bit complicated. Thus the "generally" in my statement.

First, one always withdraws Roth contributions before Roth conversions - it's an IRS ordering rule. For someone on this board, they'd probably have some quantity of Roth contributions to work through first.

Second, before 59.5 there is the five year rule you mention, but each year's Roth conversions are treated separately, and IRS ordering rules say you withdraw conversions on a FIFO basis. So someone on this board probably also has some conversions that are at least 5 years old.

Finally, as @pb4uski mentions, after 59.5 (and having had a Roth account for at least five years, which again someone on this board probably has had), there are no penalties or taxes at all.

 

[RunningBum]

Maybe it doesn't apply to you, but if you wanted to contribute more than the Roth contribution limit, which I believe is the lesser of $7K and your wife's earned income, you would have to do a Roth conversion for the overage.

Sounds like you're going with a conversion anyway, which I agree with. You might as well figure out how to do it since it probably won't be your only conversion.

 

[SevenUp]

A Roth contribution will not increase your taxable income.
A Roth conversion of pre-tax funds will increase your taxable income.

Your annual Roth contribution limit is completely independent of any Roth conversions. Provided you meet all the other requirements (having compensation, etc.) you may contribute or convert or both.