[CoachKandSportsguy]

but from a practicality point of view, for the short opportunity peeps like myself due to salary limitations and matching opportunities, the Rollover IRA gets opened at 60, so at 65 can withdraw the money tax free.

So you perform a rollover at 66, you can take the money out the next year, tax free Woo Who! but you haven't earned much if any, so any tax advantages are moot. So the real advantage is not the tax free withdrawal part, but the exclusion of the RMD, and a longer term compounding period prior to withdrawal. . . so the maximum effectiveness of the conversion is if you can live comfortably on SS and any pension payout and other incomes including smaller RMD such that you recover the taxes paid on the conversion, and gain materially when fixed pension or SS lags behind your living expenses due to inflation. .

That needs an optimization model based up the value of the IRA, maximum SS, optional pension. . and tax rate / portfolio construction of equity / bond returns. .

gives me something to do

[Caymus]

Originally Posted by Janie123

That also includes any Roth 401k money you would rollover to a Roth IRA, not just IRA conversions to the Roth account. It also does not have to do with individual conversions. Say year 1 you convert some money, then year 2, etc. the money converted in year 4 would have a waiting period until Jan 1 of the 5th year, not 5 years unless you open an new Roth account for each conversion which seems like a headache to manage but maybe there are reasons like beneficiaries upon death.???

I have two IRA accounts. One is a Roth which I converted decades ago from a regular IRA. I have added to it over the years when my earned income met the requirements. I also now have a IRA rollover (non Roth).

It appears that if I choose to convert the rollover to a Roth it would be best to open a new account.

Any opinions (besides seeing a CPA)?

[VillageDawg]

My financial advisor says that only the earnings have the five year requirement. The conversion contribution is available at anytime.

[Haggar]

Originally Posted by VillageDawg

My financial advisor says that only the earnings have the five year requirement. The conversion contribution is available at anytime.

The earnings taken out early are subject to a 10% early withdrawal penalty.
If you take out less than the full amount of the Roth balance the proportion of earnings to contribution and earnings is subject to the penalty.

If you made a Roth contribution on 4/18/23 for tax year 2022 the start date counts as 1/1/22 and you could take out a penalty free distribution on 1/1/27

[Shish]

Each Roth Conversion must be treated separately when considering the 5-year rule. The 5 years starts on January 1st in the year of conversion and ends in 5 years from that point. This is true, even if converting into an existing Roth IRA opened 10 years ago.
It is a good idea to open a separate Roth IRA for each conversion in order to easily track your investments and 5 years.

[Boomer]

Looks like there are lots of mixed messages in this thread.

Investopedia has a detailed article titled titled “What is the Roth 5-Year Rule? Withdrawals, Conversions, and Beneficiaries.” — Go forth and find that article if you have questions because according to it, there is a “trio of 5-year rules.” Be sure you understand what those are.

Converting to Roth early in retirement — when income might be lower — but before RMD age — can be a good thing to do.

If you convert young enough, years later, you can tap that money for yourself, tax free. If converting later — I think people do that sometimes for estate purposes.

If you wait to convert until RMD age that might get a little tax heavy on the conversion going into the Roth because you have to pay for the RMD first anyway, so make sure you don’t need the conversion money in your pocket immediately.

And if you do conversions before RMD age, you can lessen your RMD taxes down the road.

Whatever you do, know the official tax rules and do not forget that most advisors are not tax accountants.

Boomer

[Haggar]

Originally Posted by Boomer

Looks like there are lots of mixed messages in this thread.

Investopedia has a detailed article titled titled “What is the Roth 5-Year Rule? Withdrawals, Conversions, and Beneficiaries.” — Go forth and find that article if you have questions because according to it, there is a “trio of 5-year rules.” Be sure you understand what those are.

Converting to Roth early in retirement — when income might be lower — but before RMD age — can be a good thing to do.

If you convert young enough, years later, you can tap that money for yourself, tax free. If converting later — I think people do that sometimes for estate purposes.

If you wait to convert until RMD age that might get a little tax heavy on the conversion going into the Roth because you have to pay for the RMD first anyway, so make sure you don’t need the conversion money in your pocket immediately.

And if you do conversions before RMD age, you can lessen your RMD taxes down the road.

Whatever you do, know the official tax rules and do not forget that most advisors are not tax accountants.

Boomer

As a tax advisor I would second that last thought. Investment advisors I have have worked with know practically nothing about retirement plans or withdrawal requirements or taxability. They're unaware there's a window wherein capital gains may be taxed at a zero rate. They are especially unaware of Qualified Charitable Donations from retirement accounts. They're nice people and they provide services for investors but tax advice should be not be one of them.

[Packer Fan]

Originally Posted by Shish

Each Roth Conversion must be treated separately when considering the 5-year rule. The 5 years starts on January 1st in the year of conversion and ends in 5 years from that point. This is true, even if converting into an existing Roth IRA opened 10 years ago.
It is a good idea to open a separate Roth IRA for each conversion in order to easily track your investments and 5 years.

There are lots of mixed messages here, so let me clarify - the deciding factor is if you are over or under 59 1/2.... the rules change. So both sides are correct, but it depends on what your age is. For conversions done before 59 1/2 there is the whole craziness of track each one etc.
But if you are over 59 1/2, you just have to have an account that is open for 5 years, then withdraw at your whim and there are NO taxes, period

I opened a roth with $100 when I was like 56, so when I start Roth conversions at 65 and roll over my Roth 401K about then, I have no worries about when the conversions were done or anything. To be honest, not sure what the concern would be about conversions - why would you do one if it was not to avoid an RMD later, which means your not going to pull the money anytime soon anyway?

Like I said the confusion is the age. I have done a lot of research on this, there is a lot of confusion, but that is the way it actually is supposed to work. I personally don't think the IRS is going to come after anyone if they are over 59 1/2 anyway.
Ed

[rsmurano]

IMO, The only reason to convert to a Roth is to save money (taxes) when you have to start taking RMDs. Plus, there are good times and there are bad times when to do the conversion.
This is only my opinion and I’m not a cfp or tax guy.

Let me start on the good time to convert: that would have been in 2007/2008 and during the pandemic in 2020, both times (if you were still invested) your holdings were down 35-50% and if you would have did the conversion then (especially in 2020 with the “v” shaped recovery) you would have saved thousands and maybe hundreds of thousands in taxes doing the conversion and then in a matter of a few months (2020) or a few years (2007-2008) your investments would be back to what they were, and then tax free and you paid lower taxes. If you do the conversion now, you are paying higher taxes because the last couple of months the market has gone up. Plus, I think we are heading into a recession later this year so why pay more taxes when the market might be way cheaper months from now?

The other reason why I have held off doing a conversion is because congress has been making changes to ira/401k accounts that favor us oldies, for example, delaying the age to start taking RMDs. Maybe before I’m 73 they will change it again to 75 or so. Also, who knows what the tax rate will be then for seniors? Will it be the same, different, better, worse?
The other drawback doing a conversion is you don’t know what the landscape will look like 5 years from now. The Roth acct will only be worth it if the market grows by a good margin after the conversion so you pay taxes on the lower amount. But what if your money is worth less in 5 years? You paid X amount of taxes in say 2023 at conversion time, do you know for sure you will be better off?
If you don’t need the money from your non-taxable accts, create a Roth account now and when you do need to do an rmd, take that money after paying the taxes and put the rest in the Roth IRA so future gains (if any) will be tax free.

[Pairadocs]

Originally Posted by CoachKandSportsguy

hmmm, that's not the opinion of Schwab nor Fidelity:

link Roth IRA Withdrawal Rules | Withdrawal From Roth IRA | Charles Schwab

Over age 59½
Withdrawals from a Roth IRA you've had less than five years.
If you haven't met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

Withdrawals from a Roth IRA you've had more than five years.
If you've met the five-year holding requirement, you can withdraw money from a Roth IRA with no taxes or penalties.

From the text from schwab, appears that ONLY the roth IRA, even if unfunded, can be withdrawn from after the age of 5 years, regardless of when the conversions were deposited. .

ie, the sooner you open a ROTH IRA, regardless of funding, the earlier you can tax withdrawals without taxes

Wealth advisors vs random internet posters, wealth advisors win

I always get a kick out of the tile "wealth advisors"...LOL ! The information on here is really confusing ! Not sure what "tax withdrawals without taxes" actually means ? And the "rules" from various financial institutions not very clear either !

[dewilson58]

Originally Posted by CoachKandSportsguy

um, needs some clarity please . . oh man of few words

Different rules for a contribution vs. a conversion.

On a conversion, the clock starts when the funds are converted.....not when the account is opened.........if I read your post correctly.

As other poster mentioned: The 5 years starts on January 1st in the year of conversion and ends in 5 years from that point.

[cmkieffer]

Originally Posted by CoachKandSportsguy

According to my Fidelity advisor,

The 5 year Roth IRA contribution - withdrawal clock starts when the account is opened,
even if there is no money in the account. . .

So for anyone who hasn't opened a ROTH ira for for conversions, and that is in your plans, open the ROTH IRA today and get the tax free penalty free clock starting now!

If others have differing opinions from their advisors or tax advisors, would love to hear them to be sure i am not relaying bad information. .

not a CFP guy

It does not matter when you open the Roth. The five year period starts Jan 1 of the year you made the contribution. For example, if you made a contribution on April 18 2023 for 2022, the five year period starts Jan1 2022
Chris Kieffer
Edward Jones FA.

[Stu from NYC]

Originally Posted by CoachKandSportsguy

but from a practicality point of view, for the short opportunity peeps like myself due to salary limitations and matching opportunities, the Rollover IRA gets opened at 60, so at 65 can withdraw the money tax free.

So you perform a rollover at 66, you can take the money out the next year, tax free Woo Who! but you haven't earned much if any, so any tax advantages are moot. So the real advantage is not the tax free withdrawal part, but the exclusion of the RMD, and a longer term compounding period prior to withdrawal. . . so the maximum effectiveness of the conversion is if you can live comfortably on SS and any pension payout and other incomes including smaller RMD such that you recover the taxes paid on the conversion, and gain materially when fixed pension or SS lags behind your living expenses due to inflation. .

That needs an optimization model based up the value of the IRA, maximum SS, optional pension. . and tax rate / portfolio construction of equity / bond returns. .
es
gives me something to do

The problem I have with the roth is the opportunity cost on the funds you are now paying in taxes.

Lets say you want to start Roth with 100k that was in an IRA and then pay out $ 30,000 in taxes so you now have 70,000 invested.

I would rather invest the entire $ 100,000 and enjoy the earnings on the full amount instead of on the 70,000.

The only possible negative to this is if tax rates go up in the future.

[CoachKandSportsguy]

Originally Posted by Packer Fan

There are lots of mixed messages here, so let me clarify - the deciding factor is if you are over or under 59 1/2.... the rules change. So both sides are correct, but it depends on what your age is. For conversions done before 59 1/2 there is the whole craziness of track each one etc.
But if you are over 59 1/2, you just have to have an account that is open for 5 years, then withdraw at your whim and there are NO taxes, period

I opened a roth with $100 when I was like 56, so when I start Roth conversions at 65 and roll over my Roth 401K about then, I have no worries about when the conversions were done or anything. To be honest, not sure what the concern would be about conversions - why would you do one if it was not to avoid an RMD later, which means your not going to pull the money anytime soon anyway?

Like I said the confusion is the age. I have done a lot of research on this, there is a lot of confusion, but that is the way it actually is supposed to work. I personally don't think the IRS is going to come after anyone if they are over 59 1/2 anyway.
Ed

Thanks for your analysis of the difference in ages explanations. . seems that this piece of information is where the differences lie, and where several posters may assume that the rule they were told was based upon their current age or situation. .

since we are over 65, seems the 5 year rule would apply.

So the issue is when to take the income. . and what are you avoiding. . as you are paying taxes now versus in the future.

So by taking 401K now, and not taking social security for a year or two, one is increasing social security basis, and reducing RMD in the future, assuming that you have enough income to support the expenses, without getting hit with excess taxes while taking social security.

[M2inOR]

Originally Posted by Stu from NYC

The problem I have with the roth is the opportunity cost on the funds you are now paying in taxes.

Lets say you want to start Roth with 100k that was in an IRA and then pay out $ 30,000 in taxes so you now have 70,000 invested.

I would rather invest the entire $ 100,000 and enjoy the earnings on the full amount instead of on the 70,000.

The only possible negative to this is if tax rates go up in the future.

I'm going to be 70 this year, and started my Roth conversion planning 3 years ago when I moved to The Villages. Tip to start it from my Fidelity advisor.

After reading many articles, and doing some calculations, I got a 2nd opinion from Craig Wear. His business is to provide you with a multi-year conversion plan for a fixed fee after looking at your entire situation.

A Roth conversion does not make sense for everyone.

Yes, you will pay more in taxes during the conversion. Yes, the yearly process may subject you to IRMAA, raising your Medicare premiums. Yes it will cost you $$$ in the short term.

For me, it made sense in the long term. Wife and I have both significant IRA accounts AND taxable investment accounts. We paid taxes from our taxable accounts so full amount of IRA converted to Roth were maintained.

We've not taken Social Security yet. I just applied for benefits to start this year; wife will do it next year. Meanwhile, got 8% increase per year plus cost of living increases since deferring taking benefits.

The trigger for us was when we learned RMDs would be significant for us.

Finally, we have enough to live on well into our 90s. Our children and grand children will benefit from this conversion as they will get this money tax-free when we are gone from this earth.

Advice: read the regulations, and hire a conversion expert to make a plan for you.