[Bill14564]

Originally Posted by Pballer

I’m 65 and Just Did a Roth IRA Conversion to Avoid RMDs. Does the 5-Year Rule Apply to Me?

That article contradicts this article from the same source which includes the paragraph (emphasis added):

Additionally, tax laws dictate that you must hold your Roth IRA for five years and be age 59½ to avoid the 10% penalty on withdrawing earnings and conversions.

So, you will need to meet both the age and holding period requirements to avoid withdrawal penalties.

But, the IRS can also waive these requirements if you meet the criteria for an exception.

EDIT: Other sources also claim an exception from penalties if you are over 59 1/2 but any earnings would be subject to income tax.

[jimbomaybe]

Originally Posted by Bill14564

That article contradicts this article from the same source which includes the paragraph (emphasis added):[INDENT]Additionally, tax laws dictate that you must hold your Roth IRA for five years and be age 59½ to avoid the 10% penalty on withdrawing earnings and conversions.

So, you will need to meet both the age and holding period requirements to avoid withdrawal penalties.

But, the IRS can also waive these requirements if you meet the criteria for an exception. [/INDENT




EDIT: Other sources also claim an exception to the 5-year rule on conversions if you are over 59 1/2.

From Kiplinger article.
Scenario 3: You did a partial Roth IRA conversion in 2015. You did a second partial Roth IRA conversion in 2021, when you were age 67. In 2024, you take a distribution from your Roth IRA. You will not be taxed on the distributed earnings because it's been more than five years since you first deposited money into any IRA (through the first conversion).
I think having opened any Roth IRA previously that would comply with the 5 year rule and being over 59 1/2 would give you tax free access to the Roth IRA ?
unless less I misunderstood the people I have talked this is the case, at some point someone with professional standing will comment.

[Plinker]

Originally Posted by Bill14564

The original looks correct to me. If you contribute wages to a Roth then those can be withdrawn any time. If you convert an IRA to a Roth then the waiting period applies. And, as stated, it appears that each conversion starts its own waiting period.

Yes. People often get confused over the 5 year wait after a conversion. You can’t take the original principal from a conversion because there is no principal that was deposited that was previously taxed. The entire traditional IRA amount has never been taxed. You already took a tax deduction when you contributed to it. Like it or not, you will start a new wait period on the entire converted amount. You can shorten the wait substantially by converting in December.

[Plinker]

This is from Fidelity -

“The Internal Revenue Service (IRS) requires a waiting period of 5 years before withdrawing balances converted from a traditional IRA to a Roth IRA, or you may pay a 10% early withdrawal penalty on the conversion amount in addition to the income taxes you pay in the tax year of your conversion. (There is an exception to the penalty for withdrawals if you are age 59½ or older.)

But the clock starts on January 1 of the year you do the conversion—no matter when during the year it happened. So if you converted in December, the aging requirement might, in practice, be only a bit more than 4 years.

Important to know: The 5-year rule is counted separately for each conversion. The same rules apply to so-called backdoor Roth IRA conversions.”

The exceptions mentioned will likely not affect the majority of retirees but could in select instances. You will still be on the hook for a 10% penalty, regardless of age.

[petsetc]

I have previously done much conversions. My two comments are 1) do the conversions before you start drawing SS and 2) if you think you will need to withdraw the money of the most recent conversion before 5 yrs, you shouldn't be doing it at all.

JMHO

[elevatorman]

Originally Posted by Laker14

I'm mulling over the idea of making some substantial Roth conversions from my regular IRA account.

Other than a couple of homes, one in TV and one on a lake in NY, all of my money is in IRAs. I'm 71, and with the amount in my IRAs, and my yearly draw, I am in a comfortable position, UNLESS...where my plan gets shaky is if I or my wife live into our mid-90s (we have some history of long life-spans as well as some history of early demise, so it's a crap shoot), and we have all of our money in IRAs, we could get into some very heavy RMD years, with exorbitant tax rates, and serious depletion of our wealth.

So, it seems to me that Roth conversions over the. next 10 years could be a good hedge against that. From my calculations, somewhere in the 4 or 5 year range would be the break-even point. After that it's a clear win.

From what I've researched, the immediate costs would be obviously, more income tax now, and a bump in our Medicare premiums. Factoring those in, we get the tax back later when we withdraw the Roth money tax-free, and at the pace required of our lifestyles, not at a pace dictated by the IRS.

Furthermore, there is a very good chance that only one of us would survive into such an old age, and the survivor would be taxed at the Single rate, which would be even more of a burden.

As long as I am certain (and I'm as certain as I can be) that we won't need to tap the Roth IRA for 10 years, this seems like a no-brainer.

I'm interested in the opinions of others who may have done this, or are considering doing this, and what their thought processes are.

This is what Chat GPT says
Your reasoning for considering Roth conversions makes a lot of sense, especially given your situation and the potential future tax implications. Here are some points to think about as you weigh your options:

Tax Bracket Considerations: Converting to Roth IRAs now could help you lock in your current tax rate rather than face potentially higher rates in the future, especially during RMD years. If you anticipate your income will remain steady, it might be beneficial to convert portions of your IRA over several years, ideally staying within lower tax brackets.
Medicare Premiums: As you mentioned, higher income from conversions can lead to increased Medicare premiums (IRMAA). It’s important to factor in these costs when determining how much to convert each year.
Longevity Risk: Given your family's history, planning for a longer life is prudent. A Roth IRA could provide tax-free income in your later years, helping to preserve your wealth and maintain your lifestyle.
Estate Planning: If you plan to leave assets to heirs, Roth IRAs can be advantageous since beneficiaries can take tax-free withdrawals. This could be a strategic move if you have significant IRA balances.
Withdrawal Flexibility: With Roth IRAs, you have more control over your withdrawals. This flexibility can be beneficial in managing your taxable income in retirement.
Gradual Conversions: To minimize tax impacts, consider converting smaller amounts each year rather than a large lump sum. This can help you manage your tax bracket effectively.
Consulting a Professional: Given the complexity of tax implications, it might be beneficial to consult with a financial advisor or tax professional who can help tailor a strategy based on your specific financial situation and long-term goals.
It sounds like you're on the right track with your analysis, and careful planning now could lead to significant benefits later on.

[Haggar]

So many possibilities - my clients frequently ask me the same question. No one answer. What's your age? Your spouse's age? Your health condition? What's your investment philosophy? What are your needs for money? Who are the beneficiaries of your plan? What tax bracket are you in? What bracket will you be in when you take the distributions? What do you think the growth rate of your investments will be? Do you realize that you may need to fund the taxes when you convert? And more - talk to a professional about this before you do anything.

Here's one idea - taking your RMD and invest in tax free municipals. No tax on the income and no five year waiting period.
Don't forget about Qualified Charities Donations to take money out of your retirement plan instead of making donations directly from your personal funds.

[opinionist]

I gradually converted about half of my IRA into a Roth IRA when I was working and could afford the extra tax burden.
My Roth IRA was unallocated physical gold and silver in the Perth Mint with no storage fees.
I have no regrets, as inflation sucks the wealth out of dollar-denominated assets.
The manipulation of gold/silver prices in the futures market will soon come to an end with a failure to deliver.

[rsmurano]

I don’t get it, people doing the conversion so they don’t have RMDs! How does this make sense? Instead of withdrawing a small portion of your nest egg with your portfolio at its highest value, you would rather pay high taxes now and then decrease your portfolio drastically to pay taxes, now you are making much less every year because your investment value has decreased greatly.
Also remember, when you withdraw an RMD, most of this money is available for you to spend or reinvest, you are only paying taxes on this RMD amount.
1 more thing, when you hire an advisor to ask for his/her advice on doing a conversion, or if you are making the decision yourself, what is the hypothetical rate of return are you using? If you are comfortable in your investing and don’t want to take a little risk, you are probably happy with 4-5%, then I wouldn’t convert because you will never recover your loss in the taxes you paid. My hypothetical rate of return is over 20+%, I would be able to overcome the deduction in taxes in gains over the long haul, and I still don’t think it’s smart for me to do this.

[M2inOR]

Math is involved as was mentioned earlier.

A conversion is NOT for everyone.

For me, the RMDs added to our SS benefits provided more annual income than what we needed. We would have been placed into a higher tax bracket, so for us, it was a wash.

If we placed the extra money in a taxable account to grow, we would have to pay taxes on that growth, and who knows what future taxes would be on capital gains or interest income.

So, for some, pay the taxes now, and let that money grow tax free.

Every situation is different. Yes, knowledge of tax preparation and taxes is important. And yes, there are guides to help you determine whether it makes sense for your particular situation.

Math skills and reading are required.

[retiredguy123]

I have never used my traditional IRA money to invest in stocks because you lose the lower tax advantage of capital gains. So, I have always maintained two accounts, taxable money in stocks and tax deferred IRA money in bonds. All tax deferred money that you withdraw from a traditional IRA is taxed as ordinary income. These facts should be considered when evaluating a Roth conversion.

[Laker14]

I just want to say thank you for all of the responses. I haven't read them all yet, and haven't responded because I am currently on the road from NY to TV. I will read them all when I can.

Laker

[dewilson58]

Originally Posted by Laker14

I just want to say thank you for all of the responses. I haven't read them all yet, and haven't responded because I am currently on the road from NY to TV. I will read them all when I can.

Laker

Good Luck.

[Laker14]

Originally Posted by Plinker

Don’t forget, you will not be able to access the converted ROTH money for a period between 4 years plus one day to 5 years, depending on what date you do the conversion. Regardless of the date of your conversion, the IRS starts counting the 5 year wait on January 1st of the year of conversion. So, a conversion on July 1st has a 4 1/2 year wait while a December 31st conversion only waits 4 years plus one day. Consider waiting until mid-December to convert. Each conversion starts a new wait period.

Question about the waiting period: Say someone were to convert 100K/ year for 5 years.
In year 6 would the money converted in year 1 be available? I knew about the 5 year wait, but it isn't clear to me if every conversion freezes ALL of the money in the Roth IRA, or only the money converted over the last 5 year period.

EDIT: I knew I should have read ALL of the responses before I asked any specific questions, but I was afraid I'd forget to ask this one. Now that I've read ALL of the responses, I'm still unsure what the answer is, as there is disagreement. Which is, of course, why I will be doing further research and consulting a pro (fee based, not commission based), and reading the Craig Wear information (thanks for the tip!).

[Laker14]

Originally Posted by dewilson58

Good Luck.

Thanks.
I consider this one of those "good problems to have".