Interesting tidbit from the Fidelity Advisor
 

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

I'm missing something, all Roth withdrawal are tax free, regardless when they are taken. By definition a Roth is funded with after tax funds.

He’s talking about money transferred from an IRA into a Roth to make it tax free. You pay taxes on the money coming out of the IRA. There is a five year waiting period before you can touch those Roth funds. He wants to determine when that five year window starts. Is when you open the Roth or when you start to fund it.

Perhaps he meant to say ROTH “conversion” from an IRA account. Each conversion starts a new 5-year clock.
For Roth contributions (still working), you have immediate access.

My bad. The OP said conversion. Each has a 5-year wait.

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From the text from schwab, appears that ONLY the roth IRA, even if unfunded, can be withdrawn from after the age of 5 years, regardless of when the conversions were deposited.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

Even Michael Whitaker?:1rotfl:

I don't remember seeing a TOTV poster named michael whitaker??

Now what am i missing?

5 years comes fast !

The ROTH has to be open for 5 years before the gains can come out tax free

The 5-year rule on Roth conversions requires you to wait five years before withdrawing any converted balances — contributions or earnings — regardless of your age. If you take money out before the five years is up, you'll have to pay a 10% penalty when you file your tax return.

One bright spot: The clock starts ticking on the first day of the year you do the conversion, no matter what date the conversion actually happened. For example, you could execute the conversion on Dec. 15, 2020, and the five years would be up on Jan. 1, 2025.

Roth IRA 5-year Rule and Important Guidelines for Withdrawals

Two different things...................different rules.

My understand you must be working to contribute to a Roth IRA and you are limited on the amount you contribute. Wish it was different

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.???

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

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

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)?

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

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.

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.

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

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.

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 !

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.

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.

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.

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.

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.

I have a "mental block" trying to avoid IRMMA surcharges which I need to resolve. Maybe I will need a Psychoanalyst for that instead of a CFA or CPA. :jester:.

I added Craig Wear's Podcast to my list.

Re:IRMAA

Better to pay now, as with Washington, there's never enough. More will be needed in the coming years. Medicare premiums will increase, even without IRMAA. IRMAA will also increase.

With tax-free withdrawals from Roth accounts from principle and growth in the future, my plan is to worry less about the future increases.

At Kindle and Kindle Unlimited there is a helpful book from Craig Wear that helps overcome the psychological block.

If you are making Roth conversions it should be long term anyway, so not sure why people obsess about this.

That said, I HIGHLY recommend listening to this Podcast-
The Retirement and IRA Show with Jim Saulnier and Chris Stein. It is highly entertaining and informative. One of the best podcasts out there. If you look back they have whole episodes on this subject.

Caymus,

I hearya.

Hello my name is Boomer — once burned. I learned.

You do not need a psychoanalyst, but I understand your angst about IRMAA. I doubt you need the advice I am about to write, but that’s OK. I feel like writing it anyway. (Confession: Avoiding work I should be doing instead.)

(Please note that my use of ‘you’ in the following info does not mean I am addressing Caymus alone — who probably already knows all this stuff. It’s just the easiest general form of address in informal writing.)

Anyway, here goes:

IRMAA’s thresholds are wicked traps, either/or. Once the taxable income crosses one of those thresholds, by even a small amount, IRMAA is gonna getcha — 2 years later.

That is one reason why it can be a good idea to do conversions to Roth along the way. There might be a sweet spot to be found…….after retirement but before Medicare age or before RMD age, especially if immediate post-retirement income drops.

Once RMD age arrives, it might be a good idea to start projecting taxable income early in the year, in case you might want to head off IRMAA. Try to think of everything that has changed during the year……

Did you get…..

The SS increase?

Dividend increases on stocks held in taxable accounts?

And, now, for the first time in years, more significant interest on CDs and/or money markets in taxable accounts?

Did you sell a primary residence (that you had lived in for at least 2 years) for a huge gain, part of which exceeded a clear profit above the exclusions of $250,000/$500,000? (Always keep records of improvements to close that gap if you ever need to. This can be especially important if selling a secondary residence, which will not have those rather generous exclusions on any gain.)

Did you capture a gain by selling a stock held in a taxable account?………

(That’s the one that got me. I had never heard of IRMAA. That gain I grabbed was very nice, until…..the letter arrived, 2 years later……..

And that was what turned me into some kind of evangelist blathering about how to dodge IRMAA.)

If IRMAA is looming and you owe the RMD and want to avoid the Medicare premium increase, you can decide to give the income that exceeds an IRMAA threshold to a qualified charity in the form of a QCD. (Qualified Charitable Deduction)

Just be sure to follow all the rules and keep good records. The amount you give away with a QCD does not get added into taxable income.

For those at RMD age and who have always been charitably inclined, but now use the standard deduction since the tax law changes did away with the old way of handling charitable contributions, the QCD can be especially important to know about…….

But remember that the QCD does not apply to donor-advised funds. (I wonder how much this has affected contributions to donor-advised funds. My guess is there is lobbying going on to include them.)

Sooo, there you have all I know about avoiding IRMAA. At RMD age, the decision could boil down to giving the money to the devil you know, aka, the government, or giving it to a qualified charity of your choice.

That’s all I got on this. I will check back in to see if I have been corrected because although I have some letters I could put after my name, they have nothing to do with financial stuff.

Boomer

PS: Almost forgot to say that I am pretty sure married filing separately cannot avoid IRMAA. Does not seem fair. Heaps insult upon injury. Maybe I am wrong about this. Somebody here will correct me if I am wrong about any of it. I thank that person in advance.

Yes, there is help for those filing separately or as a single:

IRMAA 2023 for Medicare Part D and Part B | Humana

Yes, I know that filing jointly gives more leeway in overall income before both of you get hit by IRMAA.

But somewhere along the line, I picked up the idea that if the income that is throwing you over the line is in one name only, IRMAA will drag both of you across the threshold anyway. (I hope I am wrong about that. But I am not so sure I am.)

Maybe there is somebody here who knows for sure and will tell us.

That 2 year lookback comes with assumptions as to what the IRMAA thresholds will be in 2025 based on 2023 income.

I used to do conversions to Roth -- should have done more. My accountant asked me why I wanted to pay my kids' taxes. I told him maybe I was saving the money for me to tap for me, later in life, tax free. I really liked my old accountant, but in that case, I thought he was being a bit myopic.

Boomer

Boomer, that chart does indicate thresholds for single filers as well as couples filing separately.

The thresholds are lower, and may still help some people.

Unfortunately, federal tax rates might be more costly to those single and separate filers.

TurboTax could help some figure out what's better.

Unfortunately, math and problem solving are required.

I think I am not communicating my specific question clearly.

If one spouse brings in significantly more income than the other…..

……and both are on Medicare…..

……and their joint income exceeds IRMAA….

both have to pay the higher premium.

Therefore…..

it just seems reasonable that married filing separately could avoid the higher premium for the lower income spouse — if that spouse is under the IRMAA threshold but the other spouse is over.

I realize that the operative word in that question is ‘reasonable’ and married filing separately usually does not help — in general, so the numbers have to be run both ways………and we pay a CPA to do that.

(When I drop the stuff off at the accountant’s office, I know they must love how I do things. Everything they need is there, and it’s all numbered and cross-referenced. I know they have clients who drop off shoeboxes full of papers. But that’s not me.)

Could I handle Turbo Tax? Of course. But I don’t want to. Besides, I want that CPA’s signature.

Anyway, about my specific question above — I am even confusing Google with it. Although I have learned other interesting tax facts from my search, I cannot make “The Google” talk about this one. (And, btw, I taught research technique — back in the prehistoric era when Google wanted the Boolean search method. I also taught how to recognize legitimate sources for information.) (sigh)

Oh well, my question is actually a product of my tendency to think too much. And, for now, it’s moot anyway.

Thanks for trying to help though. :)

Boomer.

The way I interpreted things was that SSA bases IRMAA based on income of the IRS tax filer, by their social security number.

That return wouldn't necessarily show the joint income, of income sources were categorized and identified separately.

That joint income complicates things, though I have seen people set up income accounts separately instead of jointly. If done with diligence it could work.

Yes our tax and benefit systems aren't simple.

I would find it difficult to separate our accounts do to income from our joint, taxable accounts.

I have been listening to them for a few months now. As you wrote they are very informative and appear to give honest answers. I may consider becoming a client if they open to new customers.