Pre 59 1/2 Roth IRA withdrawals

[TravelStache]

I wanted to double check my understanding of the pre 59 ½ Roth IRA conversion withdrawal by way of example. 

I am currently 34 and my wife and I each plan to contribute $5,500 to traditional IRAs this year and then convert them to Roth IRAs.  We plan to continue to do this until we are 50 years old.  At age 50, after 17 years of converting $11,000 per year, we would be able to withdraw a total of $132,000 (the 12 years of conversions that have met the 5-year rule) tax free and without a penalty.  We would have an additional $11,000 per year added to that amount as the additional conversions met the 5-year rule. 

To the extent that we withdrew over that amount it would be (1) subject to the 10% penalty if it was a conversion that did not meet the 5-year and then (2) subject to income tax and the 10% penalty if it was gains earned on the conversions. 

Am I missing anything?  As a side note, we both currently max out our 401(k)s and HSAs.

[RWD]

I wanted to double check my understanding of the pre 59 ½ Roth IRA conversion withdrawal by way of example. 

I am currently 34 and my wife and I each plan to contribute $5,500 to traditional IRAs this year and then convert them to Roth IRAs.  We plan to continue to do this until we are 50 years old.  At age 50, after 17 years of converting $11,000 per year, we would be able to withdraw a total of $132,000 (the 12 years of conversions that have met the 5-year rule) tax free and without a penalty.  We would have an additional $11,000 per year added to that amount as the additional conversions met the 5-year rule. 

To the extent that we withdrew over that amount it would be (1) subject to the 10% penalty if it was a conversion that did not meet the 5-year and then (2) subject to income tax and the 10% penalty if it was gains earned on the conversions. 

Am I missing anything?  As a side note, we both currently max out our 401(k)s and HSAs.

If you're planning on converting to Roth IRA immediately after contributing (correct me if I'm misunderstanding) isn't that the same as just contributing to a Roth IRA directly? And if you contributed directly you wouldn't have the five year waiting period either. If you did it that way you would have $187k available to withdraw at age 50 without any worry of over withdrawals.

Usually you would want to start Roth IRA conversions after you retire because then the income tax is much lower. Have you read this article?

[TravelStache]

RWD, thanks for the link to the article.  We are fortunate to be high earners, which prevents us from being able to contribute directly to a Roth IRA, thus the need to fund a traditional IRA and then convert to a Roth IRA.  By converting to Roth right after we fund the traditional IRA, we avoid creating any gain that would be subject to tax.

[RWD]

I was under the impression that the income limits are even lower for traditional IRAs than for Roth IRAs, at least if you have a 401k available:
https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2016-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work
https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2016

[Cromacster]

I was under the impression that the income limits are even lower for traditional IRAs than for Roth IRAs, at least if you have a 401k available:

You can contribute to a non deductible IRA and convert it to a Roth.  It doesn't make any sense and I thought I remember reading they will be closing this loophole.

[RWD]

You might want to look into using an after-tax 401k. I believe they recently changed the rules with these such that you can roll them over into a Roth IRA:
https://www.irs.gov/Retirement-Plans/Rollovers-of-After-Tax-Contributions-in-Retirement-Plans

[MDM]

Am I missing anything?

No, not according to current laws.

How the laws might change is a separate issue.

See https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ and http://www.nasdaq.com/article/kitces-new-tax-legislation-set-to-reinstate-most-extenders-permanently-cm556381 for more on both of the above issues.