Author Topic: Roth conversion  (Read 404 times)

Catica

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Roth conversion
« on: June 11, 2019, 09:25:41 PM »
I know that to minimize taxes on money converted from tIRA to Roth and to have them accessible before 59.5 and not pay penalty one should do it when they retire early since most likely one will be in a low tax bracket and the money will be accessible in 5 years (or 4 years and 1 day).  I was just looking over my taxes from last year and I'm in a very low tax bracket already (paying taxes on $20000 after standard deduction).  I'm not sure if my income will be lower in my early retirement. I'm wondering if I should start converting the money now (assuming that my income this year will be similar).  Is there something I'm overlooking?

seattlecyclone

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Re: Roth conversion
« Reply #1 on: June 12, 2019, 12:27:28 AM »
In general I'd say it's likely that your income will be lower in retirement because right now you're earning enough to pay your bills and save for retirement, while once you're retired you don't need to be saving for retirement anymore. Furthermore if you go into retirement with some of your savings in a taxable account or a Roth account, some portion of your withdrawals won't even count as income. So while you're working you'll often have an income higher than expenses, it's quite possible for your income during retirement to be lower than your expenses.

That said, a $20k taxable income isn't all that high. I think it's relatively likely that you might end up in the same tax bracket during retirement that you're in now. If this is the case, you could benefit from some tax diversification: if you have all your savings in traditional retirement accounts, maybe consider contributing to Roth next year at least up to the top of your current tax bracket.

Catica

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Re: Roth conversion
« Reply #2 on: June 12, 2019, 03:42:48 AM »
In general I'd say it's likely that your income will be lower in retirement because right now you're earning enough to pay your bills and save for retirement, while once you're retired you don't need to be saving for retirement anymore. Furthermore if you go into retirement with some of your savings in a taxable account or a Roth account, some portion of your withdrawals won't even count as income. So while you're working you'll often have an income higher than expenses, it's quite possible for your income during retirement to be lower than your expenses.

That said, a $20k taxable income isn't all that high. I think it's relatively likely that you might end up in the same tax bracket during retirement that you're in now. If this is the case, you could benefit from some tax diversification: if you have all your savings in traditional retirement accounts, maybe consider contributing to Roth next year at least up to the top of your current tax bracket.
Thank you.  One thing I don't know is this.  The money that I convert from tIRA to Roth over the 5 year period, is the whole amount accessible after 5 years before I reach 59.5 without penalty or only what I put it and not the interest?

EvenSteven

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Re: Roth conversion
« Reply #3 on: June 12, 2019, 09:57:06 AM »
In general I'd say it's likely that your income will be lower in retirement because right now you're earning enough to pay your bills and save for retirement, while once you're retired you don't need to be saving for retirement anymore. Furthermore if you go into retirement with some of your savings in a taxable account or a Roth account, some portion of your withdrawals won't even count as income. So while you're working you'll often have an income higher than expenses, it's quite possible for your income during retirement to be lower than your expenses.

That said, a $20k taxable income isn't all that high. I think it's relatively likely that you might end up in the same tax bracket during retirement that you're in now. If this is the case, you could benefit from some tax diversification: if you have all your savings in traditional retirement accounts, maybe consider contributing to Roth next year at least up to the top of your current tax bracket.
Thank you.  One thing I don't know is this.  The money that I convert from tIRA to Roth over the 5 year period, is the whole amount accessible after 5 years before I reach 59.5 without penalty or only what I put it and not the interest?

Only the amount you roll over will be penalty free. Any gains on the roll over amount will need to stay in the Roth until you can make qualified withdrawals to avoid penalty.

Catica

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Re: Roth conversion
« Reply #4 on: June 12, 2019, 11:00:14 AM »
In general I'd say it's likely that your income will be lower in retirement because right now you're earning enough to pay your bills and save for retirement, while once you're retired you don't need to be saving for retirement anymore. Furthermore if you go into retirement with some of your savings in a taxable account or a Roth account, some portion of your withdrawals won't even count as income. So while you're working you'll often have an income higher than expenses, it's quite possible for your income during retirement to be lower than your expenses.

That said, a $20k taxable income isn't all that high. I think it's relatively likely that you might end up in the same tax bracket during retirement that you're in now. If this is the case, you could benefit from some tax diversification: if you have all your savings in traditional retirement accounts, maybe consider contributing to Roth next year at least up to the top of your current tax bracket.
Thank you.  One thing I don't know is this.  The money that I convert from tIRA to Roth over the 5 year period, is the whole amount accessible after 5 years before I reach 59.5 without penalty or only what I put it and not the interest?

Only the amount you roll over will be penalty free. Any gains on the roll over amount will need to stay in the Roth until you can make qualified withdrawals to avoid penalty.
So all the interest I got in my tIRA once rolled over will be accessible to me penalty free if I withdraw that before 59.5.  In other words, my tIRA has been accruing interest for the past 10 years and let's say I roll over the entire tIRA to Roth, I'm able to withdraw my tIRA principal and interest penalty free, right?

bacchi

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Re: Roth conversion
« Reply #5 on: June 12, 2019, 11:03:56 AM »
In general I'd say it's likely that your income will be lower in retirement because right now you're earning enough to pay your bills and save for retirement, while once you're retired you don't need to be saving for retirement anymore. Furthermore if you go into retirement with some of your savings in a taxable account or a Roth account, some portion of your withdrawals won't even count as income. So while you're working you'll often have an income higher than expenses, it's quite possible for your income during retirement to be lower than your expenses.

That said, a $20k taxable income isn't all that high. I think it's relatively likely that you might end up in the same tax bracket during retirement that you're in now. If this is the case, you could benefit from some tax diversification: if you have all your savings in traditional retirement accounts, maybe consider contributing to Roth next year at least up to the top of your current tax bracket.
Thank you.  One thing I don't know is this.  The money that I convert from tIRA to Roth over the 5 year period, is the whole amount accessible after 5 years before I reach 59.5 without penalty or only what I put it and not the interest?

Only the amount you roll over will be penalty free. Any gains on the roll over amount will need to stay in the Roth until you can make qualified withdrawals to avoid penalty.
So all the interest I got in my tIRA once rolled over will be accessible to me penalty free if I withdraw that before 59.5.  In other words, my tIRA has been accruing interest for the past 10 years and let's say I roll over the entire tIRA to Roth, I'm able to withdraw my tIRA principal and interest penalty free, right?

The amount you convert, which is the same amount that shows up on the form the broker sends you, is considered a contribution with a 5 year "vesting" period.

EvenSteven

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Re: Roth conversion
« Reply #6 on: June 12, 2019, 11:07:28 AM »
In general I'd say it's likely that your income will be lower in retirement because right now you're earning enough to pay your bills and save for retirement, while once you're retired you don't need to be saving for retirement anymore. Furthermore if you go into retirement with some of your savings in a taxable account or a Roth account, some portion of your withdrawals won't even count as income. So while you're working you'll often have an income higher than expenses, it's quite possible for your income during retirement to be lower than your expenses.

That said, a $20k taxable income isn't all that high. I think it's relatively likely that you might end up in the same tax bracket during retirement that you're in now. If this is the case, you could benefit from some tax diversification: if you have all your savings in traditional retirement accounts, maybe consider contributing to Roth next year at least up to the top of your current tax bracket.
Thank you.  One thing I don't know is this.  The money that I convert from tIRA to Roth over the 5 year period, is the whole amount accessible after 5 years before I reach 59.5 without penalty or only what I put it and not the interest?

Only the amount you roll over will be penalty free. Any gains on the roll over amount will need to stay in the Roth until you can make qualified withdrawals to avoid penalty.
So all the interest I got in my tIRA once rolled over will be accessible to me penalty free if I withdraw that before 59.5.  In other words, my tIRA has been accruing interest for the past 10 years and let's say I roll over the entire tIRA to Roth, I'm able to withdraw my tIRA principal and interest penalty free, right?

I should have said "convert" rather than roll over previously. If you convert all the tIRA (both contributions and earnings), you will be able to withdraw the amount converted penalty and tax free after 5 years. Be aware though that the amount you convert will show up as income and be taxed in the year you convert it.

Catica

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Re: Roth conversion
« Reply #7 on: June 12, 2019, 06:11:41 PM »
In general I'd say it's likely that your income will be lower in retirement because right now you're earning enough to pay your bills and save for retirement, while once you're retired you don't need to be saving for retirement anymore. Furthermore if you go into retirement with some of your savings in a taxable account or a Roth account, some portion of your withdrawals won't even count as income. So while you're working you'll often have an income higher than expenses, it's quite possible for your income during retirement to be lower than your expenses.

That said, a $20k taxable income isn't all that high. I think it's relatively likely that you might end up in the same tax bracket during retirement that you're in now. If this is the case, you could benefit from some tax diversification: if you have all your savings in traditional retirement accounts, maybe consider contributing to Roth next year at least up to the top of your current tax bracket.
Thank you.  One thing I don't know is this.  The money that I convert from tIRA to Roth over the 5 year period, is the whole amount accessible after 5 years before I reach 59.5 without penalty or only what I put it and not the interest?

Only the amount you roll over will be penalty free. Any gains on the roll over amount will need to stay in the Roth until you can make qualified withdrawals to avoid penalty.
So all the interest I got in my tIRA once rolled over will be accessible to me penalty free if I withdraw that before 59.5.  In other words, my tIRA has been accruing interest for the past 10 years and let's say I roll over the entire tIRA to Roth, I'm able to withdraw my tIRA principal and interest penalty free, right?

I should have said "convert" rather than roll over previously. If you convert all the tIRA (both contributions and earnings), you will be able to withdraw the amount converted penalty and tax free after 5 years. Be aware though that the amount you convert will show up as income and be taxed in the year you convert it.
Yes, that's why I'm asking if it would make sense to do it now since my taxable income is low and I don't need that money so I wouldn't care that it takes 5years, but then seattlecyclone makes a good point that in early retirement my income might even be lower and I should just open Roth and contribute to it instead up to the top of the tax bracket I'm in now.
« Last Edit: June 13, 2019, 01:38:05 AM by Catica »