Author Topic: Transfer ROTH Contributions To Taxable Account??  (Read 1297 times)

coreyP

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Transfer ROTH Contributions To Taxable Account??
« on: May 25, 2018, 08:48:50 PM »
Pardon me if this is an ignorant question.. Does it make any sense to withdraw the contributions from your ROTH(currently have 20k of contributions before I was on my path to FI) and transfer them to my taxable account, with the idea that you grow and have access to your gains? As opposed to having them locked up until you are of "retirement" age?

Please share your thoughts and opinions!

Kind regards

Corey

themagicman

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #1 on: May 25, 2018, 09:16:11 PM »
I just did this. My reasoning was with my current tax bracket I have most of the benefit of a Roth IRA in my taxable account and that if I had that 30k back now and could contribute it all to a Roth I wouldn't and would put it in taxable so by not withdrawing it I am essentially doing that.

MrUpwardlyMobile

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #2 on: May 25, 2018, 09:19:36 PM »
Pardon me if this is an ignorant question.. Does it make any sense to withdraw the contributions from your ROTH(currently have 20k of contributions before I was on my path to FI) and transfer them to my taxable account, with the idea that you grow and have access to your gains? As opposed to having them locked up until you are of "retirement" age?

Please share your thoughts and opinions!

Kind regards

Corey

Im not aware of any mathematically sound reason for transferring Roth funds to a taxable account during the accumulation phase.

MDM

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #3 on: May 25, 2018, 10:11:38 PM »
Pardon me if this is an ignorant question.. Does it make any sense to withdraw the contributions from your ROTH(currently have 20k of contributions before I was on my path to FI) and transfer them to my taxable account, with the idea that you grow and have access to your gains? As opposed to having them locked up until you are of "retirement" age?
In short, "no".

But just in case: in what scenario do you imagine a need to withdraw Roth earnings before age 59.5?

MustacheAndaHalf

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #4 on: May 26, 2018, 10:13:52 AM »
By removing Roth IRA money you don't need, you are volunteering for additional taxes.

First there's the immediate taxes on dividends and capital gains.  Each year you will pay tax on those dividends - but inside a Roth IRA, you owe no tax.

When you need money from a mutual fund, you sell it.  Outside an IRA, selling requires you pay tax on the growth.  But inside a Roth IRA, you owe no tax.

Why not wait until you need the money, and then withdraw only what you need?

themagicman

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #5 on: May 26, 2018, 11:42:08 AM »
My reasons for doing this were (YMMV)

1. Leaving the Roth money in my account would estimate to have over $220k of gains by the time I was 59.5 I would not be able to withdraw any of that money prior to that and could cause me to have to withdraw more from my traditional money and could cause me to be in a higher tax bracket then I needed to be.

2. If you are married and make less then $101k then your capital gains and dividends are already taxed at 0% so the only benefit of the Roth would be the same in the taxable account in this situation (you would need to look at your state tax rates to make sure they were not too high to be a material amount)*

3. With a taxable account, you can tax loss harvest which will save you additional taxes and can make it more tax efficient than the roth (you can also tax gain harvest to lock in your 0% rates now)

4. I am not real confident that the government will not start taxing withdraws from Roth IRA's sometime down the line as well.



- I think if you are not able to fully max out your 401k or traditional IRA one year then this is a no-brainer to take the contributions and put it into your 401k/trad IRA

And if you need the gains as well, I suppose you could just pay the 10% (penalty) tax.  Its still lower than the 15% long term capital gains rate.

To withdraw this you would have to pay the 10% penalty plus your tax rate even though it is Roth money.



* You would need to be investing in stocks. This would change if you do not have enough space for your bond allocation.

shinn497

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #6 on: May 26, 2018, 12:37:53 PM »
the magicman, those are all excellent reasons and follow closely to some of the things that madfientist suggest. However, do you never see your future income increasing to the point where you would be subjected to capital gains?


That is my only issue with eschewing the roth. The benefit assumes a lower income in retirement.

themagicman

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #7 on: May 26, 2018, 12:40:43 PM »
the magicman, those are all excellent reasons and follow closely to some of the things that madfientist suggest. However, do you never see your future income increasing to the point where you would be subjected to capital gains?


That is my only issue with eschewing the roth. The benefit assumes a lower income in retirement.

I definitely do not see it going over that amount in retirement. (We are planning to spend around $30k a year so would be nowhere close to the 100k point)
Leading up to retirement, I could but I think that it is unlikely. We are getting pretty close to being FIRE so I would not expect that high of a raise in the meantime.

seattlecyclone

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #8 on: May 26, 2018, 01:40:52 PM »
My reasons for doing this were (YMMV)

1. Leaving the Roth money in my account would estimate to have over $220k of gains by the time I was 59.5 I would not be able to withdraw any of that money prior to that and could cause me to have to withdraw more from my traditional money and could cause me to be in a higher tax bracket then I needed to be.

My reasoning for preferring Roth over taxable is that if I find myself in a situation where I have spent down all my traditional accounts and Roth contributions and HSA and taxable funds prior to age 59, and all I have left is Roth earnings, something has already gone horribly wrong with my spending earlier on in retirement. What are the odds that this $220k of Roth earnings will be enough all on its own for the rest of your life after 59? Maybe it will work out if you have a pension coming in besides your savings.

Quote
2. If you are married and make less then $101k then your capital gains and dividends are already taxed at 0% so the only benefit of the Roth would be the same in the taxable account in this situation (you would need to look at your state tax rates to make sure they were not too high to be a material amount)*

The 0% capital gains rate has only existed for about a decade. I view an increase in this rate to be much more likely than a tax on qualified Roth distributions. Furthermore, most states will tax your dividends and gains more than they would if you let the money grow in your Roth, and even for federal taxes 0% doesn't always mean 0%. This income still counts toward your AGI for the purpose of ACA tax credits and a number of other things.

Quote
4. I am not real confident that the government will not start taxing withdraws from Roth IRA's sometime down the line as well.

Anything is possible, but taxing qualified Roth distributions would be reneging on the perceived deal that was made at the time of the Roth contribution. Too many people have Roth accounts for that to be anywhere near the top of the list of ways for the government to raise more money. If they even think of this, we've probably got bigger problems.

Case

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #9 on: May 27, 2018, 09:20:53 AM »
the magicman, those are all excellent reasons and follow closely to some of the things that madfientist suggest. However, do you never see your future income increasing to the point where you would be subjected to capital gains?


That is my only issue with eschewing the roth. The benefit assumes a lower income in retirement.

I definitely do not see it going over that amount in retirement. (We are planning to spend around $30k a year so would be nowhere close to the 100k point)
Leading up to retirement, I could but I think that it is unlikely. We are getting pretty close to being FIRE so I would not expect that high of a raise in the meantime.

Am i missing something here?
Have you considered tax free growth and the conversion ladders?

themagicman

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #10 on: May 27, 2018, 11:00:15 AM »
the magicman, those are all excellent reasons and follow closely to some of the things that madfientist suggest. However, do you never see your future income increasing to the point where you would be subjected to capital gains?


That is my only issue with eschewing the roth. The benefit assumes a lower income in retirement.

I definitely do not see it going over that amount in retirement. (We are planning to spend around $30k a year so would be nowhere close to the 100k point)
Leading up to retirement, I could but I think that it is unlikely. We are getting pretty close to being FIRE so I would not expect that high of a raise in the meantime.

Am i missing something here?
Have you considered tax free growth and the conversion ladders?

Based on the current laws I already have tax free growth in my taxable account and they are actually more tax advantaged then the Roth because I can tax loss harvest them.

I am not sure what you mean by consider conversion ladder? That would only appliy to my money that is in tradional not the roth

themagicman

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #11 on: May 27, 2018, 11:09:53 AM »
My reasons for doing this were (YMMV)

1. Leaving the Roth money in my account would estimate to have over $220k of gains by the time I was 59.5 I would not be able to withdraw any of that money prior to that and could cause me to have to withdraw more from my traditional money and could cause me to be in a higher tax bracket then I needed to be.

My reasoning for preferring Roth over taxable is that if I find myself in a situation where I have spent down all my traditional accounts and Roth contributions and HSA and taxable funds prior to age 59, and all I have left is Roth earnings, something has already gone horribly wrong with my spending earlier on in retirement. What are the odds that this $220k of Roth earnings will be enough all on its own for the rest of your life after 59? Maybe it will work out if you have a pension coming in besides your savings.

Quote
2. If you are married and make less then $101k then your capital gains and dividends are already taxed at 0% so the only benefit of the Roth would be the same in the taxable account in this situation (you would need to look at your state tax rates to make sure they were not too high to be a material amount)*

The 0% capital gains rate has only existed for about a decade. I view an increase in this rate to be much more likely than a tax on qualified Roth distributions. Furthermore, most states will tax your dividends and gains more than they would if you let the money grow in your Roth, and even for federal taxes 0% doesn't always mean 0%. This income still counts toward your AGI for the purpose of ACA tax credits and a number of other things.

Quote
4. I am not real confident that the government will not start taxing withdraws from Roth IRA's sometime down the line as well.

Anything is possible, but taxing qualified Roth distributions would be reneging on the perceived deal that was made at the time of the Roth contribution. Too many people have Roth accounts for that to be anywhere near the top of the list of ways for the government to raise more money. If they even think of this, we've probably got bigger problems.

My point about the 220k would not be that it is your last 220k neesesarily. (I agree that would be a bad situation) it was more needing to spend more then what you are wanting your income to be in a certain year. (Say you were wanting to keep your income at 40k because of taxes, ACA, ect) but needed to spend $60k one year.

Yes, I agree that the 0% could not stay around forever but I do think they will be there for at least 10-15 more years and will give me time to spend down my taxable in retirement. Also I agree about the state taxes and that is something someone would have to consider before doing this. I live in a tax free state and believe that I will into retirement but if your state taxed cap gains and dividends at 10% then I would not do this

Yes, it might be a little parinoid to say that they could tax it but they did do that with social security and down the road there will be tons of Roth money out there and they could want to get their hands on some. Maybe not for everyone but have a law that if your nw is over a million then you pay half your tax rate on Roth withdraws. I could see craizer thing happening.

Case

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #12 on: May 27, 2018, 11:29:57 AM »
the magicman, those are all excellent reasons and follow closely to some of the things that madfientist suggest. However, do you never see your future income increasing to the point where you would be subjected to capital gains?


That is my only issue with eschewing the roth. The benefit assumes a lower income in retirement.

I definitely do not see it going over that amount in retirement. (We are planning to spend around $30k a year so would be nowhere close to the 100k point)
Leading up to retirement, I could but I think that it is unlikely. We are getting pretty close to being FIRE so I would not expect that high of a raise in the meantime.

Am i missing something here?
Have you considered tax free growth and the conversion ladders?

Based on the current laws I already have tax free growth in my taxable account and they are actually more tax advantaged then the Roth because I can tax loss harvest them.

I am not sure what you mean by consider conversion ladder? That would only appliy to my money that is in tradional not the roth

I guess if you are in the bracket where you are not taxed, and wont be in the future, then there is no benefit.  I had not considered the tax loss harvesting aspect, so that is an interesting one.

I do agree with the above poster that there is a risk that in the future the 0% capital gains for low earners could change...  but certainly not in the near future.

In terms ofo conversion ladder, what i mean is that, provided theright timeline and planning, it is possible to get all money out of the Roth, penalty free, before retirement age, right?

themagicman

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #13 on: May 27, 2018, 12:37:00 PM »
the magicman, those are all excellent reasons and follow closely to some of the things that madfientist suggest. However, do you never see your future income increasing to the point where you would be subjected to capital gains?


That is my only issue with eschewing the roth. The benefit assumes a lower income in retirement.

I definitely do not see it going over that amount in retirement. (We are planning to spend around $30k a year so would be nowhere close to the 100k point)
Leading up to retirement, I could but I think that it is unlikely. We are getting pretty close to being FIRE so I would not expect that high of a raise in the meantime.

Am i missing something here?
Have you considered tax free growth and the conversion ladders?

Based on the current laws I already have tax free growth in my taxable account and they are actually more tax advantaged then the Roth because I can tax loss harvest them.

I am not sure what you mean by consider conversion ladder? That would only appliy to my money that is in tradional not the roth

I guess if you are in the bracket where you are not taxed, and wont be in the future, then there is no benefit.  I had not considered the tax loss harvesting aspect, so that is an interesting one.

I do agree with the above poster that there is a risk that in the future the 0% capital gains for low earners could change...  but certainly not in the near future.

In terms ofo conversion ladder, what i mean is that, provided theright timeline and planning, it is possible to get all money out of the Roth, penalty free, before retirement age, right?

Unless I am mistaken then no, I do not think that is the case. You will not be able to take the earnings from the Roth out penalty free until you are 59.5.

MDM

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #14 on: May 27, 2018, 01:38:06 PM »
Unless I am mistaken then no, I do not think that is the case. You will not be able to take the earnings from the Roth out penalty free until you are 59.5.
Correct (absent a penalty exception such as death or disability).  See
Roth IRA Distribution Table
http://retirementlc.com/wp-content/uploads/2017/07/2017-07-06-Roth-IRA-Distribution-Ordering-Rules.pdf
http://fairmark.com/forum/read.php?2,54159,85510#msg-85510
Recapture amount subject to the additional tax on early distributions.
for more.

teen persuasion

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Re: Transfer ROTH Contributions To Taxable Account??
« Reply #15 on: May 28, 2018, 07:42:52 PM »
Yikes, no, I wouldn't want to take Roth contributions out and put them in taxable.

First, too much in investment income would disqualify us from receiving EITC (which primarily funds our Roth IRAs).  Our state matches EITC at 30%, too.

Second, retirement account assets are not included in FAFSA EFC calculations, but taxable accounts are included and would lead to less financial aid for our college kids.

That could easily cost us $5-10k each year.