Author Topic: Can I move $ from Roth to Traditional penalty-free?  (Read 559 times)

Yanisimo

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Can I move $ from Roth to Traditional penalty-free?
« on: January 03, 2019, 07:23:18 AM »
Since 2013, the husband's family has contributed $10,000 to his Roth IRA account. I have spent months reading the MMM, Mad Fientist, and GoCurryCracker blogs. Based on my research, and our specific situation, it is more beneficial for us to contribute to pre-tax accounts. I want to move the contributions from the Roth IRA to Traditional so we can realize a tax benefit this year. Specifically, I want to take out all $10,000 and contribute half for the 2018 year and the other half for the 2019 year. Later I plan to use the Roth IRA conversion ladder to access the funds tax-free.

My question is this: Can I move the contributions from the Roth to Traditional without any issues? Am I missing anything?

Plan: The Roth is currently invested through Ameriprise, and the fund name is AMTCX. Their fees are killing me. I want to withdraw the contributions, and then do a trustee-to-trustee transfer of the remaining balance to Vanguard.

I would appreciate any insight/advice into this plan of mine. I want to make sure I am not missing anything important.

reeshau

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #1 on: January 03, 2019, 09:17:01 AM »
I had never heard of anyone wanting to do this.  What you lay out is pretty convoluted, but I think I am correctly interpreting your intent.

Generally, Roth contributions had to be recharacterized as traditional by October 15 of the following year.  However, this ability was ended with the tax reform bill, so the last opportunity to do that (for 2017 contributions) was October 2018.

What you are talking about is a rollover of a whole Roth IRA to a traditional IRA.  This is not allowed.

reference:  https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-rollovers-and-roth-conversions

"Roth IRAs can only be rolled over to another Roth IRA."

Still a good idea to get away from Ameriprise.

Note:  The way you describe doing this is actually entirely different.  You talk about withdrawing the IRA funds, which would incur penalties for early withdrawal, and then making contributions for 2018 and 2019.  There are no dollar limits for rollovers, but you want to have a custodian-to-custodian transfer.  You do not want to handle your IRA money at all in a rollover; just contact Vanguard to do it, and they will work with Ameriprise.

2nd Note:  As a technical caveat, you are asking about moving $10,000 in contributions to a traditional IRA.  If these really are contributions, they could be withdrawn without penalty.  But, you also say this has been invested in Ameriprise funds.  So...they have not made any money since 2013?  Or you are making a partial withdrawal?  Regardless, you also talk about these being deposited to a traditional IRA, then back to a Roth--so, you firmly got back to Start.  You will not get the taxes back that you paid on the money; it's not a perpetual financial engine.  Leave it be.  But ditch Ameriprise.
« Last Edit: January 03, 2019, 09:23:23 AM by reeshau »

Tuskalusa

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #2 on: January 03, 2019, 09:19:12 AM »
I can confirm this. I tried to recharacterize a Roth conversion last year, and I found that I was unable to do so, due to the TCJA.

JLee

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #3 on: January 03, 2019, 09:31:37 AM »
I had never heard of anyone wanting to do this.  What you lay out is pretty convoluted, but I think I am correctly interpreting your intent.

Generally, Roth contributions had to be recharacterized as traditional by October 15 of the following year.  However, this ability was ended with the tax reform bill, so the last opportunity to do that (for 2017 contributions) was October 2018.

What you are talking about is a rollover of a whole Roth IRA to a traditional IRA.  This is not allowed.

reference:  https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-rollovers-and-roth-conversions

"Roth IRAs can only be rolled over to another Roth IRA."

Still a good idea to get away from Ameriprise.

Note:  The way you describe doing this is actually entirely different.  You talk about withdrawing the IRA funds, which would incur penalties for early withdrawal, and then making contributions for 2018 and 2019.  There are no dollar limits for rollovers, but you want to have a custodian-to-custodian transfer.  You do not want to handle your IRA money at all in a rollover; just contact Vanguard to do it, and they will work with Ameriprise.

There would be a penalty for withdrawing earnings, but the contributions could be withdrawn without penalty.

I don't see much advantage in doing this, especially if the OP is going to do a Roth ladder later (and then would be paying taxes on the tIRA gains between now and then).

MustacheAndaHalf

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #4 on: January 03, 2019, 09:48:03 AM »
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
"For 2019, your total contributions to all of your traditional and Roth IRAs cannot be more than:"
...

Your contribution limits for a year are not changed when you remove money from an IRA.  I wouldn't remove money from a Roth IRA once it's in there if you don't need the money.  The best benefit is letting it grow tax free until you need it.  If you pull it out now, you're volunteering to pay taxes on it again.  I'd just leave the money in the Roth IRA - and still work on trying to transfer it to another brokerage.

You can contribute to 2018 until tax filing day (April 15) - but I've only read about that for Roth IRAs.  I can't find the IRS stating that for Traditional IRAs.  But that's worth looking up.  Since time is limited, I would make the entire contribution into 2018, since you have a lot longer to make your 2019 contributions.
« Last Edit: January 03, 2019, 09:57:03 AM by MustacheAndaHalf »

JLee

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #5 on: January 03, 2019, 09:48:59 AM »
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
"For 2019, your total contributions to all of your traditional and Roth IRAs cannot be more than:"
...

Once you've maxed out your Roth IRA, you've also maxed out all IRAs for the year.  At that point, you're done.  You cannot pull money out by yourself and change the fact you've already contributed to an IRA for the year.

Whatever contributions you've made to an IRA are already set in stone.  You should aim to max out future years (and 2019?) with a Traditional IRA.  But you can't go back.

Based on the OP, they have not yet made any contributions for 2018 or 2019.

Yanisimo

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #6 on: January 03, 2019, 10:01:47 AM »
@reeshau

Let me clarify:
The current balance of the Roth IRA is around $11,200.
Since 2013, the grandparents have contributed between $1,000 - $2,000 per year for a total of $10,000 in contributions.
In 2018, no contributions were made to either a Roth or Traditional.
Because the money contributed is from the grandparent's pocket, they paid the federal income taxes on the contributions.

So it seems that my best bet is to do the trustee-to-trustee transfer between Ameriprise and Vanguard, and to NOT withdraw the $10,000 contributions.

My initial plan was to withdraw the $10K of contributions (because you can withdraw all contributions without penalty, right?) and put that money in my bank account, and then do the trustee-to-trustee transfer for the remaining $1,200 in earnings. I then planned on using the $10K to contribute towards a Traditional IRA for the 2018 and 2019 tax years.



« Last Edit: January 03, 2019, 10:06:41 AM by Yanisimo »

reeshau

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #7 on: January 03, 2019, 12:17:47 PM »
I still fail to see what you are hoping to gain from this.  You have tax free money now.  You are trying to transform it into pre-tax money, with a benefit of a tax deduction.  But then you will transfer it back, in the future, to the same condition it is now, paying tax on it and any earnings it makes.

Again, there is no perpetual finance machine.  There is a reason nobody does this.  It does nothing for you, in the end, and has risks in execution.

Roll the whole thing over, now, and you will have the seed of your pre-59 retirement nest egg.  Wait, play the tax game if you guess right, and you will have to wait 5 years before you can withdraw anything.

There isn't much to be gained or lost, but in the end It's negative, based on risk.

Yanisimo

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #8 on: January 03, 2019, 02:12:34 PM »
@reeshau

Thanks for the input!

MustacheAndaHalf

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #9 on: January 05, 2019, 08:14:14 AM »
If you could take $10,000 and give it any kind of account type, "Roth IRA" is the best choice - the money will not be taxed / penalized again as long as you leave the growth alone until age 59.5.  So don't spoil that.

If neither you nor your husband have an income, you can't contribute to IRAs anyways.  And if you have an income, it's better to use that money that Roth IRA assets.  My advice:

Married couples only need one spouse working to contribute to IRAs for both people.  So if any combination of your incomes exceeds $11,000 / year, you can contribute $5,500 to your IRA and $5,500 to his IRA.  So try and pour $11,000 into an IRA between now and April 15, if you can.

After April 15, start a new IRA for 2019 and contribute to that.  That's another $5,500 for each of you into an IRA.

seattlecyclone

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #10 on: January 05, 2019, 10:09:06 AM »
This is actually an interesting idea that I hadn't thought of before. I think your plan could work out if you plan to retire in a lower tax bracket than you're in now and you are eligible to make pre-tax traditional IRA contributions and you have no other source of funds to contribute to your IRA.

Let's look at some numbers.

Suppose you contributed $10,000 to a Roth IRA in the past. These funds are freely withdrawable at any time. Suppose you expect your investments to double in value between now and when you withdraw. Suppose you're in the 22% bracket now and will be in the 10% bracket during retirement.

Scenario 1: Leave the money where it is
Your $10,000 grows to $20,000 by the time you want to withdraw it, and you get to keep the whole amount because it's in a Roth account. Simple.

Scenario 2: Withdraw the money and contribute it to a traditional IRA
You take the $10,000 out of your Roth IRA, contribute it to a traditional IRA. You save $2,200 on your taxes. You put $1,500 of that into your traditional IRA (since the IRA limit is $5,500 in 2018 and $6,000 in 2019), saving another $330 on your taxes. That leaves you with $1,030 of tax savings outside of your IRA. You invest that in mutual funds in your taxable account.

Retirement comes around. Your investments have doubled, leaving you with $23,000 in your traditional IRA and $2,060 (minus a bit for dividend taxes in intervening years) in your taxable account. You pay 10% income tax on the traditional IRA withdrawal and 0% capital gains tax on your taxable account, leaving you with $20,700 from the IRA and $2,060 from the taxable account.

This is more than you would have had if you leave the money in your Roth IRA. However as I see it the flaw with this plan is the assumption that you're already in a high tax bracket but somehow have no funds leftover to contribute to an IRA without raiding your Roth account. In the very narrow set of circumstances where this is the case the math does seem to support making this maneuver, but I'd challenge you to find a way to scrape some more cash together before April to make this contribution in another way.

beam

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Re: Can I move $ from Roth to Traditional penalty-free?
« Reply #11 on: January 09, 2019, 03:35:57 AM »
What a fascinating scenario. I think that if you happen to be in this esoteric situation brilliantly envisioned by @seattlecyclone, you should only take a distribution of $5,500 right now to enable funding of the 2018 traditional IRA, and then wait to take the remainder until tax time in 2020 to fund the 2019 traditional IRA, so you achieve maximum tax-free growth in the Roth IRA in the interim. There doesn't seem to be any reason to take all $10k at once right now.

In fact, you might be able to do a little better. You can take advantage of the 60-day Roth rollover window by initiating a rollover of $5500 from the Roth IRA before filing your taxes, using the rollover check to fund your traditional IRA for 2018 and achieve the tax savings, and then re-deposit the $1,210 of tax savings back into a Roth IRA, rather than investing it in a taxable account. The $4,290 of your "rollover" that you failed to redeposit within 60 days becomes a distribution, which should be free of taxes assuming it's coming from principal. As a bonus, you get some extra time to scrape together alternative sources to re-fund that Roth IRA more fully if you can. Then repeat the process next year, with a "rollover" of the remaining principal of $5,710, and a tax savings of $1,320 from your $6,000 traditional IRA contribution, allowing you $1,030 to re-deposit into a Roth IRA after a $6,000 traditional IRA contribution. (You need to be able to float $290 from other sources to make this work, or just make a $5,710 contribution).

So you end up with $1,030 in principal in your Roth IRA instead of taxable, plus any earnings from the intervening year.

Of course, the optimal (and far easier) path is to make the traditional IRA contribution from other sources, but if you are 100% cash-constrained, this seems like an interesting option.
« Last Edit: January 09, 2019, 03:51:23 AM by beam »