Author Topic: What happens to existing Roth with Roth conversion ladder?  (Read 736 times)

cheapass

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What happens to existing Roth with Roth conversion ladder?
« on: March 06, 2017, 12:56:42 PM »
Our AGI is ~$160K so we are eligible for Roth contributions. Our 401k's are maxed, and my HSA is maxed, any spillover savings goes to taxable brokerage. We are planning on starting the Roth conversion ladder with our 401k/IRA funds in about 8 years and we will use taxable accounts to fund the first 5.

1) Can we both contribute to Roth or is the max $5,500 per year between the two of us?
2) Is contributing to Roth instead of taxable a good idea considering the plans stated above? or should we prioritize maxing my wife's HSA instead?
3) What happens to an existing Roth account when the Roth conversion ladder starts?

Thanks

Spork

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Re: What happens to existing Roth with Roth conversion ladder?
« Reply #1 on: March 06, 2017, 04:09:02 PM »
1. Assuming you're under 55... the max is $5,500 each.  I.e., you both create a Roth and both fund it.
2. I am no expert, but I think HSAs are a little more flexible.  If you have separate individual HSAs... I might start there. 
3. I am not sure I understand the question.  The Roth conversion ladder is simply adding money to the Roth account (converted from a Traditional IRA) and removing money from the same account that has "baked" for 5 years.  You can only remove principle (no earnings) and you can only remove money that's been there 5 years.   In short: It's one account (per person) that is having money stuffed in one side and pulled out the other.
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moof

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Re: What happens to existing Roth with Roth conversion ladder?
« Reply #2 on: March 06, 2017, 04:25:08 PM »
1)  Don't know all your details, but sounds like you can be putting 2x $5500 in a year into a Roth.  If one of you is stay-at-home, then you could be doing a spousal traditional IRA, but you provided the scantest of details to go on.

2)  Roth vs. taxable is a trade-off.  Roth is tax free coming out, but getting at it before 59.5 is a hassle.  Taxable counts against you for things like college aid, and has no protections in bankruptcy or a lawsuit, but is very flexible for withdrawals.  "Tax free" is less of an issue if you are in a modest retirement, as if you stay in the lower tax brackets your long term capital gains rate goes to zero.

3)  Nothing.  Existing Roth balance is there, and the principle is accessible whenever needed.  The hassle of a Roth ladder is the first 5 years where you need to live your life while waiting 5 years to start withdrawing your rolled over Roth principle.  Having an existing Roth balance with some principle to pull out plus a taxable account is what you are likely to have available to live on for those 5 years.  Any gap in available funds vs. spending might have to be plugged with IRA/401k withdrawals that would come with 10% penalties, which is what you are trying to avoid in the first place.

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Re: What happens to existing Roth with Roth conversion ladder?
« Reply #3 on: March 10, 2017, 10:08:38 AM »
1.  You might be in the phase out range for Roth contributions.  your tax software should tell you how much you are eligible to contribute to a Roth.
2.  Prioritize your wife's HSA first, it has triple tax savings.  It's free from FICA, Federal, and usually state tax.  On 401k's for example, you still pay FICA tax.  Contributing to the HSA will also lower your AGI further and improve your overall tax picture.  Get your AGI as low as possible.  Also, skip the Roth contributions in my opinion.  There are too many restrictions.  Go taxable instead if you plan to retire early.  Don't make my mistake of putting too much in your Roth.  I wrote a good article about this on my blog. 
3.  Nothing happens to the existing Roth.  You simply open up a new Roth account for each year you do a conversion.  I wouldn't recommend doing this until you retire, though, and your tax bracket is lower.  Roth conversions are taxable income. 
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cheapass

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Re: What happens to existing Roth with Roth conversion ladder?
« Reply #4 on: March 10, 2017, 11:05:00 AM »
1.  You might be in the phase out range for Roth contributions.  your tax software should tell you how much you are eligible to contribute to a Roth.
2.  Prioritize your wife's HSA first, it has triple tax savings.  It's free from FICA, Federal, and usually state tax.  On 401k's for example, you still pay FICA tax.  Contributing to the HSA will also lower your AGI further and improve your overall tax picture.  Get your AGI as low as possible.  Also, skip the Roth contributions in my opinion.  There are too many restrictions.  Go taxable instead if you plan to retire early.  Don't make my mistake of putting too much in your Roth.  I wrote a good article about this on my blog. 
3.  Nothing happens to the existing Roth.  You simply open up a new Roth account for each year you do a conversion.  I wouldn't recommend doing this until you retire, though, and your tax bracket is lower.  Roth conversions are taxable income.

Thanks for your input. I will prioritize her HSA for sure. I think I've come around to the philosophy that Roth is useful because we can just save that to use until we are 59.5 years old. There's a restriction on earnings, yes, but that money we need after that age is important and it is part of our overall retirement picture.

MustacheAndaHalf

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Re: What happens to existing Roth with Roth conversion ladder?
« Reply #5 on: March 10, 2017, 08:56:18 PM »
2)  Roth vs. taxable is a trade-off.  Roth is tax free coming out, but getting at it before 59.5 is a hassle.
That's not the case at all - Roth contributions can be taken out at any time.  Someone puts $5,000 in and it grows to $7,000 there's two components.  The first $5,000 withdrawn is assumed to be from contributions - there's no tax consequence at all.  The next $2,000 is supposed to remain in the Roth IRA until 59.5, and that part will incur a penalty if it's withdrawn early.

Roth IRA is so easy to withdraw that I see some financial advisers suggest using it for an emergency fund (which I don't personally like, but it's an option).