Author Topic: IRA: Rollover or Withdraw  (Read 4766 times)

LAGuy

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IRA: Rollover or Withdraw
« on: August 31, 2015, 12:03:51 PM »
If you're 59.5 or older, you can draw direct from your IRA (rollover IRA from employer 401k). It seems to me, however, that under every circumstance it would be better to still always roll that money over to your Roth first, unless it was for an immediate spending need. That way the funds are still in a tax protected account AND you get the protections from creditors that that these accounts provide. Am I wrong in seeing things this way? What if you're 70.5? Does a rollover to your Roth satisfy RMD requirements?

nereo

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Re: IRA: Rollover or Withdraw
« Reply #1 on: August 31, 2015, 12:15:09 PM »
If you're 59.5 or older, you can draw direct from your IRA (rollover IRA from employer 401k). It seems to me, however, that under every circumstance it would be better to still always roll that money over to your Roth first, unless it was for an immediate spending need. That way the funds are still in a tax protected account AND you get the protections from creditors that that these accounts provide. Am I wrong in seeing things this way? What if you're 70.5? Does a rollover to your Roth satisfy RMD requirements?
If you do a conversion from a 401(k) or tIRA to a ROTH you are responsible for applicable taxes on the conversion.  Therefor, it is still up to the individual situation.  If you have a high taxable inform the year of a rollover I tight not make sense to do a conversion, and instead go with a tIRA

MDM

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Re: IRA: Rollover or Withdraw
« Reply #2 on: August 31, 2015, 12:17:53 PM »
If you're 59.5 or older, you can draw direct from your IRA (rollover IRA from employer 401k). It seems to me, however, that under every circumstance it would be better to still always roll that money over to your Roth first, unless it was for an immediate spending need. That way the funds are still in a tax protected account AND you get the protections from creditors that that these accounts provide. Am I wrong in seeing things this way?
Not sure what you mean by "every circumstance."  Taking distributions in whatever manner gives you the most spendable money seems best so if that's what you are saying I agree.  The tactics to accomplish that strategy can be complex.

Quote
What if you're 70.5? Does a rollover to your Roth satisfy RMD requirements?
No.  E.g., http://www.investopedia.com/articles/retirement/03/110503.asp.

seattlecyclone

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Re: IRA: Rollover or Withdraw
« Reply #3 on: August 31, 2015, 12:19:05 PM »
If you have a fairly large traditional IRA balance, converting the whole sum to Roth in one year would generally be pretty foolish. You'll bump yourself up a few tax brackets by doing so, and will potentially lose out on the opportunity to realize income at low tax rates in future years. Generally it's optimal to structure your finances in such a way that your tax bracket stays as similar as possible from year to year. Withdraw what you need from your traditional IRA this year, consider converting a little bit to Roth as long as you'll stay in the same tax bracket, but otherwise just leave the money to grow tax-deferred.

Roth conversions do not satisfy RMD requirements. However I think that many peoples' fear of RMDs is greatly overblown. Your first year of taking RMDs you'll be required to take out something like 3.5% of your account balance. Unless you have way more money than you need, and most of it is in your traditional IRA, you probably would have done that anyway! The required percentage increases very gradually after that, staying below 10% until you're in your 90s.

LAGuy

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Re: IRA: Rollover or Withdraw
« Reply #4 on: August 31, 2015, 12:29:46 PM »
Thanks for the replys all. I think I was a bit misunderstood. Let me try to clear it up a bit.

You have an IRA that you're going to withdraw $20,000 from. You're not going to pay any taxes on this because you're married and it's within your exemption and exception range. You are aged 60. Withdraw the money to a taxable account OR convert to a Roth?

It's good to know that conversions don't count as RMD's, though. Thanks for clearing that up!
« Last Edit: August 31, 2015, 12:33:50 PM by LAGuy »

nereo

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Re: IRA: Rollover or Withdraw
« Reply #5 on: August 31, 2015, 12:36:20 PM »
Thanks for the replys all. I think I was a bit misunderstood. Let me try to clear it up a bit.

You have an IRA that you're going to withdraw $20,000 from. You're not going to pay any taxes on this because you're married and it's within your exemption and exception range. You are aged 60. Withdraw the money to a taxable account OR convert to a Roth?
::confused:: are you married filing jointly? And if so, is that your only income?
It doesn't matter if the 20k is less than your deduction because money is fungible,  what that matters is your total tax burden for that year.  If it is $0 it makes no difference if you convert it first ( but that would just add complexity unnecessarily ).

LAGuy

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Re: IRA: Rollover or Withdraw
« Reply #6 on: August 31, 2015, 12:43:52 PM »
Thanks for the replys all. I think I was a bit misunderstood. Let me try to clear it up a bit.

You have an IRA that you're going to withdraw $20,000 from. You're not going to pay any taxes on this because you're married and it's within your exemption and exception range. You are aged 60. Withdraw the money to a taxable account OR convert to a Roth?
::confused:: are you married filing jointly? And if so, is that your only income?
It doesn't matter if the 20k is less than your deduction because money is fungible,  what that matters is your total tax burden for that year.  If it is $0 it makes no difference if you convert it first ( but that would just add complexity unnecessarily ).

Haha, love this community but you guys make things WAY harder then they need to be.

Ok, ok. Forget about the tax implications of withdrawing from an IRA. Totally irrelevant to what I'm asking here today! Assume that decisions has already been made. The money is coming out of the IRA. There's not stopping it!

Withdraw OR convert? That's it. Only question.

MDM

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Re: IRA: Rollover or Withdraw
« Reply #7 on: August 31, 2015, 12:48:37 PM »
Thanks for the replys all. I think I was a bit misunderstood. Let me try to clear it up a bit.

You have an IRA that you're going to withdraw $20,000 from. You're not going to pay any taxes on this because you're married and it's within your exemption and exception range. You are aged 60. Withdraw the money to a taxable account OR convert to a Roth?

It's good to know that conversions don't count as RMD's, though. Thanks for clearing that up!
Similar question to nereo's: what is your total taxable income (Form 1040 line 43) if you don't take that $20K withdrawal?  Now, if you do take the $20K withdrawal you pay tax on it at your top marginal rate.

In general, optional income should be considered taxed at the top marginal rate.

But if you have already decided (as I see from the most recent post) to take the money, then sheltering as much as you can (i.e., whatever amount you don't need for spending) in the Roth makes sense.

seattlecyclone

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Re: IRA: Rollover or Withdraw
« Reply #8 on: August 31, 2015, 12:55:20 PM »
Thanks for the replys all. I think I was a bit misunderstood. Let me try to clear it up a bit.

You have an IRA that you're going to withdraw $20,000 from. You're not going to pay any taxes on this because you're married and it's within your exemption and exception range. You are aged 60. Withdraw the money to a taxable account OR convert to a Roth?
::confused:: are you married filing jointly? And if so, is that your only income?
It doesn't matter if the 20k is less than your deduction because money is fungible,  what that matters is your total tax burden for that year.  If it is $0 it makes no difference if you convert it first ( but that would just add complexity unnecessarily ).

Haha, love this community but you guys make things WAY harder then they need to be.

Ok, ok. Forget about the tax implications of withdrawing from an IRA. Totally irrelevant to what I'm asking here today! Assume that decisions has already been made. The money is coming out of the IRA. There's not stopping it!

Withdraw OR convert? That's it. Only question.

If you need to spend it soon, just withdraw it. If not, might as well convert to Roth and leave it there until you need it.

nereo

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Re: IRA: Rollover or Withdraw
« Reply #9 on: August 31, 2015, 01:00:05 PM »
Thanks for the replys all. I think I was a bit misunderstood. Let me try to clear it up a bit.

You have an IRA that you're going to withdraw $20,000 from. You're not going to pay any taxes on this because you're married and it's within your exemption and exception range. You are aged 60. Withdraw the money to a taxable account OR convert to a Roth?
::confused:: are you married filing jointly? And if so, is that your only income?
It doesn't matter if the 20k is less than your deduction because money is fungible,  what that matters is your total tax burden for that year.  If it is $0 it makes no difference if you convert it first ( but that would just add complexity unnecessarily ).

Haha, love this community but you guys make things WAY harder then they need to be.

Ok, ok. Forget about the tax implications of withdrawing from an IRA. Totally irrelevant to what I'm asking here today! Assume that decisions has already been made. The money is coming out of the IRA. There's not stopping it!

Withdraw OR convert? That's it. Only question.
I'm not sure we are making this harder than it needs to be - I just worry that you are falling victim to the "partitioning money" syndrome. As MDM indicated, the IRS doesn't care which portion of your taxable income comes from earned income or a conversion or whatever.  Your deductions apply across everything to yield total taxable income.  Understand?

If you will pay less in taxes to convert in tax year 2015, do that.  Other with withdraw.

Mother Fussbudget

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Re: IRA: Rollover or Withdraw
« Reply #10 on: August 31, 2015, 04:40:25 PM »
It makes sense to convert any distribution from an IRA into a Roth IRA before spending *IF* you think the stock market will continue to rise, AND you have a long-term investment horizon.  If you're planning to buy rental properties / real-estate with the proceeds, then it may make sense to withdraw immediately.  If stock market investment is in your future, then convert.  Converting to a ROTH is NOT a magic bullet - it keeps the principle & growth AFTER conversion 'tax-free'.  But by converting, you've already paid taxes on the conversion amount.

For a 60 year old investor, they have potentially 30-40 more investing years in their future.  Will the market rise in that timeframe?  Historically, yes, ~10%/year. 

In the example: 60 year old pays taxes on the GROWTH (above their original contribution) amount in the conversion/withdrawal at their regular-income-tax-rate.  Assume the 25% bracket.  Assume they have $20K to convert/withdraw, and 50% is from earnings growth.  They pay $2,500 in taxes, and have the remaining $17,500 available to spend or re-invest.  If they're going to re-invest *in the stock market* anyway, conversion to ROTH makes sense.  If they're going to buy real estate, (or - gasp! - spend the money) then withdrawal might make sense.  You're the only one who knows your situation, so this is a hard question for anyone else to answer.  There is no right answer for everyone.

MDM

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Re: IRA: Rollover or Withdraw
« Reply #11 on: August 31, 2015, 05:09:14 PM »
In the example: 60 year old pays taxes on the GROWTH (above their original contribution) amount in the conversion/withdrawal at their regular-income-tax-rate.  Assume the 25% bracket.  Assume they have $20K to convert/withdraw, and 50% is from earnings growth.  They pay $2,500 in taxes, and have the remaining $17,500 available to spend or re-invest.  If they're going to re-invest *in the stock market* anyway, conversion to ROTH makes sense. ... You're the only one who knows your situation, so this is a hard question for anyone else to answer.  There is no right answer for everyone.
Some things:
  - Assuming the tIRA contributions were deductible when made (i.e., the usual case), taxes are paid on not only the growth but the entire amount withdrawn.
  - If the marginal bracket doesn't change, then tax-wise it doesn't matter whether money is withdrawn and rolled over now, vs. leaving it in the tIRA and withdrawing later.

Taking the example of $20K to withdraw now and assuming the 25% bracket now and later:
Convert to Roth now, have investment double, and withdraw for spending later = $20K * (1 - 25%) * 2 = $30K
Leave in tIRA, have investment double, and withdraw and pay tax for spending later = $20K * 2 * (1 - 25%) = $30K

Of course, if one assumes a different tax bracket in the future (and good cases can be made for it to be lower or higher) then the conclusion will also be different.