Author Topic: Roth Conversion for elderly  (Read 568 times)

ericbonabike

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Roth Conversion for elderly
« on: June 19, 2020, 12:22:18 PM »
Hey, can someone help me out?

I'm managing my mom's finances and I'm a bit fuzzy on roth conversion.
Here's the scoop:

She turns 70 this year.  She has about 500k in a traditional rollover IRA.  And about 200k in taxable brokerage account. 
She's actively trying to sell her farm which might net her another 200k in untaxed earnings.

I've been exploring roth conversion for her.  This year and future years, her income will be fairly low (this year 30k, next year maybe 25k).  But this year, she gets the standard deduction 24k because my dad (her husband) passed away in early 2020. So, her MAGI will be about 5 or 6k.   My thought was this year, convert up to the top of the 12% tax bracket which is $80,249 for 2020. 
So, I reckon I move ~75k from her traditional to roth ira this year.  Next year will be less, cause she won't be eligible for MFJ status.  I reckon she can only do that conversion for the next 2 years prior to turning 72.


But my question is:  if I do that, will she be able to access ANY of that rollover money prior to 5 years without paying the 10% penalty?  I'm a little fuzzy.
Note: I'd have to open a roth, fund it with the conversion.    I'm 95% confident that she won't need that roth money prior to 5 years, but I'm worried that if she had a medical issue or needed assisted living, some of those assets might need to be accessible.

ixtap

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Re: Roth Conversion for elderly
« Reply #1 on: June 19, 2020, 12:33:56 PM »
Does she currently have a Roth IRA?

ericbonabike

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Re: Roth Conversion for elderly
« Reply #2 on: June 19, 2020, 12:38:11 PM »
No, I would have to create one for her.

I think the answer is:

Since she's over 59.5 she can access 100% of her converted dollars immediately without paying taxes or penalty.  But she can't access any of the earnings from that until 5 years from the date of roth IRA creation. 

Sound right?


terran

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Re: Roth Conversion for elderly
« Reply #3 on: June 19, 2020, 01:22:50 PM »
If she's never had a Roth IRA then she'll have to wait 5 tax years after she first funds it before withdrawing. Since she's over 59.5 this is the only 5 year clock that matters, not the one for each conversion. Here's more info: https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

Since she's over 59.5 she can just withdraw straight from the IRA (and pay taxes), so the Roth conversion would typically be for IRA balances she'd rather not withdraw.

She can continue to convert once she's 72, but she'll need to take her RMD first, so the conversion will add to her taxable income in addition to the RMD.

MDM

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Re: Roth Conversion for elderly
« Reply #4 on: June 19, 2020, 01:27:32 PM »
Since she's over 59.5 she can access 100% of her converted dollars immediately without paying taxes or penalty.
Yes.

Quote
But she can't access any of the earnings from that until 5 years from the date of roth IRA creation. 
Close.  She can access them, but will have to pay tax (but no penalty) if she does.

ixtap

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Re: Roth Conversion for elderly
« Reply #5 on: June 19, 2020, 01:31:21 PM »
No, I would have to create one for her.

I think the answer is:

Since she's over 59.5 she can access 100% of her converted dollars immediately without paying taxes or penalty.  But she can't access any of the earnings from that until 5 years from the date of roth IRA creation. 

Sound right?

She can access the earnings, but will owe taxes on them, no penalty.

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earni :x ngs: Tax-Yes; Penalty-No

ericbonabike

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Re: Roth Conversion for elderly
« Reply #6 on: June 29, 2020, 07:29:14 AM »
No, I would have to create one for her.

I think the answer is:

Since she's over 59.5 she can access 100% of her converted dollars immediately without paying taxes or penalty.  But she can't access any of the earnings from that until 5 years from the date of roth IRA creation. 

Sound right?

She can access the earnings, but will owe taxes on them, no penalty.

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earni :x ngs: Tax-Yes; Penalty-No


Perfect!  Thanks for the explanation. 
But what is the difference between "Taxable Portion" and "Nontaxable Portion"

MDM

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Re: Roth Conversion for elderly
« Reply #7 on: June 29, 2020, 12:08:26 PM »
Perfect!  Thanks for the explanation. 
But what is the difference between "Taxable Portion" and "Nontaxable Portion"
If you ever use the Backdoor Roth process, the taxable portion is the amount of gain you had between contributing and converting.  The nontaxable portion is the amount of your contribution.