Author Topic: Seeking Clarity on Roth rollover pipeline  (Read 2432 times)


  • Handlebar Stache
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Seeking Clarity on Roth rollover pipeline
« on: July 01, 2013, 07:13:08 PM »
I am planning to pull the cord and ESR next year (Gawd, I hate the day job).  DW currently has a small business that brings in roughly $2k a year.  Our living expenses I estimate at 60k annually once I cut some fluff and buy health insurance.  I might be bringing in some money with what would amount to a side hustle or contractor work, but I think we would be able to shelter a LOT of income from the tax man.  We are a family of 4 (4 exemptions), have a mortgage with interest cost of about 7k, state taxes at roughly 5% of taxable income, RE taxes of $1800 or so, and would be able to wrote off health insurance premiums vs. DW.s business income.  I estimate exemptions and deductions at $30k or so before we have the first dollar of taxable income.  While we have a good slug of funds in after tax investments, an awful lot of our net worth is in traditional IRAs.  DW and I will be 40 when I pull the plug.

I think that we should be able to wriggle along via self employment and draws on the after tax funds, but whether I live on it or simply need to reduce my lifetime tax liability, I have to deal with the whopping amount of traditional IRA money.  As a result, I am thinking that when we have lower taxable income years, I will first use my room in te 15% bracket to take 0% capital gains and then do Roth conversions (although I would rather do those a t 10% if I can get away with it). 

As I understand it, the Roth pipeline basically works as follows:  I convert $X on day one and pay whatever taxes are due on the conversion amount.  5 years from day 1, I can withdraw the original amount I converted with any earnings/appreciation having to stay in the Roth to avoid paying penalties for early withdrawal (I assume all of this happens before I am old enough to avoid penalties).

Do I have to have each year's conversion in a separate Roth IRA account in order to keep the 5 year timeline for each $X separate and distinct and able to avoid penalties upon withdrawal?  Any other gotchas to be aware of? 

I think we can go 10 years or more on the after tax assets, so this all affords me a lot of time to plan.  If I have some years where I can convert a lot (low income) and others where I can covert little or none, it won't matter so long as I I know what to do every year as calendar year end approaches.

I get the feeling I will be spending a lot of quality tie with turbotax starting the end of next year.


  • Handlebar Stache
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Re: Seeking Clarity on Roth rollover pipeline
« Reply #1 on: July 01, 2013, 08:13:59 PM »
I haven't rolled money into a Roth, but I did get a form 5498 from Vanguard this year, and box 3 is labeled "Roth IRA conversion amount." I imagine all you need to know for record keeping can be contained in a stack of these forms through the years. Since the money is tax-free, there is no cost basis, so unlike a taxable account, all the dollars are the same, in one big pile. Certainly, you don't need more than one account. I have heard that you can roll back a Roth conversion, for example if you end up earning a lot of money during the year. You can look up the distribution ordering rules and such for more information. When you do the conversion, please come and tell us the details. Do you just fill out a form?