Roth Conversion - does appreciation roll as principal?

[newton86]

I haven't seen this detail addressed. When setting up a Roth conversion ladder, what happens to the gains that were in the traditional IRA? I understand that you will owe tax the gains at time of conversion. But afterwards, are they considered principal in the Roth that you can withdrawal after 5 years? Or are they still considered earnings?

[butchmonkey]

I believe they're considered principal. The key here is "after-tax" contributions. Since your taxed on your appreciation to date your entire contribution is "after-tax."

But check with your accountant!


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[Eric]

Yes, rollover funds are considered a contribution.  Otherwise, the Roth pipeline wouldn't work!

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

Once the money has been converted into a Roth IRA, the converted amount is then available for withdrawal, tax and penalty free, five years after the conversion date (the earnings on those investments, however, need to remain invested until standard retirement age).

[seattlecyclone]

Yes, the full amount rolled over is considered principal from the perspective of the Roth IRA. Be aware that any earnings accrued on that money after you roll it over to the Roth IRA cannot be withdrawn without penalty until age 59½.

[Gin1984]

Yes, the full amount rolled over is considered principal from the perspective of the Roth IRA. Be aware that any earnings accrued on that money after you roll it over to the Roth IRA cannot be withdrawn without penalty until age 59½.

Unless of course you are taking the money out for some of the allowed expenses (like college tuition).

[newton86]

Thank you. I figured that was the case, but I just wanted to make sure before I based my ER strategy on it!