Author Topic: Traditional to Roth pipeline  (Read 910 times)

TradHunterRN

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Traditional to Roth pipeline
« on: January 22, 2020, 12:42:54 PM »
I am sorry to ask something that gets discussed so much but sometimes reading people's explanations leaves unanswered questions and I thought it may be easier for me to just ask my specific question with real numbers.

So, as it stands I have approximately $30,000 sitting in a Traditional IRA, This money is there due to me moving a 403b about 3 years ago. Given there has been some time there some of that amount is of course earnings and not just contributions.

Let's assume I move ALL $30,000 over to a Roth NOW. After 5 years, is that entire $30,000 amount seasoned and withdraw-able (obviously not any new earnings it has been making in the Roth), or is it only possible to withdraw the original contributions even though those were made years ago when it was still in a 403b?

Also, do conversions count towards any contribution limits that are set? Or can I still contribute full $6,000 a year to my traditional, regardless of any rollovers?

Thanks, hope those questions make sense. They are probably dumb but the specifics were nagging me because I am trying to decide what to do with my current IRA funds

Thanks

ixtap

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Re: Traditional to Roth pipeline
« Reply #1 on: January 22, 2020, 12:48:30 PM »
I am sorry to ask something that gets discussed so much but sometimes reading people's explanations leaves unanswered questions and I thought it may be easier for me to just ask my specific question with real numbers.

So, as it stands I have approximately $30,000 sitting in a Traditional IRA, This money is there due to me moving a 403b about 3 years ago. Given there has been some time there some of that amount is of course earnings and not just contributions.

Let's assume I move ALL $30,000 over to a Roth NOW. After 5 years, is that entire $30,000 amount seasoned and withdraw-able (obviously not any new earnings it has been making in the Roth), or is it only possible to withdraw the original contributions even though those were made years ago when it was still in a 403b?

Also, do conversions count towards any contribution limits that are set? Or can I still contribute full $6,000 a year to my traditional, regardless of any rollovers?

Thanks, hope those questions make sense. They are probably dumb but the specifics were nagging me because I am trying to decide what to do with my current IRA funds

Thanks

Yes, the entire converted amount would be available after 5 years. This is due to the fact that you will be paying all of the taxes when you make the conversion.

Conversions are completely independent of contributions. You will still be able to make the full contribution. Whether or not it is deductible will depend on your overall income level, including the $30k conversion that will count as income.

EvenSteven

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Re: Traditional to Roth pipeline
« Reply #2 on: January 22, 2020, 12:52:44 PM »
Quote
Let's assume I move ALL $30,000 over to a Roth NOW. After 5 years, is that entire $30,000 amount seasoned and withdraw-able (obviously not any new earnings it has been making in the Roth)

Yes, 5 years after doing a conversion of 30k traditional to 30K Roth (and paying taxes on the 30k), all of the 30k conversion is available for penalty free withdrawal.

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Also, do conversions count towards any contribution limits that are set?

No.

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Or can I still contribute full $6,000 a year to my traditional, regardless of any rollovers?

Yes. Or a contribution to a Roth IRA instead, if that makes sense for your situation.


TradHunterRN

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Re: Traditional to Roth pipeline
« Reply #3 on: January 22, 2020, 01:00:47 PM »
Thanks both of you!

I knew it was simpler than I was making it. You pay taxes when you make a conversion so of course it makes sense that it is available later since you already payed your "penalty" (tax) by doing the conversion. I wasn't making that connection lol

Thanks again!!

TradHunterRN

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Re: Traditional to Roth pipeline
« Reply #4 on: January 22, 2020, 01:12:59 PM »
One other question. I just read somewhere that although you can take contributions out of a Roth at any time, tax and penalty free you "can't "pay back" the money to your IRA once you take it out." What would they mean by that? You can certainly keep contributing in the future.

In fact, why can't your Roth be like a working long term savings account. Take a contribution out for an unforeseen expense like rebuilding a roof for example and then just keep investing once the crisis is over. Would there be any problems with that?

I pulled that little quote from this site by the way: https://www.investopedia.com/ask/answers/082515/how-do-you-calculate-penalties-ira-or-roth-ira-early-withdrawal.asp

EvenSteven

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Re: Traditional to Roth pipeline
« Reply #5 on: January 22, 2020, 01:16:58 PM »
Quote
One other question. I just read somewhere that although you can take contributions out of a Roth at any time, tax and penalty free you "can't "pay back" the money to your IRA once you take it out." What would they mean by that? You can certainly keep contributing in the future.

It means that if you make a contribution of 6k this year, and then withdraw it, you are still at your 6k contribution limit, so you can't put in another 6k in the same year.

You can make 6k of contributions per year, regardless of any withdrawals you make.

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In fact, why can't your Roth be like a working long term savings account. Take a contribution out for an unforeseen expense like rebuilding a roof for example and then just keep investing once the crisis is over. Would there be any problems with that?

That is fine, as long as you stay within your 6k per year contribution limit.

EliteZags

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Re: Traditional to Roth pipeline
« Reply #6 on: January 22, 2020, 01:55:21 PM »

In fact, why can't your Roth be like a working long term savings account. Take a contribution out for an unforeseen expense like rebuilding a roof for example and then just keep investing once the crisis is over. Would there be any problems with that?



the amount you take out would lose it's tax free earning potential, can still only contribute additional $6K each year

TradHunterRN

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Re: Traditional to Roth pipeline
« Reply #7 on: January 22, 2020, 06:20:50 PM »
Quote
One other question. I just read somewhere that although you can take contributions out of a Roth at any time, tax and penalty free you "can't "pay back" the money to your IRA once you take it out." What would they mean by that? You can certainly keep contributing in the future.

It means that if you make a contribution of 6k this year, and then withdraw it, you are still at your 6k contribution limit, so you can't put in another 6k in the same year.

You can make 6k of contributions per year, regardless of any withdrawals you make.

Quote
In fact, why can't your Roth be like a working long term savings account. Take a contribution out for an unforeseen expense like rebuilding a roof for example and then just keep investing once the crisis is over. Would there be any problems with that?

That is fine, as long as you stay within your 6k per year contribution limit.

Thanks that makes sense! Thanks for clarifying!!

TradHunterRN

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Re: Traditional to Roth pipeline
« Reply #8 on: January 22, 2020, 06:23:01 PM »

In fact, why can't your Roth be like a working long term savings account. Take a contribution out for an unforeseen expense like rebuilding a roof for example and then just keep investing once the crisis is over. Would there be any problems with that?



the amount you take out would lose it's tax free earning potential, can still only contribute additional $6K each year

Oh sure, I get that that would not be an ideal situation. But to an extent I would think it may be better than just having $10,000 sitting in a low interest savings account for possible emergencies earning you no money. Even though the money you took out of a Roth would lose its own earning power, the returns that it did yield would still sit pretty in your nest egg. And those would most likely be returns far in advance of anything that contribution would have found in a typical savings account.

EvenSteven

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Re: Traditional to Roth pipeline
« Reply #9 on: January 23, 2020, 07:56:14 AM »

In fact, why can't your Roth be like a working long term savings account. Take a contribution out for an unforeseen expense like rebuilding a roof for example and then just keep investing once the crisis is over. Would there be any problems with that?



the amount you take out would lose it's tax free earning potential, can still only contribute additional $6K each year

Oh sure, I get that that would not be an ideal situation. But to an extent I would think it may be better than just having $10,000 sitting in a low interest savings account for possible emergencies earning you no money. Even though the money you took out of a Roth would lose its own earning power, the returns that it did yield would still sit pretty in your nest egg. And those would most likely be returns far in advance of anything that contribution would have found in a typical savings account.

Yes, if you would not otherwise contribute the max to an IRA, a Roth IRA is a good place to keep an emergency fund.

terran

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Re: Traditional to Roth pipeline
« Reply #10 on: January 23, 2020, 08:04:25 AM »
Lots of good information above. One more tidbit: it's not actually 5 years, it's 5 years from January 1 of the year in which the conversion is made. So if you convert at any time in 2020 (even Dec. 31st -- although you'd want to double check with your broker about what year the conversion will count for if you leave it to the last minute) you'll be able to take the amount converted out tax and penalty free Jan. 1 2025 even though that might be as little as 4 years + 1 day after your conversion.