Author Topic: What if retirement savings is already (mostly) Roth?  (Read 3370 times)

ysette9

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What if retirement savings is already (mostly) Roth?
« on: April 02, 2015, 03:40:06 PM »
I apologize if this has already been covered and I just did not find it by searching through old posts. I have read a lot about the Roth conversion ladders which seems to be a great tool. My question though has to do with how the situation changes if a good portion of the retirement savings is already in a Roth-type account?

Specifically: my husband has a good chunk of his savings in a Roth IRA. We bit the bullet and converted from a Traditional/Rollover several years back when the government allowed us to split the tax bill over a three-year period (was that around the 2009/2010 time frame?). I jumped on the Roth 401(k) wagon when my company initially offered it soon after I started. I now realize that Traditional is the right option for us now that our situation has changed, but in the meantime, a good portion of my 401(k) is Roth.

If we retire tomorrow, can we start pulling from his Roth IRA right away, presuming that it has been 5 years since we did that conversion? Similarly, if I retire tomorrow and roll my Roth 401(k) into a Roth IRA (or even keep it where it is at), can I pull from it penalty-free right away or are there other rules that apply?

Thanks for your guidance.

MDM

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Re: What if retirement savings is already (mostly) Roth?
« Reply #1 on: April 02, 2015, 04:10:58 PM »
If we retire tomorrow, can we start pulling from his Roth IRA right away, presuming that it has been 5 years since we did that conversion? Similarly, if I retire tomorrow and roll my Roth 401(k) into a Roth IRA (or even keep it where it is at), can I pull from it penalty-free right away or are there other rules that apply?
See http://www.irs.gov/publications/p590b/ch02.html#en_US_2014_publink1000231057 for more details, but if I read your question correctly you can withdraw both your and his contributions - but neither your nor his earnings - penalty-free.

forummm

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Re: What if retirement savings is already (mostly) Roth?
« Reply #2 on: April 02, 2015, 04:24:43 PM »
If we retire tomorrow, can we start pulling from his Roth IRA right away, presuming that it has been 5 years since we did that conversion? Similarly, if I retire tomorrow and roll my Roth 401(k) into a Roth IRA (or even keep it where it is at), can I pull from it penalty-free right away or are there other rules that apply?
See http://www.irs.gov/publications/p590b/ch02.html#en_US_2014_publink1000231057 for more details, but if I read your question correctly you can withdraw both your and his contributions - but neither your nor his earnings - penalty-free.

Yes, contributions can be withdrawn penalty free. And you could even withdraw additional funds for purchasing a home (for you or a relative) or for educational expenses (for you or a relative). I think the cap is $10k for a home and the owner has to not have owned a home for 2 years. And if that isn't enough, you can also withdraw more using substantially equal periodic payments until you are 59.5 (at which point you can take out as much as you want without penalty).

ysette9

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Re: What if retirement savings is already (mostly) Roth?
« Reply #3 on: April 02, 2015, 04:40:36 PM »
@MDM: I appreciate the link to the IRS document. Reading through it, I am just not finding where it addresses that early distributions can be done penalty-free. Admittedly, the language is dense and I am short on sleep, so I am sure I am missing something here. From the IRS publication:

What Are Qualified Distributions?

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1.   It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

 2.   The payment or distribution is:

        Made on or after the date you reach age 59,

        Made because you are disabled (defined earlier),

        Made to a beneficiary or to your estate after your death, or

        One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).


Our situation meets criterion 1 but not 2. What am I missing here?

Aphalite

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Re: What if retirement savings is already (mostly) Roth?
« Reply #4 on: April 02, 2015, 04:50:29 PM »
You are missing that CONTRIBUTIONS can be withdrawn at any time after five years - for most people, that's 5500 a year, but for you, it's the balance of your conversion. Earnings SINCE that conversion cannot be withdrawn without penalty before 59.5

See section above the one you quoted:
"You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering Rules for Distributions , later."
« Last Edit: April 02, 2015, 04:52:27 PM by aphalite »

MDM

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Re: What if retirement savings is already (mostly) Roth?
« Reply #5 on: April 02, 2015, 04:52:59 PM »
What Are Qualified Distributions?
...
Our situation meets criterion 1 but not 2. What am I missing here?

See the chart in the IRS document, and note the text in the bottom right box:
Quote
The distribution from the Roth IRA is not a qualified distribution. The portion of the distribution allocable to earnings may be subject to tax and it may be subject to the 10% additional tax.

As long as you withdraw only contributions and not earnings then you are ok.

And, believe it or not, the IRS makes it easy for you to withdraw only contributions.  See the Ordering Rules for Distributions section just below the chart: whatever you withdraw is assumed to come first from contributions.

forummm

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Re: What if retirement savings is already (mostly) Roth?
« Reply #6 on: April 02, 2015, 06:34:29 PM »
You are missing that CONTRIBUTIONS can be withdrawn at any time after five years - for most people, that's 5500 a year, but for you, it's the balance of your conversion. Earnings SINCE that conversion cannot be withdrawn without penalty before 59.5

Earnings can be withdrawn without penalty at any age, in these ways (quoting me from above--"more" means earnings):

Yes, contributions can be withdrawn penalty free. And you could even withdraw additional funds for purchasing a home (for you or a relative) or for educational expenses (for you or a relative). I think the cap is $10k for a home and the owner has to not have owned a home for 2 years. And if that isn't enough, you can also withdraw more using substantially equal periodic payments until you are 59.5 (at which point you can take out as much as you want without penalty).

ysette9

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Re: What if retirement savings is already (mostly) Roth?
« Reply #7 on: April 03, 2015, 09:24:45 AM »
Awesome - thank you for the clarifications.