Moving Money from IRA to Taxable Accounts with Zero Tax ?

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Cut-Throat
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Moving Money from IRA to Taxable Accounts with Zero Tax ?

Post by Cut-Throat »

My wife and I are getting ready to retire and will have an income of just a few thousand from taxable accounts. We will be living on money from these taxable accounts for about 8 years, no Social Security and No Pensions

We will still have deductions and exemptions of almost $25K per year. Would it make sense to withdraw enough from my IRA to equal the $25K in deductions each year and move to a taxable account? Our taxable income would still be zero. Is this commonly done or am I overlooking something?
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archbish99
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Post by archbish99 »

Better yet, don't just withdraw it into taxable, do a Roth conversion with the money. That not only gets it out of the IRA tax-free, it lets it grow still tax-sheltered.
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Cut-Throat
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Post by Cut-Throat »

archbish99 wrote:Better yet, don't just withdraw it into taxable, do a Roth conversion with the money. That not only gets it out of the IRA tax-free, it lets it grow still tax-sheltered.
As I understand the rules, you would not be able to access this money for 5 years once it was converted to a Roth. Correct?
nonnie
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Post by nonnie »

Cut-Throat wrote:
archbish99 wrote:Better yet, don't just withdraw it into taxable, do a Roth conversion with the money. That not only gets it out of the IRA tax-free, it lets it grow still tax-sheltered.
As I understand the rules, you would not be able to access this money for 5 years once it was converted to a Roth. Correct?
It's confusing--perhaps this will help:



Also see Pub 90
http://www.obliviousinvestor.com/roth-i ... wal-rules/
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Cut-Throat
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Post by Cut-Throat »

nonnie wrote: It's confusing--perhaps this will help:



Also see Pub 90
http://www.obliviousinvestor.com/roth-i ... wal-rules/
Reading through your link, it still looks like your money is locked up in a Roth for 5 years, otherwise you would incur a 10% penalty.
tripleb
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Post by tripleb »

Suppose you can take $25k per year from the Traditional IRA at no tax liability.
Suppose you only need $15k.

Do a Roth IRA conversion for $10k. Who cares if you can't use the money immediately due to the 5 year rule, if you didn't need that $10k anyway?

If you really need the $10k that year, just take out another $10k from the Traditional IRA and pay a few dollars in taxes on it, or reverse the conversion, and then take another $10k Traditional IRA distribution.

Or better yet, wait until the last week of December, after taking out whatever you needed from the Traditional IRA, and do a conversion of whatever amount of money that you can and hit your $0 tax cap for the year.

So many options, and the 5-year rule shouldn't be a problem.
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Cut-Throat
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Post by Cut-Throat »

tripleb wrote:Suppose you can take $25k per year from the Traditional IRA at no tax liability.
Suppose you only need $15k.

Do a Roth IRA conversion for $10k. Who cares if you can't use the money immediately due to the 5 year rule, if you didn't need that $10k anyway?

If you really need the $10k that year, just take out another $10k from the Traditional IRA and pay a few dollars in taxes on it, or reverse the conversion, and then take another $10k Traditional IRA distribution.

Or better yet, wait until the last week of December, after taking out whatever you needed from the Traditional IRA, and do a conversion of whatever amount of money that you can and hit your $0 tax cap for the year.

So many options, and the 5-year rule shouldn't be a problem.
I may not need it this year, but may need it 4 years from time of withdrawal.
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archbish99
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Post by archbish99 »

Do a small rollover before the EOY, and 2012 is your first year, though. If I'm reading correctly, the money would then be available in 2016, four years later. (First day of the fifth year after the conversion.) Alternatively, when you need money in the meantime, take distributions from the unconverted Traditional.

I'm not suggesting you roll over the whole thing at once, but it might be worth considering for at least a good portion of the money you want to shelter in your deductions/exemptions for years with no income.
tripleb
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Post by tripleb »

Cut-Throat wrote:
tripleb wrote:Suppose you can take $25k per year from the Traditional IRA at no tax liability.
Suppose you only need $15k.

Do a Roth IRA conversion for $10k. Who cares if you can't use the money immediately due to the 5 year rule, if you didn't need that $10k anyway?

If you really need the $10k that year, just take out another $10k from the Traditional IRA and pay a few dollars in taxes on it, or reverse the conversion, and then take another $10k Traditional IRA distribution.

Or better yet, wait until the last week of December, after taking out whatever you needed from the Traditional IRA, and do a conversion of whatever amount of money that you can and hit your $0 tax cap for the year.

So many options, and the 5-year rule shouldn't be a problem.
I may not need it this year, but may need it 4 years from time of withdrawal.
Create a decision model. Two possibilities:

A) You don't need the money in less than 5 years from the time of the withdrawal.

B) You do need the money in less than 5 years.

Then compare the costs and benefits associated:

A) You do the conversion to Roth
1) save taxes on earnings of these earnings
2) allow for special death transfers
3) you may have to pay additional taxes if you must withdraw more than $25k from a Traditional IRA in the year you need it

B) You do not do the conversion
-the exact opposite of the above

Estimate the chances of needing the money in any given year, estimate the costs and benefits, and then make a decision based on the numbers.

If I were you, I would just do the Roth IRA conversion to the limit of the annual level where you pay $0 in taxes.
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Post by Guest422 »

Cut-Throat wrote:
archbish99 wrote:Better yet, don't just withdraw it into taxable, do a Roth conversion with the money. That not only gets it out of the IRA tax-free, it lets it grow still tax-sheltered.
As I understand the rules, you would not be able to access this money for 5 years once it was converted to a Roth. Correct?

I think you age may make a difference here I think if you are over a certain age you dont need to wait
"The hardest victory is over self" | Aristotle
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Epsilon Delta
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Post by Epsilon Delta »

Your original plan to take distributions at 0% tax was good. Converting to a Roth while in the 0% rate may better.

If you don't already have a Roth IRA you should make an effort to make at least a token conversion or contribution to a Roth before the end of 2011.*

There are in fact two different five year rules. The one people have been discussing here matters once you are 59.5 years of age. It runs from the year of your first Roth IRA contribution or conversion. If you already have a Roth IRA five years may already have passed, or there are less than five years to go. If a Roth is established this year the five year period expires on Jan 1st 2016. Assuming you are 59.5 on that date you can withdraw from the Roth penalty and tax free. This means that you can do Roth conversions without any reservations for the last 4 years of your 8 year planning period. (You might want to do them earlier but once the Roth is qualified it's one of the few no-downside options in tax planning)

* It does not matter how much, $1 will do if you can find a custodian. In practice a few $100 in a credit union is probably the most token you can do without fees.

It would help to give less qualified advice if you give some or all of the following information for both you and your wife:
- how old are you?
- Do you already have a Roth and if you do, what year did you open it in?
- Do you have tax deferred money (e.g. IRA, 401(k) etc.)
Alan S.
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Post by Alan S. »

Note that the 5 year holding period for Roth conversions to avoid the 10% penalty becomes moot at age 59.5.

Example: You do a Roth conversion at 57.5. 2 years later you can withdraw the conversion without the penalty. The holding period for conversions runs for 5 years OR until 59.5, whichever is reached sooner.

Earnings on that conversion are only tax free at both 59.5 AND 5 years from the year (Jan 1) of your first Roth contribution of any kind.
livesoft
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Post by livesoft »

^ So this suggests, that if I contribute $100 to a Roth IRA in 2011 at age 50 and make no more contributions, that I can do a conversion from an IRA to a Roth IRA of $50,000 when I am age 60 and all the subsequent gains after the conversion (even one month after) will be tax free.

That is, the relative amount of the original Roth IRA contribution and its earnings and the amount of the conversion and its earnings do not matter at all and once age 59.5 is reached there is no waiting necessary to avoid extra taxes or penalties.
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nonnie
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Post by nonnie »

Alan S. wrote:Note that the 5 year holding period for Roth conversions to avoid the 10% penalty becomes moot at age 59.5.

Example: You do a Roth conversion at 57.5. 2 years later you can withdraw the conversion without the penalty. The holding period for conversions runs for 5 years OR until 59.5, whichever is reached sooner.

Earnings on that conversion are only tax free at both 59.5 AND 5 years from the year (Jan 1) of your first Roth contribution of any kind.
Can you please cite your source? I have Pub 90 and the link I provided earlier quite confusing.

Thanks much,
Nonnie
DSInvestor
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Post by DSInvestor »

Nonnie, Here's something from IRS Pub 590 about exceptions to the early distribution tax:
http://www.irs.gov/publications/p590/ch ... 1000231064
Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income. A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions , later, to determine the amount, if any, of the distribution that is attributable to the part of the conversion or rollover contribution that you had to include in income.

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions, earlier.

For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2010, and makes a regular contribution for 2009 on the same date, the 5-year period for the conversion begins January 1, 2010, while the 5-year period for the regular contribution begins on January 1, 2009.

Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.

You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions.

Other early distributions. Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Exceptions
. You may not have to pay the 10% additional tax in the following situations.

You have reached age 59½.

You are disabled.

You are the beneficiary of a deceased IRA owner.

You use the distribution to pay certain qualified first-time homebuyer amounts.

The distributions are part of a series of substantially equal payments.

You have significant unreimbursed medical expenses.

You are paying medical insurance premiums after losing your job.

The distributions are not more than your qualified higher education expenses.

The distribution is due to an IRS levy of the qualified plan.

The distribution is a qualified reservist distribution.
nonnie
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Post by nonnie »

DSInvestor wrote:Nonnie, Here's something from IRS Pub 590 about exceptions to the early distribution tax:
http://www.irs.gov/publications/p590/ch ... 1000231064
[/quote]

My bad. I misspoke, I read too fast, I responded too quickly, it's Sat morning :D . I do know about avoiding the penalty in the way quoted in the link. The confusing part is whether withdrawals prior to the elapse of the 5 year period are taxed again. Any info/take on that?

Nonnie
DSInvestor
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Post by DSInvestor »

Nonnie, here's a link to a fairmark page called Distributions After a Roth IRA conversion:
http://fairmark.com/rothira/rolldist.htm
nonnie
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Post by nonnie »

DSInvestor wrote:Nonnie, here's a link to a fairmark page called Distributions After a Roth IRA conversion:
http://fairmark.com/rothira/rolldist.htm
Thanks for sending the link. I've read several others like it and have come to the conclusion as the OP did that it's 5 years from the initial opening of the Roth, right?

Nonnie
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Cut-Throat
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Post by Cut-Throat »

livesoft wrote:^ So this suggests, that if I contribute $100 to a Roth IRA in 2011 at age 50 and make no more contributions, that I can do a conversion from an IRA to a Roth IRA of $50,000 when I am age 60 and all the subsequent gains after the conversion (even one month after) will be tax free.

That is, the relative amount of the original Roth IRA contribution and its earnings and the amount of the conversion and its earnings do not matter at all and once age 59.5 is reached there is no waiting necessary to avoid extra taxes or penalties.
You do know you have to pay tax on the $50K conversion at the time of the conversion. right?
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Epsilon Delta
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Post by Epsilon Delta »

livesoft wrote:^ So this suggests, that if I contribute $100 to a Roth IRA in 2011 at age 50 and make no more contributions, that I can do a conversion from an IRA to a Roth IRA of $50,000 when I am age 60 and all the subsequent gains after the conversion (even one month after) will be tax free.

That is, the relative amount of the original Roth IRA contribution and its earnings and the amount of the conversion and its earnings do not matter at all and once age 59.5 is reached there is no waiting necessary to avoid extra taxes or penalties.
Absolutely. Once you are 59.5 and your oldest Roth is 5 years old all distributions are qualified. Qualified distributions are tax and penalty free. The dollars involved don't matter. Check out Figure 2.1 in the following link. In particular the final box on the left.

http://www.irs.gov/publications/p590/ch ... 1000231061

Parenthetically, this five year rule is now nugatory because anybody with earned income can establish a Roth and start the five year clock ticking so that it expires before they are 59.5. This should be on the list of things to do on particular birthdays.
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