Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
Anyone else thinking about converting ira funds to roth?
Just another reason, I have chosen to say away from a roth at this stage of my life now being age 67. As you explained some of its complexity it seems extremely complicated for most of us to have a good understanding as to the ends and outs of this anminal.
It is probally better for most younger investors to be in a roth over a traditional ira ... but, by my thinking ... it is not so good for me. Five year lock up ... nope, not for me.
Now, more than ever I plan to say as far away from it as I can get.
I'm thinking about dropping a USB drive into my safe deposit box (and checking that USB drive memory every year or so). I know, I know, safe deposit box. How quaint. But at least I won't be worried about hackers.
You really should watch "Ocean's 11" before doing that.
Ah, but I have thought of that. I figure that I have to worry about bank robbers or hackers, but not both together. I always use USBs with encryption for sensitive or proprietary data. Not that I expect the encryption to be that secure, but I really don't think that bank robbers are going into vaults looking for (encrypted) intangible property. More like currency and jewelry - stuff you can hold in your hand.
Just another reason, I have chosen to say away from a roth at this stage of my life now being age 67. As you explained some of its complexity it seems extremely complicated for most of us to have a good understanding as to the ends and outs of this anminal.
It is probally better for most younger investors to be in a roth over a traditional ira ... but, by my thinking ... it is not so good for me. Five year lock up ... nope, not for me.
Now, more than ever I plan to say as far away from it as I can get.
Thanks again,
Old_Skeet
Now I understand your concern better. I try to make things sound more straightforward. While the interaction of some rules is complicated, that's no excuse - I clearly didn't explain as well as I might have.
The bottom line is that only the earnings are "locked up", and only until Jan 1 2020 (if you contribute/convert this year). Worst case, you pay ordinary taxes on the earnings (no penalty); that's not too much worse than keeping the money in the taxable account where you'd still owe taxes on the earnings (though perhaps at a lower cap gains rate).
With the Roth, before 2020 you could still withdraw all the contributions/conversions with no tax or penalty - so you've got the same access to that money you'd have as if you'd kept it in a taxable account. Better, actually.
In a taxable account, say you purchase 5 shares of a fund at $8. The shares grow to $10. You want to pull out your original $40. So you sell four shares. You recognize a gain of $8 ($2/share times 4 shares). You owe tax on that.
In the Roth, you get to pull all the principal out first. No taxes until you reach into earnings. And if you wait things out until 2020, no taxes on that, either.
I won't say that you can ignore all the rules. Just that in your case there are only a couple - principal comes first and is free; the earnings are taxable until 1/1/2020. And you might even have more flexibility with the Roth.
Some additional info on Roth regarding amounts less than 5 years from Schwab :
If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations: You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase. You use the withdrawal to pay for qualified education expenses. You're at least age 59½. You become disabled or pass away. You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed. The distribution is made in substantially equal periodic payments.1
1. The IRS treats a Roth IRA withdrawal made more than five years after the first tax year in which you made a contribution (including earnings) as a “qualified distribution.” This means it is not taxable or subject to a penalty as long as you satisfy one of these qualifying conditions: You’re at least 59½, you become disabled or pass away, or you use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
Schwab does not currently perform these substantially equal periodic payment (72(t)) calculations. You should speak with a tax advisor. Find more information on these calculation methods in IRS Revenue Ruling 2002-62.
Qualified means nontaxable. It is defined as: Earliest Roth > 5 years AND ( > Age 59.5 OR dead OR disabled) http:
If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:
I have a duh and d'oh question. I am in the middle of rolling over a self 401k into a rollver IRA. With the recent declines, it is at breakeven or slightly underwater. Is there any reason NOT to convert it to a Roth now instead?
I checked to see that if you do a direct 401k to Roth IRA conversion you could recharacterize it to a traditional IRA, and you can. You may want to have this ability in case the market continues to decline after the conversion. (One cannot recharacterize a Roth conversion within a 401(k), but it seems one can recharacterize a 401(k) to Roth IRA conversion.)
I don't know for sure how the timing will work with a direct 401(k) to Roth IRA conversion. My guess is that the value of the conversion is set on the date the check is cut (if you're doing the transfer in cash), or the date the securities are removed from the 401(k) (for an in-kind transfer).
Either way (cash or securities) you may have some timing questions. If transferring cash, it could take a couple of trading days for the cash to arrive at the IRA. So you'll know the date of the conversion, but you might be out of the market during a market bounce (not good regardless of whether converting). If transferring securities, it could take a little longer for the 401(k) plan to distribute them. You won't be out of the market, but the value of your holdings when the conversion actually goes on the books could come after that bounce.
Pure speculation on my part. You should probably check into the mechanics and timing.
These are likely nonissues if you're transferring from a 401(k) to an IRA where both are managed by the same custodian. I did that a couple of years ago and the transaction was almost instantaneous. (No Roth conversion though.)
Thanks much as always for listing considerations. This would be in kind, funds, not cash. However upon doublechecking I discovered that self 401k, which goes way back, is not underwater at all; don't know what I was thinking. Large gain over the decade-plus, even with dip. So I shall roll over to a rollover IRA. Gov wanted self 401k to be ongoing and active and permanent and all that, including regular paperwork, not inactive.
Conversion being done today on a portion of my regular IRA to Roth, using the funds that have gone down the most since their highs, FBTIX, TMLPX and HIEMX. It is transferring in kind, so no cashing out and trying to figure out when to buy in. In his wisdom, my late husband had converted considerable amounts to a roth over the last five years before he passed, and my plan is to convert more in subsequent years. Don't need to withdraw from it for the next five years, so five year rule on these funds can simply expire. By the time I reach 70 six years from now, RMD from ira should be much lower.
This could also be a good time to recharacterize last year's Roth conversion. You have until Oct. 15th to do that.
The decision to do so may depend on whether last year's conversion is still above water, whether a recharacterization would leave you more than you planned in a traditional IRA (equivalently - too few years left to convert what you want to convert), how it would affect last year's and this year's tax brackets, how you feel about filing an amended 2014 tax return, etc.
@Slick - Good move. As you can see from the thread there's a variety of views on the subject. Like you, I'm not in a hurry to harvest a profit. Five years is a reasonable time, I think, to expect some payback for the risk undertaken.
Pleased to report that the conversion I did in January appears to finally have stopped falling. We sit about 14% under the conversion amount at this moment. (I'm being careful however not to walk under ladders or step on any cracks in the sidewalk.)
Comments
Just another reason, I have chosen to say away from a roth at this stage of my life now being age 67. As you explained some of its complexity it seems extremely complicated for most of us to have a good understanding as to the ends and outs of this anminal.
It is probally better for most younger investors to be in a roth over a traditional ira ... but, by my thinking ... it is not so good for me. Five year lock up ... nope, not for me.
Now, more than ever I plan to say as far away from it as I can get.
Thanks again,
Old_Skeet
Ah, but I have thought of that. I figure that I have to worry about bank robbers or hackers, but not both together. I always use USBs with encryption for sensitive or proprietary data. Not that I expect the encryption to be that secure, but I really don't think that bank robbers are going into vaults looking for (encrypted) intangible property. More like currency and jewelry - stuff you can hold in your hand.
The bottom line is that only the earnings are "locked up", and only until Jan 1 2020 (if you contribute/convert this year). Worst case, you pay ordinary taxes on the earnings (no penalty); that's not too much worse than keeping the money in the taxable account where you'd still owe taxes on the earnings (though perhaps at a lower cap gains rate).
With the Roth, before 2020 you could still withdraw all the contributions/conversions with no tax or penalty - so you've got the same access to that money you'd have as if you'd kept it in a taxable account. Better, actually.
In a taxable account, say you purchase 5 shares of a fund at $8. The shares grow to $10. You want to pull out your original $40. So you sell four shares. You recognize a gain of $8 ($2/share times 4 shares). You owe tax on that.
In the Roth, you get to pull all the principal out first. No taxes until you reach into earnings. And if you wait things out until 2020, no taxes on that, either.
I won't say that you can ignore all the rules. Just that in your case there are only a couple - principal comes first and is free; the earnings are taxable until 1/1/2020. And you might even have more flexibility with the Roth.
If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:
You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
You use the withdrawal to pay for qualified education expenses.
You're at least age 59½.
You become disabled or pass away.
You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
The distribution is made in substantially equal periodic payments.1
1. The IRS treats a Roth IRA withdrawal made more than five years after the first tax year in which you made a contribution (including earnings) as a “qualified distribution.” This means it is not taxable or subject to a penalty as long as you satisfy one of these qualifying conditions: You’re at least 59½, you become disabled or pass away, or you use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
Schwab does not currently perform these substantially equal periodic payment (72(t)) calculations. You should speak with a tax advisor. Find more information on these calculation methods in IRS Revenue Ruling 2002-62.
Qualified means nontaxable. It is defined as:
Earliest Roth > 5 years AND ( > Age 59.5 OR dead OR disabled)
I don't know for sure how the timing will work with a direct 401(k) to Roth IRA conversion. My guess is that the value of the conversion is set on the date the check is cut (if you're doing the transfer in cash), or the date the securities are removed from the 401(k) (for an in-kind transfer).
Either way (cash or securities) you may have some timing questions. If transferring cash, it could take a couple of trading days for the cash to arrive at the IRA. So you'll know the date of the conversion, but you might be out of the market during a market bounce (not good regardless of whether converting). If transferring securities, it could take a little longer for the 401(k) plan to distribute them. You won't be out of the market, but the value of your holdings when the conversion actually goes on the books could come after that bounce.
Pure speculation on my part. You should probably check into the mechanics and timing.
These are likely nonissues if you're transferring from a 401(k) to an IRA where both are managed by the same custodian. I did that a couple of years ago and the transaction was almost instantaneous. (No Roth conversion though.)
The decision to do so may depend on whether last year's conversion is still above water, whether a recharacterization would leave you more than you planned in a traditional IRA (equivalently - too few years left to convert what you want to convert), how it would affect last year's and this year's tax brackets, how you feel about filing an amended 2014 tax return, etc.
Pleased to report that the conversion I did in January appears to finally have stopped falling. We sit about 14% under the conversion amount at this moment. (I'm being careful however not to walk under ladders or step on any cracks in the sidewalk.)
Not to worry!