For a married couple, taxes will go up significantly in the future: When one dies and leaves the other in the single tax bracket. IF you are planning on leaving a legacy to your heirs, you want to consider THEIR tax brackets also.. since they have to do RMD's and empty the account entirely in 10 years after they inherit the money.
I just spent many hours on the question about when to pay the taxes on a conversion. You pay estimated taxes on the conversion in the quarter that it is done, but you might not HAVE to. I can convert in 2024 and pay the taxes April 15th 2025. If you're interested in knowing what you can do, keep reading. There's a chart on page 20 of the IRS publication "About Publication 505, Tax Withholding and Estimated Tax." If you want, you can also complete the worksheet on page 8 of the "Form 1040-ES." I'm very pleased with this because I'll have a year to save up what is needed. This will allow me to max my Roth contributions for years 23 and 24. Yay!!
actually, there is another important factor.... even if the rate of return and tax rate are identical, the VALUE of money is different.... money is worth more today than the future, so it would be better to pay tax in the future with less valuable money
The math isn't as simple in my opinion. By not doing Roth conversions I could be subject to significant ACA and Irmaa costs on the future since those are income based. So even though I may pay more taxes now, there is an offset if I can benefit from lower healthcare and Medicare costs in the future. I wish people would stop saying it's just about tax rates now vs the future. It ignores these other factors.
Right, but I think these factors (generally) make the argument for Roth conversions stronger. In the video, this was said (too generally) as a rebuttal to the argument about the "cost" of a conversion.
We've discussed this in other videos (just not here due to time) but when we take other expenses like an ACA subsidy phaseout, we can simply translate that into a 'tax rate'. For instance, if I convert $10,000 more and lose a $100 per month subsidy, that extra $10,000 is costing me 12% + whatever the underlying tax rate would be. Well then you can assess, does paying 12% + the marginal tax rate on that $10,000 make sense? You can adjust variables and perform this calculation repeatedly until you gain the right target or close to the right target. The concept is simple IMO but that doesn't make it easy if you don't have tools/software that can aid in this process.
@@joycewright5386 Many people elect to retire before the age of 65 and Medicare, which means health care costs are potentially a big issue for a period of time. And not people get post-retirement medical benefits from their employer. I was personally able to retire at age 60 (because I was railroad employee with 30 years of service), which meant I needed to pay for five years of health insurance on my dime. ACA essentially provided us (me and my wife) free health care insurance for several years because my tax strategy was to stay under the ACA subsidy cliff during 2017, 2018, 2019 and 2020. My annual ACA subsidies averaged $ 20,303 per year during those four years. The strategy is much easier to implement/achieve if most of your assets are in IRA and Roth IRA accounts, while you carefully limit/eliminate IRA to Roth IRA conversions. The ACA subsidy cliff was temporarily eliminated from 2021 to 2025 (tax years) but is currently scheduled to return for 2026 (tax year). Lastly, if you do a large IRA to Roth IRA conversion during 2023 and turn 65 during 2024, that conversion will result in an IRMAA penalty (Medicare Income-Related Monthly Adjustment Amount) during 2025 so should be considered when evaluating tax strategies.
Question: My 2023 fed tax owed would have been $211 without a Roth conversion. But, I converted $45K and with that simple act, it caused my fed tax owed to be $9.8K with another $2.4K in state tax. Why? My 'taxable' Social Security income zooms from $15K to $53.3K -- and my Taxable Income goes from $2.1K to $85.3K. What a crazy system.
Very good video, I get these questions from co workers and viewers all the time. I am doing Roth conversions in my early 50's because I plan to retire next year at 55. Because of my pension, I know I will be in higher tax brackets forever. Thx
I retired at 49 y/o with a state pension in 2014 for life. My wife will retire end of this year at 60 y/o. We both have sizable IRAs after years of planning Roth conversions don't make sense in our situation. She will take SS at 62 y/o. Do your research a lot of financial gurus on YT pushing conversions & making them sound doable.
@@user-wm2tw 50% each whatever is left from the estate. We want to start spending down at 62 y/o for the kids. doesn’t make sense to wait until we die start gifting now!
@@HB-yq8gy yes. What will be their tax burden when they get leftover IRA and house? I am wondering g if I should convert to Roth or just go with RMDs and leave leftover on trust for them. I can tell what’s the best way.
Great video, thanks, see TIM LOWERY's question below,, I have the same question,, PLEASE if you can do a complete video on how these backdoor roth's work it would be greatly appreciated. I watched many video's but they just don't touch everything we need to know,, thanks again for the good video's.
Hello, I have been watching your videos on TH-cam for some time. You are ABSOLUTELY AWESOME! In this video on Roth Conversions, Question #13 is "Do I Have to Wait 5 Years to Access My Conversion" is very interesting to me. I completed "Backdoor Roth Conversions" from IRA to Roth IRA in 2021 and 2022 keeping two different accounts so not to confuse the start of the 5 year periods. I retired in Feb 2023 and I am 62 Years old. From this video, it appears that I may withdraw earnings from these Roth IRA accounts tax free NOW and do not I need to wait until the 5 year period passes?
Yeah, I'm still not sure on the "you don't have to wait 5 years if you're over 591/2. I just looked on Fidelity sight and it clearly states quote "Note: The 5-year aging requirement applies to all Roth IRAs, even if the account holder is 59½ or older. In addition to withdrawals from originally owned Roth IRAs, it covers inherited Roth IRAs based on when the original owner made the first contribution. A separate 5-year aging rule covers conversions from traditional IRAs to Roth IRAs."
Great video. I agree growth rate is not relevant as long as it is a positive number. If you have a loss, you could have just withdrawn the money and put it into a brokerage account and taken advantage of tax loss harvesting and your heirs would get a step up in basis and not have the 10 year rule to withdraw the funds like they would for a Roth. For that reason, as well as the time value of money, the tax rate needs to be more than a couple of % higher in the future for me to consider converting today.
Something I haven't been able to find much information about is the impact on current income and taxes when converting contributions that were nondeductible. What little I've found seems to imply the nondeductible contributions are not counted as income and therefore incur no taxes - only gains on the investment are considered income and therefore taxed.
15:25 Could you clarify? Whenever someone talks about this rule, they talk about paying a 10% penalty if you (under 59.5) access the converted money in less than 5 years. But no one explicitly says what seems to be implied by that statement: that you _are allowed_ to withdraw and use the converted Roth funds after 5 years. *Is that true?* In other words, are funds converted to Roth treated exactly the same as Roth contributions after 5 years have passed? Because we can withdraw our Roth contributions with no penalty. Is this the same (after 5 years)?
My fear of rushing into Roth Conversions now is if Congress decides (shockingly) to allow the TAX CUT AND JOBS ACT to continue for some time past the targeted expiration. While we all agree it most likely will go back to normal, I also think in the current political climate, no administration is going to want the "black eye" of being the one that made the call to allow it to expire. Regardless, Americans with collectively see this move as a extremely undesirable and unpopular. Voters should express this very loudly as we enter the next presidential cycle.
It’s much easier for Congress to let a sunset happen than to pass a tax increase bill. Either way, rates are low at least through 2025 so I am converting to the top of 24%. However, I think there are so many variables to consider (ACA, IRMAA, money to pay the taxes, etc) that there is no consensus answer and it’s an individual decision.
@@straitjacketstudios The other huge factor is current domicile state and anticipated moves before retirement. States want that tax revenue and the ones that currently don't I certainly don't trust to stay that way in the next x many years depending on your age... I certainly don't trust WA stays tax free now that the state supreme court made their contrived ruling that ruled things like capital gains taxes can be considered excise taxes and thus exempt from state constitutional scrutiny. I'm also not convinced ROTH conversions as they currently can be made will always be that way without further restrictions. I got 30ish years, that's a long time to assume taxes will stay as favorable as they are today... Sure they may be more favorable, but I'm not sure I want to bet on it.
I understand what you say about comparing the net after tax values and rates of return not mattering. However, is it not better to convert to a Roth in a down maket as this would help convert a larger percentage of your assets at an overall lower tax liability?
3:00 time mark: It is not clear in your visuals what exactly is going on. I wish that you had labeled "15% tax on ROTH Conversion". Notwithstanding the point of clarity, the example itself stands out as being not the usual case. Ordinarily, for a large withdrawal of funds, you would incur a HIGHER tax, not a lower tax. The usual case would be something more like 20% for the $100K conversion and 15% for the annual $10K withdrawals. That would make more sense as an example.
As you approach RMD's with a significant IRA account, don't you really want to IRA to Roth IRA convert those assets before age 73, which would limit/eliminate the RMD's? Either way you are going to pay federal income tax, but the RMD's will result in assets that are future taxed while IRA to Roth IRA conversions will result in assets that are not future taxed. Or am I missing something?
Great video! I would like to increase the after-tax money available to me. I will be making a withdrawal from my traditional IRA. Since I may not use the $ for a few years, should I put it in my Roth until I need it? Thank you.
Question from a beginner: #14 - let's say I convert $10K from a tax-deferred account into my existing Roth; certain positions within my tax-deferred will need to be sold to come up with the $10K that will then become "Roth-ed." My fear is basically will I get double-taxed? Will IRS tax the $10K as ordinary income (at 24%) and additionally tax the gains on my sold positions (let's say $1000 hypothetically) as long-term capital gains (at 15%)? If so, I will owe $2550 instead of $2400 in taxes.
I am a seasoned investor and have >50% of my retirement funds in ROTHs for my wife and I. My CPA says I should stop converting funds to a ROTH because he feels the fed will limit the amount allowed in retirement accounts and force people to reduce the amounts. He mentioned that Congress has already tried to put limits on the retirement fund totals. I get that, but is there any chance they would force us to reduce our accounts in the future?
On the Roth Conversion 5-Year Rule, don’t you have to wait 5 years to withdraw any of the post-conversion EARNINGS, even if you’re over the age of 59-1/2 in order to avoid the 10% early withdrawal penalty? Thanks, Craig in NC
You're confusing two different things. You have to wait 5 years to withdraw Roth conversion principal unless you're over 59 1/2. Any earnings withdrawn from the Roth are subject to taxes and early withdrawal penalties unless you're over 59 1/2. It doesn't matter if the earnings are from contributions or conversions.
So to clarify, if you do a Roth conversion after age 59 1/2 are you saying you can take that money as a distribution without having to wait 5 years? This is a most confusing topic There is no place that I have searched on the internet that clearly says that you can take a Roth Distribution without having to wait 5 years if you are older than 59 1/2. I hope you are right. If you are, why is this not made clear to everyone? Is this done intentionally so as to make everyone think you have to wait 5 years?
Eric is correct. Note: I’m removing my 2 previous comments to this, and replacing them with 1 clear and concise response (I hope, ha). The deal is this: if you are > 59 1/2, you CAN do a Roth conversion and take those funds out as a distribution (tax and penalty free) without having to wait 5 years. But this is for the CONVERSION amount. If you take out any EARNINGS on the conversion amount before 5 years, then you MIGHT owe taxes and/or an additional 10% penalty on the earnings. But the bigger overriding rule is this: if you are > 59 1/2, and you have held your first Roth IRA for at least 5 years (either a contributory Roth or a conversion Roth), then all of your Roth distributions are “qualified”, which means you don’t pay any taxes or penalties on any part of the distributions, current or future, whether they consist of regular contributions, conversion contributions, or earnings. And this will include any new Roth IRAs (contributory or conversions) that you set up in the future. You are home free forever. Thus all of these other confusing Roth distribution rules that come into play, such as one 5 year rule for all contributory Roths, separate 5 year rules for each conversion Roth, rules for when taxes and/or additional 10% penalties apply to contributions vs earnings, the withdrawal order of distributions (contributions first, conversions second, earnings third): all these rules have to do with “unqualified” distributions. Meaning you are < 59 1/2 and/or you haven’t held your first Roth IRA for at least 5 years. This is where we beat our heads against the wall trying to figure out these insane rules. They are so insane that many tax and accounting pros get it wrong. I see videos on TH-cam, and articles elsewhere on the internet, half of them are right, half are wrong, half don’t make clear enough distinctions in what they are saying. That makes 3 halves, ha. Also keep in mind that all your Roth IRAs are considered by the IRS to be just one single big pot, no matter how many separate Roth accounts you have at how many institutions. Also, a Roth "contribution" is defined by the IRS as either a regular contribution or a conversion contribution. You can find a SUMMARY of the IRS tax code rules dealing with Roth IRA distributions in IRS Publication 590-B, but you have to read the upper part of the Roth distribution rules, as well as the exceptions down below. Note that this is only a summary of the actual tax code, there can be differences between the summary and the code itself, in which case the code overrides the summary. I find this 590-B summary most confusing at times, lacking true clarity. Rather than this IRS summary, I found a better excellent article to explain this (and other situations), with sample problems, which reference the IRS tax code as written by the Cornell Law School. To find the article, do a search for: " fi tax guy the taxation of roth ira distributions " dated July 31, 2023. There’s an excellent Roth distributions table at the end. For the tax code referenced in the article, do a search for " Cornell Law School Legal Information Institute 1.408A-6 - Distributions ". So the easiest way around all this is to wait and not take Roth distributions until (a) you are 59 1/2, AND (b) you’ve held your first Roth IRA for at least 5 years. At that point all current and future Roth distributions are tax and penalty free FOREVER. And as Eric says somewhere in one of his videos, it’s best to go ahead and set up your first Roth IRA as soon as you can, either by contribution or conversion, even if it’s only for $1, and get that “first Roth IRA” 5 year clock running ASAP. Thanks Eric !!
I've asked this question on several of these financial advice channels but never got an answer. I have a 401k through my employer (I realuze 401k is different from IRA, but bear with me). I'm contributing enough to the pre-tax part of the 401k to get my company's full match. I'm contributing the remainder up to the legal limit of $30,000 to the Roth part of the 401k (note that I'm over 50, so catch up applies). In addition, I'm contributing about $15,000 to the after-tax tax part of the 401k. The question is this: I understand that I can roll after tax 401k contributions to the Roth 401k in the current year without getting taxed for it (back door). I neglected to do this rollover last year. If I'm careful to only roll over the actual amount of last year's total contribution (i.e., not any earnings), can I still roll those funds from last year over during this year without paying additional tax? If so, is there any additional tax paperwork I'll have to file (amended return, etc.)?
Congratulations on such successful savings. What you're describing (post tax 401k to Roth IRA) is actually a mega backdoor Roth conversion. You can only do this type of conversion if allowed for by your 401k provider. A typical backdoor Roth is contribute after-tax to a traditional IRA then convert that to Roth IRA. I'm not trying to not pick, but hope that if you search with the right terms, you'll have an easier time finding more information on the topic. You should check with your employer about the company matching funds. My employer lets me contribute to the Roth 401k and get matching funds from those contributions. This way the only pretax I have is from their matching funds. The form you need is 8606. The way I read it, you would be best off by doing a conversion of all the after tax money, both contributions and growth. You'll have to pay taxes on the growth, of course. If you only do a partial conversion, you'll have to pay taxes proportionally. Say you contributed $30k and grew $10k. If you only convert the $30k, you'll have to pay taxes on 1/4 of the $30k that you convert. You effectively will be moving over $22.5k of post tax and $7.5k of pre tax (earnings.) Then you must keep track of your post tax basis of $7.5k is post tax and $2.5k is treated as pre tax cause it's earnings. So much simpler to just move it all and pay the taxes at the time of conversion.
If I transfer Roth TSP to a Roth IRA, and my 5-year window has already passed for when I started Roth TSP, the 5-year waiting period does not restart for my new Roth IRA does it? Doesn't seem like it would since it's a transfer and not a conversion.
Roth 401K vs Roth IRA vs Roth 403b. Do Roth 401k and Roth 403b have RMD's. It is my understanding that Roth IRA's do not require RMD but not sure about the others.
Very import for planning well - unfortunately I just made all these calculations for myself last month🤣- oh well hopefully good for keeping my brain youn
What method do you use to determine future tax bracket income limits. I’ve seen very different results that impact convert or not depending on what the software assumptions are for adjusting the bracket limits. Thanks.
As I understand it, they use a COLA (Cost-Of Living Adjustment) to project future tax brackets. In the past, I have asked what factor they assume going forward, and they said that the usually use a 3% annual growth rate assumptions.
Great info. Thank you. Question: I have an HSA and to minimize inheritance taxes, I want to do a Roth conversion using those funds. What steps must I take to accomplish this ?
So if you're over 59.5 and do a ROTH conversion you don't have to wait 5 years to withdraw it penalty free. But what about a ROTH contribution? Up to $7,000 annually is allowed for my age. 🤔
In both cases, yes, you can withdraw the conversion or contribution penalty free. But you can only withdraw the gains/earnings penalty free and/or tax free if you have held an earlier Roth IRA for 5 years; that earlier Roth can be either a contribution or a conversion. Thus to get everything thing out penalty free/tax free after age 59 1/2, you must have held an earlier Roth for 5 years. This criteria is the definition of a qualified distribution.
Saw a video saying you have to convert to trad IRA first then Roth but I thought I could just take my distribution after withholding and send to my Roth?
Not only are there no income or size limitations on Roth conversions, Roth conversions don't count towards the income limit to contribute to Roth IRAs if you wish to do that in the same year as a conversion. That is not well-known.
I retired last year at age 56 so Rule of 55 should apply to my 401k which has both Roth and Traditional, and I want to request an in-service conversion of the Traditional part of the 401k to Roth 401k. This year I am 57 so I'd expect that the amount converted will be taxed as ordinary income, given the Rule of 55 is there a chance I'll be on the hook for the 10% early distribution penalty?
If retired requesting "in-service conversion" seems undo-able. Why not roll part of t-401(k) to t-IRA and then convert to Roth IRA (using outside money for the tax)?
@@alrocky we are both under age 59.5 and the Rule of 55 does not apply to IRA, only 401k. Any distribution from an IRA at this age comes with the 10% penalty.
@@jessefletcher9116 If you want money to spend just withdraw from t-401(k). If you want t-401(k) converted to Roth then proceed as described as there is no 10% early withdrawal penalty for t-IRA to Roth IRA as long as you use non t-IRA money to pay for conversion tax.
The Roth tax not the same as comparing it to retaxing your bank account. All the growth in the Roth has not been taxed. So, I can see congress changing things to start taxing the growth pretty easily since it's not really a retax.
If a single person can only contribute to a Roth if his income (MAGI) is less than 160,000 (In 2024), does that mean if my income is 80,000 and I convert another 80,000 to Roth, then I can not contribute another 8,000(catch up) to my Roth in 2024?
If I complete Roth conversions in multiple years after age 59.5, does each Roth conversion have a separate 5 year time frame to have tax free disbursements of the earnings?
No, a different rule applies for "after age 59 1/2" : 5 years after your first Roth IRA was set up (whether by contribution or conversion), you can take tax free/penalty free distributions on anything in your Roth(s) = contribution amounts, conversion amounts, and earnings. Satisfy these 2 conditions and you're home free the rest of your life. If you don't meet both of these conditions, then you'll have to deal with all the freaky rules, ugh. See my much longer reply below to DP-ol5uv.
@@F8NcH8Ng Thank you. Much appreciated. The rules are somewhat complicated and there are also many confusing explanations on TH-cam and the internet when it comes to after 59.5 and multiple conversions.
Rule of 55 for Roth conversions may allow you to avoid the 10% tax penalty (form 5329, Exception 01): If you turn 55 during the calendar year you lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty. However, you must still pay taxes on your withdrawals. Not only does the rule of 55 work with a 401(k), but it also applies to 403(a) and 403(b) plans. Doesn't apply to IRAs.
On when to pay tax on conversion. When/how is the IRS notified of the date of the conversion? The 1099-R doesn't seem to have it. (Someone told me that the IRS assumes Jan 1, which probably isn't true!)
They will assume that it is received equally throughout the year. If it isn't (e.g. a Roth conversion later in the year) then you can file form 2210 using the Annualized Income Installment Method to show when the income was received and when the tax payments were made in order to avoid a penalty.
I would shy away from paying taxes from the money in your pre-tax accounts. You have to keep in mind that the money pulled to pay taxes on the conversion is also taxed. For example, if you convert or need to withdraw $10,000 and the tax rate is 20%, you'll actually need to pull $12,500 to pay the taxes and have the $10K remaining for your needs. You are essentially being taxed at 25% on that needed/converted $10K ($2500 tax / $10,000). If you pay the taxes from an after tax source, then the tax owed will just be the 20%, or $2000. It gets worse as the tax rate increases; at 30% tax rate, you're really paying about 42.9% in taxes.
I'm struggling to find a reason it wouldn't make sense to funnel all IRA distributions through a Roth IRA (via conversions) after age 59 1/2 . Taking a straight IRA distribution would remove the ability to move any unused funds to a Roth going forward. Why not always first convert to Roth and then take your distribution from the Roth since you can access the funds with no additional tax burden immediately after conversion. Using this approach you will earn tax free growth on the funds while you draw down from the Roth throughout the year. I'm I missing anything?
I could also be missing something, but I don't think those converted funds are tax-free immediately....the 5-year rule does apply to this. Please correct me if I'm wrong.....
@@scottgoff6305 There are two different 5-year rules. One rule is that you must have had the Roth account open for at least 5 years, a second 5-year rule applies to conversions but only if you are under 59 1/2. My point is that if you are over 59 1/2 and have had a Roth open for 5 years then you have satisfied the relevant 5-year rules and conversions at that stage would be available immediately without penalty. So, if you are in this situation, why not convert all traditional IRA distributions to a Roth rather than taking a normal distribution. This way you are getting tax free growth on any portion of the IRA distribution you don't use right away.
Great video, can you please do a video for expats before 59.5 and living outside of US full time? It seems that doing a Roth conversion, if done right, has more ‘juiced’ since expats can take advantage of additional earned income exemptions?
There are 2 reasons to not to convert to a Roth. First the easy one-- if you expect to outlive your money it's very foolish to convert. Second-- and more complicated--is because you expect your marginal rate to increase in retiremenmt ( rare but it can happen).
MoneyGuide Pro is pretty interesting software. Once you've entered you financial data, plans, and expectations, it runs monte carlo simulations with various econmic conditions to show probability of successful outcome. It also lets you do "what if" scenarios and see their effects.
![[MV] A leap of faith...ความเชื่อใจครั้งสุดท้าย (From "Petrichor the series")](http://i.ytimg.com/vi/U1piZH2CNXA/mqdefault.jpg)
For a married couple, taxes will go up significantly in the future: When one dies and leaves the other in the single tax bracket. IF you are planning on leaving a legacy to your heirs, you want to consider THEIR tax brackets also.. since they have to do RMD's and empty the account entirely in 10 years after they inherit the money.
Are rules for spouses different than for other heirs?
@@vpmassacre4771 Yes. Spouses are not subject to the 10-year rule for withdrawing all funds in an inherited Traditional account.
I just spent many hours on the question about when to pay the taxes on a conversion. You pay estimated taxes on the conversion in the quarter that it is done, but you might not HAVE to.
I can convert in 2024 and pay the taxes April 15th 2025. If you're interested in knowing what you can do, keep reading. There's a chart on page 20 of the IRS publication "About Publication 505, Tax Withholding and Estimated Tax." If you want, you can also complete the worksheet on page 8 of the "Form 1040-ES." I'm very pleased with this because I'll have a year to save up what is needed. This will allow me to max my Roth contributions for years 23 and 24. Yay!!
actually, there is another important factor.... even if the rate of return and tax rate are identical, the VALUE of money is different.... money is worth more today than the future, so it would be better to pay tax in the future with less valuable money
Thanks for clarifying this confusing topic.
The math isn't as simple in my opinion. By not doing Roth conversions I could be subject to significant ACA and Irmaa costs on the future since those are income based. So even though I may pay more taxes now, there is an offset if I can benefit from lower healthcare and Medicare costs in the future. I wish people would stop saying it's just about tax rates now vs the future. It ignores these other factors.
Right, but I think these factors (generally) make the argument for Roth conversions stronger. In the video, this was said (too generally) as a rebuttal to the argument about the "cost" of a conversion.
We've discussed this in other videos (just not here due to time) but when we take other expenses like an ACA subsidy phaseout, we can simply translate that into a 'tax rate'. For instance, if I convert $10,000 more and lose a $100 per month subsidy, that extra $10,000 is costing me 12% + whatever the underlying tax rate would be. Well then you can assess, does paying 12% + the marginal tax rate on that $10,000 make sense?
You can adjust variables and perform this calculation repeatedly until you gain the right target or close to the right target. The concept is simple IMO but that doesn't make it easy if you don't have tools/software that can aid in this process.
Why would you be on the ACA when you are on Medicare?
@@joycewright5386 Many people elect to retire before the age of 65 and Medicare, which means health care costs are potentially a big issue for a period of time. And not people get post-retirement medical benefits from their employer. I was personally able to retire at age 60 (because I was railroad employee with 30 years of service), which meant I needed to pay for five years of health insurance on my dime.
ACA essentially provided us (me and my wife) free health care insurance for several years because my tax strategy was to stay under the ACA subsidy cliff during 2017, 2018, 2019 and 2020. My annual ACA subsidies averaged $ 20,303 per year during those four years. The strategy is much easier to implement/achieve if most of your assets are in IRA and Roth IRA accounts, while you carefully limit/eliminate IRA to Roth IRA conversions. The ACA subsidy cliff was temporarily eliminated from 2021 to 2025 (tax years) but is currently scheduled to return for 2026 (tax year).
Lastly, if you do a large IRA to Roth IRA conversion during 2023 and turn 65 during 2024, that conversion will result in an IRMAA penalty (Medicare Income-Related Monthly Adjustment Amount) during 2025 so should be considered when evaluating tax strategies.
@@joycewright5386Some people retire before age 65
Question: My 2023 fed tax owed would have been $211 without a Roth conversion. But, I converted $45K and with that simple act, it caused my fed tax owed to be $9.8K with another $2.4K in state tax. Why? My 'taxable' Social Security income zooms from $15K to $53.3K -- and my Taxable Income goes from $2.1K to $85.3K. What a crazy system.
Very good video, I get these questions from co workers and viewers all the time. I am doing Roth conversions in my early 50's because I plan to retire next year at 55. Because of my pension, I know I will be in higher tax brackets forever. Thx
I retired at 49 y/o with a state pension in 2014 for life. My wife will retire end of this year at 60 y/o. We both have sizable IRAs after years of planning Roth conversions don't make sense in our situation. She will take SS at 62 y/o.
Do your research a lot of financial gurus on YT pushing conversions & making them sound doable.
@@HB-yq8gy It's true, everyone's
situation is different. What works for one doesn't always work for others.
@@HB-yq8gyhow will your leftover IRA treated when it goes to your children?
@@user-wm2tw 50% each whatever is left from the estate. We want to start spending down at 62 y/o for the kids. doesn’t make sense to wait until we die start gifting now!
@@HB-yq8gy yes. What will be their tax burden when they get leftover IRA and house? I am wondering g if I should convert to Roth or just go with RMDs and leave leftover on trust for them. I can tell what’s the best way.
Great video, thanks, see TIM LOWERY's question below,, I have the same question,, PLEASE if you can do a complete video on how these backdoor roth's work it would be greatly appreciated. I watched many video's but they just don't touch everything we need to know,, thanks again for the good video's.
Hello, I have been watching your videos on TH-cam for some time. You are ABSOLUTELY AWESOME! In this video on Roth Conversions, Question #13 is "Do I Have to Wait 5 Years to Access My Conversion" is very interesting to me. I completed "Backdoor Roth Conversions" from IRA to Roth IRA in 2021 and 2022 keeping two different accounts so not to confuse the start of the 5 year periods. I retired in Feb 2023 and I am 62 Years old. From this video, it appears that I may withdraw earnings from these Roth IRA accounts tax free NOW and do not I need to wait until the 5 year period passes?
Yeah, I'm still not sure on the "you don't have to wait 5 years if you're over 591/2. I just looked on Fidelity sight and it clearly states quote "Note: The 5-year aging requirement applies to all Roth IRAs, even if the account holder is 59½ or older. In addition to withdrawals from originally owned Roth IRAs, it covers inherited Roth IRAs based on when the original owner made the first contribution. A separate 5-year aging rule covers conversions from traditional IRAs to Roth IRAs."
Great video. I agree growth rate is not relevant as long as it is a positive number. If you have a loss, you could have just withdrawn the money and put it into a brokerage account and taken advantage of tax loss harvesting and your heirs would get a step up in basis and not have the 10 year rule to withdraw the funds like they would for a Roth. For that reason, as well as the time value of money, the tax rate needs to be more than a couple of % higher in the future for me to consider converting today.
Thank you! Excellent video as usual! I really appreciate the 5 yr rule on conversions, and the software you use.
This truly did answer some of my lingering questions that other videos didn't. Thank you.
Your 100% correct, best time to do a Roth is in your early 60’s
Can I just pay my Roth conversion taxes from my monthly pension withholding? I can easily increase or decrease withholding as needed
Another great video Eric! Thanks!
Something I haven't been able to find much information about is the impact on current income and taxes when converting contributions that were nondeductible. What little I've found seems to imply the nondeductible contributions are not counted as income and therefore incur no taxes - only gains on the investment are considered income and therefore taxed.
Looking forward to your software!
15:25 Could you clarify? Whenever someone talks about this rule, they talk about paying a 10% penalty if you (under 59.5) access the converted money in less than 5 years. But no one explicitly says what seems to be implied by that statement: that you _are allowed_ to withdraw and use the converted Roth funds after 5 years. *Is that true?* In other words, are funds converted to Roth treated exactly the same as Roth contributions after 5 years have passed? Because we can withdraw our Roth contributions with no penalty. Is this the same (after 5 years)?
My fear of rushing into Roth Conversions now is if Congress decides (shockingly) to allow the TAX CUT AND JOBS ACT to continue for some time past the targeted expiration. While we all agree it most likely will go back to normal, I also think in the current political climate, no administration is going to want the "black eye" of being the one that made the call to allow it to expire. Regardless, Americans with collectively see this move as a extremely undesirable and unpopular. Voters should express this very loudly as we enter the next presidential cycle.
It’s much easier for Congress to let a sunset happen than to pass a tax increase bill. Either way, rates are low at least through 2025 so I am converting to the top of 24%.
However, I think there are so many variables to consider (ACA, IRMAA, money to pay the taxes, etc) that there is no consensus answer and it’s an individual decision.
@@JFreeUNC Good point
@@straitjacketstudios The other huge factor is current domicile state and anticipated moves before retirement. States want that tax revenue and the ones that currently don't I certainly don't trust to stay that way in the next x many years depending on your age... I certainly don't trust WA stays tax free now that the state supreme court made their contrived ruling that ruled things like capital gains taxes can be considered excise taxes and thus exempt from state constitutional scrutiny. I'm also not convinced ROTH conversions as they currently can be made will always be that way without further restrictions. I got 30ish years, that's a long time to assume taxes will stay as favorable as they are today... Sure they may be more favorable, but I'm not sure I want to bet on it.
I understand what you say about comparing the net after tax values and rates of return not mattering. However, is it not better to convert to a Roth in a down maket as this would help convert a larger percentage of your assets at an overall lower tax liability?
Makes sense, then when it rebounds in the Roth, it’s tax free.
Good Slogan..."You don't need..."
3:00 time mark: It is not clear in your visuals what exactly is going on. I wish that you had labeled "15% tax on ROTH Conversion".
Notwithstanding the point of clarity, the example itself stands out as being not the usual case. Ordinarily, for a large withdrawal of funds, you would incur a HIGHER tax, not a lower tax. The usual case would be something more like 20% for the $100K conversion and 15% for the annual $10K withdrawals. That would make more sense as an example.
As you approach RMD's with a significant IRA account, don't you really want to IRA to Roth IRA convert those assets before age 73, which would limit/eliminate the RMD's? Either way you are going to pay federal income tax, but the RMD's will result in assets that are future taxed while IRA to Roth IRA conversions will result in assets that are not future taxed.
Or am I missing something?
Great video! I would like to increase the after-tax money available to me. I will be making a withdrawal from my traditional IRA. Since I may not use the $ for a few years, should I put it in my Roth until I need it? Thank you.
Question from a beginner: #14 - let's say I convert $10K from a tax-deferred account into my existing Roth; certain positions within my tax-deferred will need to be sold to come up with the $10K that will then become "Roth-ed." My fear is basically will I get double-taxed? Will IRS tax the $10K as ordinary income (at 24%) and additionally tax the gains on my sold positions (let's say $1000 hypothetically) as long-term capital gains (at 15%)? If so, I will owe $2550 instead of $2400 in taxes.
I am a seasoned investor and have >50% of my retirement funds in ROTHs for my wife and I. My CPA says I should stop converting funds to a ROTH because he feels the fed will limit the amount allowed in retirement accounts and force people to reduce the amounts. He mentioned that Congress has already tried to put limits on the retirement fund totals. I get that, but is there any chance they would force us to reduce our accounts in the future?
On the Roth Conversion 5-Year Rule, don’t you have to wait 5 years to withdraw any of the post-conversion EARNINGS, even if you’re over the age of 59-1/2 in order to avoid the 10% early withdrawal penalty? Thanks, Craig in NC
From what I remember once you are 59.5 and have had a Roth for over 5 years, any Roth, you don’t have to wait 5 years.
You're confusing two different things. You have to wait 5 years to withdraw Roth conversion principal unless you're over 59 1/2. Any earnings withdrawn from the Roth are subject to taxes and early withdrawal penalties unless you're over 59 1/2. It doesn't matter if the earnings are from contributions or conversions.
Great video. Thank you for sharing this info with us.
So to clarify, if you do a Roth conversion after age 59 1/2 are you saying you can take that money as a distribution without having to wait 5 years? This is a most confusing topic There is no place that I have searched on the internet that clearly says that you can take a Roth Distribution without having to wait 5 years if you are older than 59 1/2. I hope you are right. If you are, why is this not made clear to everyone? Is this done intentionally so as to make everyone think you have to wait 5 years?
Eric is correct. Note: I’m removing my 2 previous comments to this, and replacing them with 1 clear and concise response (I hope, ha). The deal is this: if you are > 59 1/2, you CAN do a Roth conversion and take those funds out as a distribution (tax and penalty free) without having to wait 5 years. But this is for the CONVERSION amount. If you take out any EARNINGS on the conversion amount before 5 years, then you MIGHT owe taxes and/or an additional 10% penalty on the earnings.
But the bigger overriding rule is this: if you are > 59 1/2, and you have held your first Roth IRA for at least 5 years (either a contributory Roth or a conversion Roth), then all of your Roth distributions are “qualified”, which means you don’t pay any taxes or penalties on any part of the distributions, current or future, whether they consist of regular contributions, conversion contributions, or earnings. And this will include any new Roth IRAs (contributory or conversions) that you set up in the future. You are home free forever.
Thus all of these other confusing Roth distribution rules that come into play, such as one 5 year rule for all contributory Roths, separate 5 year rules for each conversion Roth, rules for when taxes and/or additional 10% penalties apply to contributions vs earnings, the withdrawal order of distributions (contributions first, conversions second, earnings third): all these rules have to do with “unqualified” distributions. Meaning you are < 59 1/2 and/or you haven’t held your first Roth IRA for at least 5 years. This is where we beat our heads against the wall trying to figure out these insane rules. They are so insane that many tax and accounting pros get it wrong. I see videos on TH-cam, and articles elsewhere on the internet, half of them are right, half are wrong, half don’t make clear enough distinctions in what they are saying. That makes 3 halves, ha.
Also keep in mind that all your Roth IRAs are considered by the IRS to be just one single big pot, no matter how many separate Roth accounts you have at how many institutions. Also, a Roth "contribution" is defined by the IRS as either a regular contribution or a conversion contribution.
You can find a SUMMARY of the IRS tax code rules dealing with Roth IRA distributions in IRS Publication 590-B, but you have to read the upper part of the Roth distribution rules, as well as the exceptions down below. Note that this is only a summary of the actual tax code, there can be differences between the summary and the code itself, in which case the code overrides the summary. I find this 590-B summary most confusing at times, lacking true clarity.
Rather than this IRS summary, I found a better excellent article to explain this (and other situations), with sample problems, which reference the IRS tax code as written by the Cornell Law School. To find the article, do a search for: " fi tax guy the taxation of roth ira distributions " dated July 31, 2023. There’s an excellent Roth distributions table at the end. For the tax code referenced in the article, do a search for " Cornell Law School Legal Information Institute 1.408A-6 - Distributions ".
So the easiest way around all this is to wait and not take Roth distributions until (a) you are 59 1/2, AND (b) you’ve held your first Roth IRA for at least 5 years. At that point all current and future Roth distributions are tax and penalty free FOREVER. And as Eric says somewhere in one of his videos, it’s best to go ahead and set up your first Roth IRA as soon as you can, either by contribution or conversion, even if it’s only for $1, and get that “first Roth IRA” 5 year clock running ASAP.
Thanks Eric !!
I've asked this question on several of these financial advice channels but never got an answer. I have a 401k through my employer (I realuze 401k is different from IRA, but bear with me). I'm contributing enough to the pre-tax part of the 401k to get my company's full match. I'm contributing the remainder up to the legal limit of $30,000 to the Roth part of the 401k (note that I'm over 50, so
catch up applies). In addition, I'm contributing about $15,000 to the after-tax tax part of the 401k. The question is this: I understand that I can roll after tax 401k contributions to the Roth 401k in the current year without getting taxed for it (back door). I neglected to do this rollover last year. If I'm careful to only roll over the actual amount of last year's total contribution (i.e., not any earnings), can I still roll those funds from last year over during this year without paying additional tax? If so, is there any additional tax paperwork I'll have to file (amended return, etc.)?
Congratulations on such successful savings. What you're describing (post tax 401k to Roth IRA) is actually a mega backdoor Roth conversion. You can only do this type of conversion if allowed for by your 401k provider. A typical backdoor Roth is contribute after-tax to a traditional IRA then convert that to Roth IRA. I'm not trying to not pick, but hope that if you search with the right terms, you'll have an easier time finding more information on the topic.
You should check with your employer about the company matching funds. My employer lets me contribute to the Roth 401k and get matching funds from those contributions. This way the only pretax I have is from their matching funds.
The form you need is 8606. The way I read it, you would be best off by doing a conversion of all the after tax money, both contributions and growth. You'll have to pay taxes on the growth, of course. If you only do a partial conversion, you'll have to pay taxes proportionally. Say you contributed $30k and grew $10k. If you only convert the $30k, you'll have to pay taxes on 1/4 of the $30k that you convert. You effectively will be moving over $22.5k of post tax and $7.5k of pre tax (earnings.) Then you must keep track of your post tax basis of $7.5k is post tax and $2.5k is treated as pre tax cause it's earnings.
So much simpler to just move it all and pay the taxes at the time of conversion.
After Roth, distributions do not increase tax on SS.
If I transfer Roth TSP to a Roth IRA, and my 5-year window has already passed for when I started Roth TSP, the 5-year waiting period does not restart for my new Roth IRA does it? Doesn't seem like it would since it's a transfer and not a conversion.
When you do an In Plan Roth rollover. Can you use the standard deduction to lower your overall tax bill when doing your taxes? Thanks
Roth 401K vs Roth IRA vs Roth 403b. Do Roth 401k and Roth 403b have RMD's. It is my understanding that Roth IRA's do not require RMD but not sure about the others.
Very import for planning well - unfortunately I just made all these calculations for myself last month🤣- oh well hopefully good for keeping my brain youn
IRMAAs killed me after my Roth Conversions the last few years before my retirement.
This was really well done. Good work.
What method do you use to determine future tax bracket income limits. I’ve seen very different results that impact convert or not depending on what the software assumptions are for adjusting the bracket limits. Thanks.
As I understand it, they use a COLA (Cost-Of Living Adjustment) to project future tax brackets. In the past, I have asked what factor they assume going forward, and they said that the usually use a 3% annual growth rate assumptions.
Great info. Thank you. Question: I have an HSA and to minimize inheritance taxes, I want to do a Roth conversion using those funds. What steps must I take to accomplish this ?
So if you're over 59.5 and do a ROTH conversion you don't have to wait 5 years to withdraw it penalty free. But what about a ROTH contribution? Up to $7,000 annually is allowed for my age. 🤔
In both cases, yes, you can withdraw the conversion or contribution penalty free. But you can only withdraw the gains/earnings penalty free and/or tax free if you have held an earlier Roth IRA for 5 years; that earlier Roth can be either a contribution or a conversion. Thus to get everything thing out penalty free/tax free after age 59 1/2, you must have held an earlier Roth for 5 years. This criteria is the definition of a qualified distribution.
Great video. Thanks!
Saw a video saying you have to convert to trad IRA first then Roth but I thought I could just take my distribution after withholding and send to my Roth?
I recently took a distribution from TSP and they withheld 20%
I should have 60 days to deposit to roth
Not only are there no income or size limitations on Roth conversions, Roth conversions don't count towards the income limit to contribute to Roth IRAs if you wish to do that in the same year as a conversion. That is not well-known.
I dug thru a lot of pages to find the answer to that question just a few months ago.
I retired last year at age 56 so Rule of 55 should apply to my 401k which has both Roth and Traditional, and I want to request an in-service conversion of the Traditional part of the 401k to Roth 401k. This year I am 57 so I'd expect that the amount converted will be taxed as ordinary income, given the Rule of 55 is there a chance I'll be on the hook for the 10% early distribution penalty?
If retired requesting "in-service conversion" seems undo-able. Why not roll part of t-401(k) to t-IRA and then convert to Roth IRA (using outside money for the tax)?
@@alrocky we are both under age 59.5 and the Rule of 55 does not apply to IRA, only 401k. Any distribution from an IRA at this age comes with the 10% penalty.
@@jessefletcher9116 If you want money to spend just withdraw from t-401(k). If you want t-401(k) converted to Roth then proceed as described as there is no 10% early withdrawal penalty for t-IRA to Roth IRA as long as you use non t-IRA money to pay for conversion tax.
The Roth tax not the same as comparing it to retaxing your bank account. All the growth in the Roth has not been taxed. So, I can see congress changing things to start taxing the growth pretty easily since it's not really a retax.
If a single person can only contribute to a Roth if his income (MAGI) is less than 160,000 (In 2024), does that mean if my income is 80,000 and I convert another 80,000 to Roth, then I can not contribute another 8,000(catch up) to my Roth in 2024?
Roth conversions do not affect the income limit for a Roth Contribution. In your example, just the $80,000 would count to that income limit.
If I complete Roth conversions in multiple years after age 59.5, does each Roth conversion have a separate 5 year time frame to have tax free disbursements of the earnings?
No, a different rule applies for "after age 59 1/2" : 5 years after your first Roth IRA was set up (whether by contribution or conversion), you can take tax free/penalty free distributions on anything in your Roth(s) = contribution amounts, conversion amounts, and earnings. Satisfy these 2 conditions and you're home free the rest of your life. If you don't meet both of these conditions, then you'll have to deal with all the freaky rules, ugh. See my much longer reply below to DP-ol5uv.
@@F8NcH8Ng Thank you. Much appreciated. The rules are somewhat complicated and there are also many confusing explanations on TH-cam and the internet when it comes to after 59.5 and multiple conversions.
Rule of 55 for Roth conversions may allow you to avoid the 10% tax penalty (form 5329, Exception 01):
If you turn 55 during the calendar year you lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty. However, you must still pay taxes on your withdrawals. Not only does the rule of 55 work with a 401(k), but it also applies to 403(a) and 403(b) plans.
Doesn't apply to IRAs.
Great stuff.
On when to pay tax on conversion. When/how is the IRS notified of the date of the conversion? The 1099-R doesn't seem to have it. (Someone told me that the IRS assumes Jan 1, which probably isn't true!)
They will assume that it is received equally throughout the year. If it isn't (e.g. a Roth conversion later in the year) then you can file form 2210 using the Annualized Income Installment Method to show when the income was received and when the tax payments were made in order to avoid a penalty.
Exactly right Clinton!
I would shy away from paying taxes from the money in your pre-tax accounts. You have to keep in mind that the money pulled to pay taxes on the conversion is also taxed. For example, if you convert or need to withdraw $10,000 and the tax rate is 20%, you'll actually need to pull $12,500 to pay the taxes and have the $10K remaining for your needs. You are essentially being taxed at 25% on that needed/converted $10K ($2500 tax / $10,000). If you pay the taxes from an after tax source, then the tax owed will just be the 20%, or $2000. It gets worse as the tax rate increases; at 30% tax rate, you're really paying about 42.9% in taxes.
In 20% tax rate that $2,000 of "an after tax source" money is equivalent to ($2000 / 0.80 =) $2,500 pretax income. So it's a wash.
I'm struggling to find a reason it wouldn't make sense to funnel all IRA distributions through a Roth IRA (via conversions) after age 59 1/2 . Taking a straight IRA distribution would remove the ability to move any unused funds to a Roth going forward. Why not always first convert to Roth and then take your distribution from the Roth since you can access the funds with no additional tax burden immediately after conversion. Using this approach you will earn tax free growth on the funds while you draw down from the Roth throughout the year. I'm I missing anything?
I could also be missing something, but I don't think those converted funds are tax-free immediately....the 5-year rule does apply to this. Please correct me if I'm wrong.....
@@scottgoff6305 There are two different 5-year rules. One rule is that you must have had the Roth account open for at least 5 years, a second 5-year rule applies to conversions but only if you are under 59 1/2. My point is that if you are over 59 1/2 and have had a Roth open for 5 years then you have satisfied the relevant 5-year rules and conversions at that stage would be available immediately without penalty. So, if you are in this situation, why not convert all traditional IRA distributions to a Roth rather than taking a normal distribution. This way you are getting tax free growth on any portion of the IRA distribution you don't use right away.
Great video, can you please do a video for expats before 59.5 and living outside of US full time?
It seems that doing a Roth conversion, if done right, has more ‘juiced’ since expats can take advantage of additional earned income exemptions?
Every cent made on tax deferred is taxed as regular income and not a single cent of dividends or capital gains is taxed in Roth. Do the math.
After a compreheision plan with FA for us a roth conversion doesn't make sense if you have a pension. Plus we need the income.
There are 2 reasons to not to convert to a Roth. First the easy one-- if you expect to outlive your money it's very foolish to convert. Second-- and more complicated--is because you expect your marginal rate to increase in retiremenmt ( rare but it can happen).
MoneyGuide Pro is pretty interesting software. Once you've entered you financial data, plans, and expectations, it runs monte carlo simulations with various econmic conditions to show probability of successful outcome. It also lets you do "what if" scenarios and see their effects.