How to Avoid Roth IRA Taxes and Penalties
ฝัง
- เผยแพร่เมื่อ 19 พ.ค. 2024
- Roth IRAs are best known for tax-free spending in retirement. What many don't know, however, is that if you make a mistake with a Roth IRA, you could end up owing taxes or a 10% penalty on some of your withdrawals.
In this video, we'll walk through how to avoid these Roth IRA tax traps. We'll cover the two 5-year rules of Roth IRAs, the ordering rules of withdrawals, the aggregation rule, and even the backdoor Roth IRA.
------------
Timestamps
------------
0:00 Roth IRA Tax Traps
1:51 3 Ways to add money to a Roth IRA
2:55 Contributions can always be withdrawn tax-free
3:24 No Penalty if 59.5 or older
3:57 The Aggregation Rule
4:54 5-Year Rule on Withdrawing Earnings
12:31 5-Year Rule on Roth IRA Conversions
17:50 Backdoor Roth IRAs & the 5-Year Rule on Conversions
21:43 Ordering Rules
32:50 Keep documentation
------------
Video Resources
------------
IRS Pub. 590-B: www.irs.gov/pub/irs-pdf/p590b...
FITaxGuy Article: fitaxguy.com/roth-ira-withdra...
Join the Newsletter. It's Free:
robberger.com/newsletter/?utm...
Financial tools I use:
I track all of my investments, performance, fees, and asset allocation with Empower. It's Free:
go.robberger.com/personal-cap...
My retirement plan comes from New Retirement, the most robust retirement planner available at a reasonable cost:
go.robberger.com/new-retireme...
I used Capitalize for my last 401(k) rollover. They did all of the work, and it's Free:
go.robberger.com/capitalize/y...
My budgeting tool of choice is Tiller. It downloads all your banking data to Excel or Google Sheets:
go.robberger.com/tiller/yt-tools
We save and invest our credit card rewards. Here are some of my favorite credit cards:
www.allcards.com/best-credit-...
My Book (Retire Before Mom and Dad):
amzn.to/2MsRJ9B
#rothira #5yearrule #robberger
ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
LET'S CONNECT
TH-cam: / @rob_berger
Facebook: / financialfreedomguy
Twitter: / robert_a_berger
DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.
AFFILIATE DISCLOSURE: Some of the links on this channel are affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase and/or subscribe. However, I only recommend products or services that (1) I believe in and (2) would recommend to my own mom.
![[LIVE] : ONE ลุมพินี 63 | คู่เอก "ยอดภูผา vs โซเนอร์"](http://i.ytimg.com/vi/RGVmBsegKEI/mqdefault.jpg)
The utilization of after-tax money and tax-free growth makes opening a Roth IRA very advantageous. Through a careful guidance of my FA, l did not pay taxes on my withdrawaIs of $2.86 miIIion when I retired.
I don't regret the numerous financial mistakes I've made in the past since I've learnt from them. But the biggest one was planning my finances without consulting with a licensed financial counsel.
Indeed, I did make use of a financial counselor. As I get closer to retirement, their advice has been really helpful. I thought compound interest on index funds wouldn't be sufficient because I started late. It's amusing how I've done better than colleagues who have more years of investment experience. I've profited more than $886k tax free.
Please who is the consultant that assists you with your investment and if you don't mind, how do I get in touch with them?
'Angela Lynn Schilling, is respected in her field. I suggest delving deeper into her credentials, as she possesses experience and serves as a valuable asset.
She looks to be well-educated and well-read. I ran an online search on her name and came across her website; thank you for sharing.
I am 53 years old and consider myself to be a high earner. My job provides me the option to contribute the employer contributions to my Roth 401k. Should I do that or should I continue to direct that to my Traditional 401k ahead of retirement?
You're doing well for yourself but it is better to seek help from a professional. I am sure that an expert with experience provides more edge than a TH-camr.
As a high income earner can you easily afford to contribute max of $22,500 to your traditional 401(k) and towards retirement? What is your Federal Tax Bracket and percentage of company match? I f you don't know all this then its best you consult with an advisor.
Market behavior can be complex and unpredictable. Mind if I ask you to recommend this particular coach to whom you have used their services?
Myself and a few other employees work with Sharon Ann Meny . She helps me max out on the Roth 401k in the month of November each year. My company matches 6% and I think my tax bracket is 22%.
I just googled her now and I'm really impressed with her credentials. I reached out to her since I need all the assistance I can get.
You may retain a larger portion of the money you've worked so hard to accumulate since ROTH IRAs are tax-free.I spent six years in retirement. In addition to my depleted 401(k), I have a 130k annuity.What is the best way for me to invest $100k in a non-retirement account?
I would avoid index funds, mutual funds, and specific stocks for the time being. Right now, the best option is a fixed income of five percent.
Consider allocating 20-30% to a High-Yield Savings Account (HYSA) and enlisting the help of an advisor to diversify into positions with the rest of your capital. My advisor has significantly impacted my financial journey, fostering clarity and confidence in the stock market. that’s what works for my spouse and I. We've made over 80% capital growth minus dividends.
I'm intrigued by this. I've searched for financial advisors online but it's kind of hard to get in touch with one. Okay if I ask you for a recommendation?
There are a handful of experts in the field. I've experimented with a few over the past years, but I've stuck with ‘’Jennifer Leigh Hickman” for about five years now, and her performance has been consistently impressive. She’s quite known in her field, look her up.
Thanks for sharing. I curiously searched for her full name and her website popped up after scrolling a bit. I looked through her credentials and did my due diligence before contacting her.
Thank you. I was trying to setup a spreadsheet to track roth and order of withdrawal and 5 year clocks. this video definitely helped define my template! thank you again
Incredibly thorough coverage of an insanely confusing combination of Roth IRA issues. Sir, I salute you!
One takeaway for me is to have my 20-year old son open a Roth this year, even if he just puts $100 in it. Just to get that 5-year clock ticking. 😂
Always good to contribute however much up to one's earned income. Not sure what benefit the son would be getting on a $100, $1000 or even the full $7k Roth IRA contribution for 2024. If the son wanted access to his contributions to a Roth, he can take those out at any time without a penalty and there is no 5-year rule dealing with mere contributions. What the son could not withdraw is the earnings on the $100-$7000, which that first year would be pretty low. If the son already had a traditional IRA and did a conversion to the Roth, yes there might be a 5 year rule there somewhere, but I don't think there is anything truly applicable to the 20-year old or is there if he just wanted to withdraw the contribution only. Hopefully any one opening a Roth IRA doesn't use the account for small expenses. I have heard of "in plan conversions" where if someone has been putting money into their work 401k, and the company also offers a Roth 401k, if the company allows it, the traditional contribution can be converted to the Roth, but will create taxable event for that year. I haven't heard of anyone actually doing this yet, but it sounded interesting. I have opened and funded Roth accounts for 2 adult children and 1 teen grandkid as they all have earned income. I trust they will all be responsible with my effort to hellp them.
Taxes and wealth confiscations will become so bad in the future that I strongly recommend your son max out his Roth IRA every year of contribution!!!!
Thanks for the good information and great explanation of overcomplicated rules. I do like that you always reference source materials in your videos, so you can read on your own and do further research if needed.
Incredible!! Someone finally makes a video that gets ordering rules right that includes FIFO and taxable/non-taxable. Of course its Rob Berger. There is no one else like you on TH-cam. Time and again you have done the research I couldn’t or confirmed the research I did but couldn’t confirm definitively anywhere else. Thank you for your time and expertise.
This is an amazing "complete guide" for these weird Roth IRA rules! The Roth IRA conversion ladder has been my strategy for early retirement/financial independence for several years now. Currently, I am on year 3 of making my conversions from Traditional to Roth. Because I no longer work a W-2 and I am frugal with my spending, I have never paid any income tax on my conversions. In the mean time, I have a regular taxable investment account that provides me with funds during my 5-year waiting period.
"I have never paid any income tax on my conversions" - We're different - I PAID Fed/State income tax when I did a Trad IRA conversion to a ROTH. I would think you would be subject to taxes with your conversions.
I have much lower taxable income and I contribute to an HSA accountto further reduce AGI. I also qualify for the saver's credit. It's taxable income, but I strategically kept it at an amount that didn't result in any net federal income tax. I also live in an income tax-free state.@@user-iu7ow6yp3b
Very good description. Many people get the conversion 5 year rule wrong. A simple thing to remember that once you are 591/2, no rules apply provided you had a roth account 5 years old. You can withdraw from a roth account any money anytime without any penalty and taxes. Once you retire, a very good way to withdraw from you tax deferred retirement accounts (IRA/401K) is to do roth conversion instead of withdrawing the money into a bacnk account and use the Roth account as checking account. This makes the income predictable and keep the left-over unused money tax-free forever.
@malaybasu961 My understanding, after 59-1/2, is you can take out any contributions or rollovers and no penalty/taxes apply. It's only on the interest (earnings) that you would have to meet the 5 year rule. (And, the interest is always the last to come per IRS rules. Am I wrong???
@@cottagemail4066 Somehow my comment got removed. This may be due to an external link. Once you are 59.5 years old, no rules apply to you provided you held a Roth account 5 years old. Search "KAWII roth table" in Bogleheads wiki.
Withdrawing from an IRA (or 401k) into a Roth and using that as your income source is fine IF YOU ARE NOT SUBJECT TO RMDs. The RMD amount can not be placed into a Roth. If can be used to live on or invested in a brokerage account. Additional money can be withdrawn from the IRA (or 401k) and placed into a Roth but not the RMD.
@@cgmoog terminology. Taking money from a 401k and putting it into a Roth is not WITHDRAWING , it is a CONVERSION. hence the different treatment. As RMDs cannot be “converted” and must be withdrawn (distributions) it’s sorta in the name.
@@cgmoog That's a good point. However, it does not matter. You use the RMD to pay taxes on the roth conversion instead of using the RMD for expenses and use the Roth account for all expenses. This is equivalent as direct roth conversion with tax witheld but in the long run will save a lot of money. After 591/2 you also should not convert with tax withheld. You let the whole amount accumulate gains and pay the taxes by directly withdrawing from the roth before next April. You get a whole year return free of cost using government money. The trick is not keep any money idling outside of retirement account and use every penny to do roth conversion. And use roth account for all expenses.
Rob - you did a great job explaining this. Not to say that I understood it all - but now I know what I am still foggy on. THX!
What one learn from reading Mr Ed Scott book for hrs, can learn from this 1/2 video. Thanks for your time and making complicated topics so simple
Great content! It's the clearest discussion I've heard.
Great explanation and I learned some things I didn’t know before. Thank you.
Outstanding explanation! I have old Roth IRA’s and only recently been doing Roth conversions…good to know the 5 years are lumped!
Keep in mind, though, that the conversions are NOT lumped. Each conversion has its own 5-year time period. When withdrawals from conversions commence, they're deemed to be first-in, first-out (FIFO)
@@wernermueller9004 It is an up to 5 year time period, all concluding at age 59 1/2 assuming the first Roth acct is 5+ years old.
I really appreciate you doing this video. You have done a great job of making this easy to grasp.
I’m just getting ready to go down the Roth path. This is invaluable advice. Thanks!
Toward the very end you probably should have mentioned something about the aggregation rule that applies to Roth conversions. That Rule is found at the bottom-right of page 33 through the top-left of page 34 of IRS Pub 590-B. It applies when you make more than one Roth conversion in a tax year. Basically all conversions or rollovers in a year are treated as one conversion to the extent that any taxable portion is aggregated with any other taxable portion and any non-taxable portion is aggregated with any other non-taxable portion.
Also you glossed over what was meant by rollovers. In the context of the Ordering Rules, the only rollovers that matter are ones from a Pre-tax account into a Roth IRA.
Also you should make a video that talks about how designated Roth subaccount (employer sponsored retirement plan) distribution rules work and how they relate to Roth IRAs and Roth IRA distribution rules.
Thanks Rob - another great informational video!
Great info, would love to see you do a video on inherited IRA’s. Thanks for keeping us informed:-)
Agreed, especially if the loved one passed in 2020 or later, triggering the SECURE Act requirements. Thanks Rob!
Well done!
Thank you for this presentation and all the others!
Pro rata rule has to be part of the conversation.
@Rob Berger - This is very helpful! Would you consider a "part 2" to discuss the same topic for Roth 401k taxes and penalties?
Thanks Rob! For explaining this - very helpful! 😎🏆
Informative. Thanks Rob 👌
Very informative video. A great deal to digest, however. I'll need to return to it, probably several times.
This is a great video as always but I wish Rob would have begun by saying "if you open your first Roth IRA at or before age 54 and all you ever do is contribute (no conversions) then starting at age 59 1/2 your distributions will all be tax- and penalty-free." I think a lot of wage earners like me just open and contribute without ever messing with conversions. The vast majority probably open a Roth before age 54---I was a relative latecomer to finance but still opened mine in my early 40s. The discussion about backdoor Roths was worth the wait though, so I have no major complaint with the video.
I just open my first Roth im 26 i got vanguard bonds van stocks and van high div and some stocks in big tech idk what im doing
Excellent. Answered all my questions
You are an outstanding communicator! Thank you for this~ ;-)
Nice job. Helped a lot. Thanks
LOVE your video's!!! Do you have a video, or can you do one, when someone is in their 60's, never invested in market, but got a nested, and wants to invest in market and live off dividends. Keep up the great work!!
The last thing you said was "Keep good documentation." I was getting curious wondering if this is all being kept track of correctly and efficiently. For me, I just have one Roth account. Hopefully that makes my tax prep easier.
Excellent content thank you!
Playing AD&D as a kid was good training for dealing with this insane complexity.
Great video! I will keep it handy. You might have mentioned (if I understand correctly) that IRA's and ROTH's are individual, spouses must be considered separately and are not aggregated together (I don't know about spousal IRAs), even if you file taxes jointly. An easy point to get confused for some. If you said it, I missed it.
Yes all retirement accounts are individually owned by each owner and never combined with the exception if one spouse passes away and the surviving spouse is the beneficiary, the surviving spouse can put their deceased spouses IRA into their own. There are other options for a spouse inheriting their partners IRA, and I don't think how they file their taxes matters. Folks can have multiple Roth IRA accounts for what ever reasons and that one person can combine their various accounts, but there is no combining IRA accounts between spouses to calculate RMDs.
Conversion from regular Ira to Roth triggers tax event. converted amount is treated as ordinary income and tax withheld based on your estimated tax rate. So if your tax rate is 20%. You would have 20%. tax withheld usually by brokerage when you make the Roth conversion.
Can you address or talk more about the backdoor Roth. You didn't say much about them in this talk. Great job explaining Roths. Thanks
Great explanation! Thanks for doing the homework most of us wouldn't =)
Great information ❤
Good overview of the Roth IRA…if you were to open a Roth IRA in your 20s/30s I assume once the 5yr rule expires you can do as many conversions as you want from a 401k into a RothIRA beyond the 59.5age yr penalty free to make disbursements whenever you want? I guess I don’t understand the 5yr rule on a per conversion basis from a traditional 401k and will do some research but may want to use this as an episode..
Thank you. Great info. FYI your last chapter time is off by 10 minutes
Very good information thanks
Great video although it's probably good to also go over the pro-rata rule when it comes to backdoor roth conversions. I'd wager most people doing backdoor roth conversions aren't aware of this but it's very important if you already have other traditional/rollover IRAs with money in them. In fact, I'd wager this is the single Roth IRA rule that by far most people aren't aware of or how to apply it.
I don't watch many videos but this was well worth it.
I think this was part of the "Tax Accountants Full Employment Act" when it was passed by Congress. Just a guess. :)
🤣🤣🤣
Very helpful!
Some companies also allow you to contribute after tax money, do an in-plan-conversion and then roll it into a Roth. This is known as megabackdoor roth
Sort of true. If you do an in-plan conversion, the step of rolling it out to a Roth IRA is redundant. The in-plan conversion means you already have it in a designated Roth subaccount in your retirement plan. If your plan options are good you could just leave the money in the plan and wait until much later to do the rollover.
BTW, the original Mega backdoor Roth IRA contribution involved doing an in-service distribution of a designated After-Tax subaccount to a Roth IRA. The subaccount needs to be in-service distribution eligible. My last employer offers both types of Mega backdoor Roth contribution options.
Just completed my first year of retirement. Currently 62 and drawing social security. Beyond that, I have an IRA (all withdrawals taxed as regular income); a smaller Roth IRA (no tax on any withdrawals); and a smaller still regular stock account (capital gains tax). This first year I drew totally from the Roth, which has been wonderful because it's all tax free. However after gaining a better understanding of RMDs, I've decided to do two relatively large Roth conversions, one by month's end, and another in early 2024. Plan right now is to pay the taxes sparked by the conversions from the stock account. I'll also have slightly higher Medicare premiums to contend with for one yr (from the 2024 conversion). After that though, path to a tax-free existence later into retirement should be fairly straightforward.
The calculation is not so straightforward. You need to calculate your IRMA ceilings. Also, don't convert the entire IRA money to Roth. Keep at least the amount projected standard deduction multiplied by your life expectancy in traditional IRA. Those are tax free money and you should not pay taxes on those. Also markets are quite high. Wait for it to drop before roth conversion.
@@malaybasu961 - If your stock or the market corrects is a great time for a conversion, but predicting it is market timing. I got lucky this year my stock (I do like for like conversion with my brokerage in 24-48 hours) tanked in January and I pulled the trigger on a conversion chunk. No one knows if/when the market might correct. I suppose if I was concerned about it I'd dollar cost average over the year in mini chunks I guess. Otherwise, you might end up doing a conversion at a higher rate by waiting. Because the market is "expensive" on some or other score doesn't mean it'll drop in a given year.
@@malaybasu961great point on the IRMA.
Thanks Rob. I was new to the US in 2022 and I opened a Roth IRA and contributed $500 (was testing). I forgot about it and although my income doesn’t allow contributions I did it as I was unaware. I withdrew the contribution (it had fallen in value). I didn’t make any contributions in 2022. My tax folks filed and there seemed to be no penalty since I withdrew my contribution. Now in 2023 I did a backdoor roth (non deductible Ira to immediate conversion to Roth IRA). I hope that is right. My question is in 2024 can I use the same Ira I opened in vanguard for conversion to Roth IRA? This is a non Deductible Ira which I immediately convert to Roth. The Ira value remains 0 throughout the year except one or two days in which I receive money before conversion. Thanks.
Very detailed explanation, I understand it really well and I’m stupid
Thank you very much
Thanks for the awesome information! I need some aspirin....
Great video, but at a certain amount of complexity, part of me just wants to throw it all in a brokerage account and use deductions and Traditional contributions to get my taxable income down to $44,625, in which case I don't pay any taxes on dividends or long term capital gains for US stocks. Simpler way to achieve that same goal with no restrictions
I think the Boglehead wiki has a table that summarizes the first 5-year rule visually
Thanks Rob. Is the 59& 1/2 age before the tax year of withdrawal or can it be during tax year ? I don’t understand what IRS is losing by making it just age 59.
Thanks! Do you have a video about IRS pro-rata rules for Roth conversion when converting from traditional IRA where you have both after-tax and before- tax dollars in any of your traditional IRAs?
Rob your videos are great and very explanatory. Thanks for that❤
Qq: I have a employee 401k. Does that mean I can’t really have an IRA because I will not get the tax benefits of having an IRA?
Thanks for the tutorial. I have a question about Roth IRA earnings within a conversion. You mentioned that for a given conversion if the 5 year rule is not satisfied, independent of the 591/2 rule that you'd have to pay the 10% penalty, but what about any earnings accrued within that converted Roth? Would these earnings be taxed as ordinary income if distributed in violation of the 5 year rule for conversions?
Or is it accurate to say that the only potential taxation for conversions is limited to 10%?
Thanks again.
Will you please advise on Roth investment strategies for an account earmarked for heirs and never be drawn from? We will begin to convert to Roth for our severely disabled son. You are a gem. Thank you for your expertise.
Thank you, Rob! Question: if someone opens up their first Roth IRA at age 70 and only puts into it conversion money from a traditional IRA/401k, how does the first 5-year rule apply? Is that conversion money considered a "contribution," and any subsequent earnings on that "contribution" are taxed if withdrawn before age 75?
My understanding is if this is the first Roth IRA, Earnings are subject to taxation until the account is open for 5 years. The amount converted to the Roth would not be subject to taxation because tax was paid the year it was converted. Example 70 year old converted $100,000 to a Roth IRA in 2024. They can withdraw up to $100,000 total over the next 5 years. In 2030 and beyond all funds are tax free on withdraw for the account owner.
Hey Rob! I recently opened a rollover IRA to move my employer-sponsored 401k amount (say $10K) earlier in Dec. Would it make sense to convert into a Roth IRA via a backdoor before the end of this year or the next? Also would the conversion from 401k to a Roth IRA introduce taxes? We are assuming that there is no earnings or contributions on the IRAs and that this is my first time opening the accounts and everything is uninvested so far.
Great video. Looking for some advice on how to find my non deductible basis. Over 20 years ago I filed several forms 8606 to track my basis. The tax filings have been lost. Any way to ask the IRS what they may have?
I’ll have to research more about conversions before I retire, not sure I completely comprehend yet
Check my comment above. Search "KWAII roth table" in google. That's a very simple reference table.
New subscriber
Love how much knowledge you have ,
QUESTION ,if I have traditional ira and roth ira
The roth fully funded for the year limit (6500k)
IS POSSIBLE TO CONVERSION traditional for that year( of before ) to a fully funded roth ira for the year
And paying the taxes now,
Cause you never know hiw.
much will be taxes in 10 years
Please i will like to know
So how does a rollover Roth 401(k) work? 5 year conversion rules or tax and penalty free contributions (on that part)?
Excellent video. If I roll over a Roth 401k (for example let’s say $20k, half contribution and half earnings) into a Roth IRA, how is that money classified (contribution vs conversion vs earnings) in the Roth and to which portions of that rollover does the 5 year rule apply?
Is there any reason for a person to keep money converted from 401k's into separate IRA accounts? Some say liability protection is better but I thought that only applied while the money was actually in a 401k.
The conversion five year rule is to prevent you from circumventing the early distribution penalty. There is no early distribution penalty on non-deductible contributions, that's why the five year rule doesn't apply to that.
one thing the 5 year rule does that no one realizes is make it more difficult to double dip on a simple account vs non simple accounts. Also, for the roth IRA there are some weird strategies where you could open a roth IRA, put 6-12k in there, and make it disappear from the FAFSA/divorce/other tax triggering event/some bankrupcy, and then take it right back out as cash yo.
What about inherited Roths ? In many cases these are set up to leave to heirs without tax consequences. 2018 secure act rules say inherited IRAs must be withdrawn overten years. Do five year rules apply?
Love these videos!
Question for you, or one of your viewers…
I just completed my first Roth conversion (12/23/2023), I’m age 58, and I am planning to pay taxes from my savings account.
Myra question is: When are the taxes on my conversion due, and how do I go about paying them!
Thank you in advance!
When I do Roth conversions, I have a really good idea on what my tax liability will be for the year. If I know I am going to owe less that $1K, I can file my tax return in April. Otherwise, I file my tax return by the end of January. This is based on your Roth conversion done the end of December. I have done Roth conversions earlier in the year and have made estimated tax payments to the IRS based on the amount of taxes I would owe with the conversion. Just remember to use IRS Form 8606 to report the conversion when filing your tax return.
My question is
If I convert my Traditional IRA to a Roth IRA over 10 years then I should have 10 different holding periods One for each year of conversion correct? Or will the five year start over with the last conversion?
I enjoyed this content. Although I have been watching less yt and doing more research. My retirement contributions are not making my 401k any better, should I buy popular index funds in a brokerage account, is this a better alternative to outperform and rebuild my retirement?
I would go with index funds.. Most actively managed funds don't beat index finds long term..
Just trying to understand why my 26 yr old (just short of meeting 5 yr rule )who withdrew his entire Roth IRA around $ 5,000 just got a 1099 R showing entire amount as distribution , not just the approx. 125.00 in earnings.
He got tired of FL credit union saying “you should go to a
branch “when he had moved to NC. No wonder people don’t save for retirement since IRS always makes things so complicated & costly.
Great explanation. FI Tax guy is worth looking more into! Particularly in regards to tax issues when retiring before 59.5yrs old.
First in first out is interesting... let me see if I've got this right...
In 2023, you contribute $5000 of after tax disposable money to Traditional IRA, then convert to Roth IRA, during which time that $5000 has grown to $6000.
1) you convert and pay income tax on the $1000 gain.
2) you have now converted 'contributed' $6000 to Roth IRA, $1000 of which was taxable AKA deductible.
3) you can withdraw $5000 'non deductible' without the 5yr rule penalty.
BUT...
Since first in-first out means the deductible $1000 "appears first" when the IRS looks at it, you appear to have withdrawn $1000 of taxable '5yr rule' money and $4000 of non-taxable 'no 5yr rule' money.
As a result, you pay 10% penalty on that $1000 EVEN THOUGH YOU ARE WITHDRAWING the non-taxable conversion.
Therefore, if you convert any after tax money from Traditional IRA alongside a gain , you cannot avoid paying 10% penalty on something...!
@mwp6662 - The conversions are 'taxable' or 'non-taxable', not 'deductible' or 'non deductible'. Deductibility applies specifically to T-IRA contributions, but has nothing to do with conversions.
Correct. You can access the $5,000 non-taxable conversion without paying the 10% early withdrawal penalty, but before you do that you must withdraw the $1,000 taxable conversion, which would incur a $100 penalty ... at least in your example. This is a very good argument for doing the conversion on a backdoor Roth contribution quickly.
Reminder the documentation you need to file every year is stored on your previous tax forms. You will need to reenter/update that information for every year you contribute.
I am currently 62. I deposited funds from the RMD of an inherited IRA (on which I paid taxes) into a Roth IRA for the 2022 tax year. Am I correct that this is still considered a "conversion"? If so, if I do the same for the 2023 tax year (and potentially subsequent years), does the clock start over for each conversion from a tax on the earnings standpoint, or is this separate treatment only apply to the 10% penalty on conversions? I understand that as I am over 59.5 I would not have to pay a 10% penalty for any withdrawal. Just trying to determine if I will have to keep close track of withdrawals after 2026 from an earnings standpoint...
Great video as always! Question. Does it make sense to get a ROTH accounts at age 64, since you have to wait 5 years to withdraw money?
Remember you can always pull out contributions. No 10% penalty. Only pay tax on earnings before 5 years.
I was under the understanding that if you are past the 59 1/2 age, and that knowing the first conversion falls under the 5 year rule, if you have a subsequent conversion to a Roth IRA, any subsequent conversion falls under a new 5 year rule, even if you are older than 59 1/2 years?
Doesn’t the pro rata rule apply for conversions on non-deductible IRAs apply if you immediately convert to a Roth?
Do you have to wait 5 full years to pull out the contributions from the conversion? Or can you do the conversion on 12/31/24 and pull them out 1/1/29? Thanks.
As an immigrant to the US and having used retirement account "equivalents" this vid just shows how ridiculously complicated the US tax system is. Wash sale rules as well in taxable accounts are ridiculous.
Important to point out the rules of convertion vs contribution. My accountant says that conversions need to be done by each given year end. So a 2023 conversion needs to be done by year end 2023.
Yes and no. There are no dollar or income limits on conversions, so you can do them whenever you like. Or better yet, you should do them in the year your taxes dictate it appropriate. But it's when you do that conversion that dictates when you report it. It's not when you report it that dictates when you do the conversion.
Yea i agree. No dollar or income limits. There are consequences though. Just wanted to clarify Rob's comments about when you can declare/make a convertion is different than when you can declare/make a contribution. That distinction wasn't mentioned in the video.
@@blownaway13 - There are no time restrictions on when you can make a contribution, nor is there a restriction on when you can make a conversion. You can make them early and often - just don't contribute more than you are allowed in a given year.
Yes. The only point I'm making is that the date you make the conversation is the year it is applied for your tax return.
You can't make a convertion on April 1st 2024 AND count it as a 2023 conversation on your 2023 tax return.
On the other hand, you can make a contribution April 1st 2024 for the 2023 tax year.
I don't think Rob made that distinction.
Great video Rob. I'm 74 and have been converting traditional IRA to Roth for about 4 years and am finished. Wondering; can I take the dividends from income funds without triggering the earnings taxability if u Der 5 years. Thanks guys,
Money is fungible. By definition the first dollars you withdraw are contributions. Once contributions are depleted, the next dollars are conversions - by year and within each year, taxable conversions followed by non-taxable conversions. Once conversion dollars are depleted, you are by definition withdrawing earnings.
So by definition you can't be withdrawing "your dividends" per se. But you can withdraw your contribution and conversion dollars up until the 5-year clock has run.
@@joelcorley3478 I believe at age 74 the 5 year conversion rule is moot since being 59.5 is an exception
When inheriting a Roth IRA you have to transfer the original Roth IRA funds into a custodian beneficiary Roth IRA account, but its not clear if the beneficiary's account or the original owner's account needs to have existed for 5 years for earnings to be tax free. The 1099R gave me a T code.
Will I be taxed on earnings from my inherited Roth IRA as a non-spouse beneficiary if my beneficiary Roth account holding the funds was opened only 2 years ago but my mother's original Roth was well over 5 years old?
Does the original owner or the beneficiary need to have held ownership of the Roth IRA funds for over 5 years for the distributed earnings to be tax free?
Question. My understanding is that one is okay to convert a ROTH 401K into their ROTH IRA and will be able to withdraw penalty and tax free at 59.5. Both will have been in existence for over 5 years at the 59.5 years point. Is this correct or does some 5 year rule trigger when that conversion is made if done at 57 years? Great video btw!
Treasury Direct is a pain too. Not fed bashing but the feds are v reg and rule bound.
I know that I have to pay taxes and penalty but can I take the money out of the Traditional IRA at anytime without satisfying the 59 1/2 year?
0MG...."i know it's a lot".....lol... we have
been trying to negotiate converting this year and looking forward, tax-wise...wish it was simpler
Deciding how much and figuring out how to convert are actually separate topics! This is only about the tax treatment of distributions!
Thanks Rob. Whether you are younger than 59.5 or older than 59.5 when you do a conversion do the taxes owed have to be paid through an outside source? Can the taxes be paid by deducting from the amount to be converted? Example: 100k to convert @ 22% tax bracket, deduct 22k from conversion amount, 78k gets converted into roth. Lastly, when you retire can you take the dividends and gains as a distribution without eating into the principle amount of shares? That way the roth could be left to your children. Can you do this given the order of operations for distributions? I cannot get clarity to these questions. Thank you for your help.
Q1 If under 59.5 You owe early withdrawal penalty for using part of the traditional money to pay tax on the conversion.
Are you going to cover how all these rules apply to inherited Roth IRAs?
Inherited Roth IRAs are treated differently. You have 10 years after death of owner to withdraw everything for non-spouse. No 5 year waiting period. If you're a spouse, you can treat like it's your own.
Rob, in 2017 and 2018, I contributed to my company’s 401k plan, which had an in plan conversion to a Roth 401k. All the funds are comingled, and about 15% of the funds are considered to be the Roth portion. I left the company in 2018, but have left the 401k untouched. In the meantime, in 2022, I converted some funds from and older Rollover IRA into a newly created Roth IRA. Now, back to the older 401k, I’d like to rollover the 401k into my existing Rollover IRA, and the 15% which is considered a Roth 401k, into my existing Roth IRA. Question…When did the 5 year rule start in my scenario? When I initially contributed to the 401k and had some funds converted, or when I converted some IRA money into a Roth IRA??? I’m 58 years old, if that matters at all.
Thanks!
I had a situation similar to yours. I had a Roth 401K that had long met the 5 year rule. In Dec. 2019 I was preparing to retire in Jan. 2020 (over 59 1/2) and chose to transfer this Roth 401K to a Roth IRA with a well known brokerage firm. I was told by my brokerage firm that the 5 year rule would begin anew (I did not have an existing Roth IRA) so eff. 1/1/2024 I will have satisfied this 5 year rule. Additionally, I transferred a traditional 401K to same brokerage firm and have been making annual conversions to a Roth IRA but in a different account as I was advised not to comingle the two distinctly different contribution types. Good luck, another thing, my employer's plan administrator said I was the first employee to ever request a transfer of only the Roth 401K but I wanted to get it moved in 2019 prior to retiring to get the 5 year clock started. The plan administrator's company actually had to program their system to make the transaction possible which fortunately took just a few days.
@SFOtoLIH - There are two sets of 5-year Rules that apply here too. (Actually there are 4: One pair for the 401(k) and one for the Roth IRA.) There is a 5-year rule that affects your earnings and there is a 5-year rule that affects your conversions. The 5-year rule that affects earnings depends on when you first opened and funded the account [or designated subaccount in the case of a 401(k)]. Since you appear to not have made a direct Roth contribution to either your Roth 401(k) or your Roth IRA, but instead made a Roth conversion, the 5-year Rule on earnings would apply to the first conversion.
Unfortunately you don't say exactly when you first contributed to or converted into the designated Roth subaccount in the 401(k), but since you were only an active participant in 2017 and 2018, I'm assuming it was 5 or 6 tax years ago. This means when you turn 59 1/2 your distributions from your Roth 401(k) designated Roth subaccount will be qualified. This is only maybe a year from now. That is to say, every dollar you distribute will be exempt from taxes or penalties. This is important, but I'll come back around to that.
Now let's talk about your Roth IRA. Your Roth IRA appears to have been opened and funded in 2022. Earnings distributed from this account will not be tax free until 2027, even though you will apparently be 59 1/2 some time in 2025. However, any early withdrawal penalty will be waived because the age (59 1/2) is the primary exception for that penalty.
So let's talk about you rolling your Roth 401(k) into your Roth IRA and the consequences of that maneuver: If you do that before you turn 59 1/2, the rollover will be considered Non-Qualified. That effectively means any earnings you roll into the Roth IRA will still be subject to ordinary income taxes if you subsequently withdraw it from the Roth IRA before 2027.
On the other hand, if you leave your designated Roth 401(k) subaccount intact until you turn 59 1/2, the rollover become qualified. A Qualified rollover into a Roth IRA allows you to treat the rollover funds the same as a contribution when it comes to distributions. This means only earnings that were already in the Roth IRA and any new earnings from the rest of the account balance are subject to the early withdrawal penalty. And of course once you get to 2027 all distributions are tax and penalty free.
@@joelcorley3478Wow! Thanks for such a detailed response! This is exactly what I was hoping for.
Even though I have no plans to use the Roth funds until much later in life, I think I’ll wait until I’m 59.5 years old to move the Roth 401k into the Roth IRA.
Thanks again!
Rob, so I have read that Earnings on conversions to Roth IRAs are subject to taxation if withdrawn before 5 years since the tax year of the conversion. Regardless if you already meet the rule for having a Roth for 5 years AND regardless if you are 59.5 or older. Example, a 60 year old coverts $10,000 from a traditional IRA to a Roth IRA in 2023 and put this in a new Vanguard Roth. They have an existing Roth IRA with Schwab since 2015 (5 year rule met). Then they withdraws $11,000 dollars from the Vanguard account in 2025 consisting of $1,000 in Earnings and $10,000 in conversions (which they paid tax on in 2023 when converted). Is the $1,000 in Earnings subject to taxation because it was withdrawn before 2029, 5 years after the conversion? Lets assume for this example this person had only 1 other Roth IRA (Schwab) opened 2015 and had zero dollars left in the account because they had withdrawn all contributions and earnings in 2024. So the only Roth IRA remaining was the Vanguard with conversion funds in it. Let me know what you think.
Does that 5 year rule also apply to Roth 403B's, too?
what about a roth 401k. I opened a roth 401k in 2013 and a roth IRA in 2023. Then I started rolling over roth money from the roth 401k to the IRA because it has better options. When does the clock start ticking? 2013 or 2023?
Hi Rob, I am 60 going through a divorce and want to know the money that I get from my husband‘s account 401K. Will I be able to roll this into a Roth and what are the steps I need to take. I also hold a 401(k) in my name. What are the steps I should take to roll that into an IRA being 60 years old. I appreciate any feedback you have.
So if you do a non-deductible IRA contribution (e.g. 5k) per year for say 10 years (e.g. 50k total), I only have to pay taxes on the interest that I earned (say 10k over the 10 years)? So, I have to keep very good records on my contributions and interests? How does the IRS know when I have completely withdrawn 50k contributions on the non-deductible and started taking out the 10% earned interest?
is there anything i should know before moving a roth from one company to another?
is there any penalty if I make conversion from traditional to roth Ira before age 59?
Sound confusing. I hope I get it right.
Before age 59.5 , 5 years rule apply for each conversion. And after age 59.5. No more 5 years rule apply.
I have a roth annuity. 14 years. Will all the ditributions be tax free?
Assuming I understand the law correctly, I think it is worth mentioning that if an investor has a sizable IRA then a backdoor conversion is not practical, because when you make the conversion, the IRS will assume that you convert your IRA in proportion to the pretax and after tax balances in ALL your IRAs. To quote from Investopedia: “… if most of your IRA contributions were deducted from your income, and if your IRA has accumulated earnings or made investments that have appreciated over a long period, then most of the funds and investments that you convert to a Roth IRA likely will count as taxable income at the time of the conversion”. So, if you have a $90,000 traditional IRA originally funded with pretax funds, and contribute $10,000 after tax funds to an IRA, when you convert $10,000 to Roth, $9,000 will be treated as converting pretax dollars (since 90% of the IRA was from pretax sources) - so you will have taxable income in that year of $9,000 on the conversion.
See form 8606. It has the calculations you need.