I explain our circumstances later as to why we do not want to do more Roth conversions. We want funds in our personal investment account after tax. We need to spend down some pre-tax retirement funds to not have a significant bump up in funds withdrawn and taxes paid due to RMD. We also want some liquid funds more easily accessible to us.
Obviously you are free to change your investments however youād like, and you may already know all Iām typingā¦ But, I am pretty sure Roth funds are considered liquid, assuming you meet age requirement and maybe have had some money in Roth for 5 years. You will pay the same tax whether you move the pre-tax retirement funds to Roth or to your own personal investment account. You donāt have to consider Roth when taking RMDs. If the funds are in Roth account, all you donāt spend will continue to grow (hopefully - depending on how you invest/the market which is the case no matter where you move them) and you donāt have to ever pay tax on the gains.
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I also explained that our Roth IRAs are with our FA and it is not very liquid to us - and those are intended to not be used. We know Roths donāt have tax on the gains - but it doesnāt make sense to move our money to Roth when it is part of what we want to have to spend/keep liquid for spending. The gains we have in our investment account, yes that will be taxed. If we are in RMD years, we will use the funds that we move from pre-tax accounts.
We have a large portion of our retirement funds in 401k. RMDs for us are coming.
Another on this thread indicated they have a portion of their net worth in short-term; some is for emergency fund, some is to be active with investments and seeking short-term opportunities. Another āThe in case happened.ā We donāt like to be w/o resources available - even if it gives up a little. If paying closer attention to investments means greater yields in the long run for the majority of our funds, having a bit more liquid is OK in our household.
I just was wondering about others taking advantage of lower personal tax rate after retirement and prior to RMD to āsmooth outā tax when RMDs are going to jump their income (and tax).
Some decided to talk about back door Roth. āThe overwhelming portion of investors will never do a backdoor Rothā - and we are in with the majority of the investors.
Some talked about different ways they are or are not assisting their children with investments. I had mentioned we guide one DD and the other has hers in place with government work and TSP.
I cannot understand this position. Canāt you inform your FA that you will need access to some of the Roth funds? Iām struggling to see why you would want to withdraw money from your IRA and not convert it to Roth? If you converted a lump sum in January, you could spend it down throughout the year as needed. Granted you would need to make an estimated tax payment timed with the conversion, but that is the case whether you withdrew the money and deposited in your taxable account or converted to Roth.
It still seems you would be ahead to convert the funds to Roth instead of just withdrawing from the IRA. You could convert up to the top of whatever marginal tax bracket you are comfortable with.
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So much depends upon individual situations. We did a lot of conversion to Roth in the years after retirement, gritting out teeth to pay the associated taxes. (We could have withheld the taxes, but FA advised against that). This year we decided to not do any Roth conversion, instead shifting to withdrawals from a taxable IRA.
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One thing to consider is liquidity for heirs. If those funds arenāt readily available for your use today, how available will they be for your heirs? Or, a surviving spouse to use for LTC? At some point, someone is gonna need to unwind those (complex?) illiquid transactions. (Of course, your FA will recommend against, bcos thatās how they make their money.)
In our case, converting tIRA (and rollover 401k) into Roth. (you can have multiple Roth accounts). But if you need the cash to live on, then you need the cash to live on. Just take some tIRA distributions now, pay the taxes, and use for living expense.
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We have beneficiary designations on funds - they are liquid for them to do the steps. Surviving spouse can use as well. Transactions are not complex - it is having the log of information (accounts, passwords, contacts, etc.) Our own investment account is quicker access on liquidity; yes FA make money with their fee, but to do some of the things we have done with our funds we needed a FA.
Yes, we need cash not just to live on but to make changes in our living place for one.
We donāt need to spend down Roth funds. We are in the years when we spend funds, we would be spending 401k funds along with the funds we take from annuities (penalty free) and pay associated taxes. We donāt want to have a growth of after-tax Roth funds when we want to have some investment funds that are not in retirement funds. We worked to get the Roth funds there that we have - we donāt want to spend them down unless necessary. Those funds are part of our kids/grandkids inheritance. We are living well, we feel good about how we are living our lives. We want to be smart about how we pay taxes as well.
Why would we ābe aheadā by converting funds to Roth? It doesnāt do what we want to do (build up investment account outside of retirement funds.)
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If you are currently at a sub 24% bracket and otherwise have plenty of liquidity through existing non-retirement savings and annuities, it may make sense to convert traditional 401k/IRA assets to Roth up to the 24% bracket. This reduces your future RMDS and shelters any further capital gains those assets may accrue. The liquidity of a Roth account is not much different than regular non-retirement savings. The withdrawal limitations/penalties should not come into play if you are otherwise liquid ā you can always take out principal tax and penalty free, earnings can be withdrawn tax free after a 5 year holding period.
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You commented that you plan to withdraw from IRA to fund an accessible brokerage account so as to have cash on hand. I am assuming that you do not have access to other non-retirement assets and need to fund ongoing expenses.
I suggested that instead of just withdrawing from your IRA and depositing it in your brokerage/taxable account that you instead withdraw from your IRA and deposit in your Roth account. These two approaches are tax neutral for the withdrawal, but the tax advantage goes to depositing the money in a Roth account instead of in your brokerage account because the money deposited in the Roth will grow tax-free, whereas any gains on the money deposited in your brokerage account will incur a tax liability.
So as I commented earlier, transfer say $100,000 from your IRA to your Roth on January 1st, spend that money from your Roth as needed throughout the year, allowing the balance of the $100K to grow tax-free until you need to spend that money.
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I think, but am not certain, that the OP needs to withdraw money from the IRA to fund current living expenses. My suggestion was to convert a lump sum to Roth at the start of the year, pay quarterly estimated taxes as needed, and allow the unused amount to grow tax-free.
Slightly more complicated, but not excessively so.
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We would be under the 5-year holding period.
ETAā¦I guess even your initial deposit is not easily accessibleā¦from the response below. Hmmm.
Thatās only for earnings. You have access to the principal you deposit without penalty at any time. @BKSquared am I correct?
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Not on funds you roll over from a traditional IRA. those have a 5 year holding requirement.
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Got it. So for rollovers, nothing is really liquid until you hit the 5 year mark if you are under 59 1/2.
My understanding is the 5 year holding period on converted funds does not apply to principal after you turn 59.5. It does apply to earnings.
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After a really quick Google search, I agree.
This is a completely separate five-year rule covering Roth IRA conversions from a traditional IRA or 401(k). Importantly, each Roth conversion has its own five-year holding period, which starts on January 1 of the year in which the conversion occurs.
Under this rule, if you withdraw converted funds before age 59Ā½, you will generally have to pay a 10% penalty on the any pre-tax assets that were convertedānot just the earningsāas well as income taxes on the earnings. It doesnāt matter if you have already met the five-year Roth contribution rule.
After age 59Ā½, you can withdraw converted funds without a 10% penalty. But remember, the five-year contribution rule (mentioned above) still appliesāif that rule hasnāt been met, taxes may apply for the earnings portion of the withdrawal.
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I just want to make sure I have this correct. The Roth conversion funds can be withdrawn without penalty if you are over 59 1/2ā¦but any earnings withdrawn could be taxed.
If you are UNDER 59 1/2, there is a five year hold periodā¦and a penalty for withdrawal before that 5 years is up.
I thought that was what our financial planner told usā¦that what was being converted was accessibleā¦we are over 59 1/2.
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Who keeps track of the 5 year rule (after age 59 1/2)? Weāve been converting 401k to Roth slowly over many years. I would have no clue which money has been in the Roth over 5 years, if we needed or wanted to withdraw a substantial amount in the next 5 years.
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Itās tracked on your tax returns each year you do conversions. See form 8606 (1040).
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