Can I add to a converted IRA?

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Can I add to a converted IRA?

Postby donall » Thu Mar 21, 2013 11:55 pm

I am interested in keeping the number of accounts down and keeping things simple. If I have existing Roth IRAs that were converted three years ago from traditional IRAs, can I add additional funds to the converted Roths or do I need to open a new Roth for funds I would like to add this year?
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Re: Can I add to a converted IRA?

Postby Alan S. » Fri Mar 22, 2013 1:01 am

You can add either regular contributions or later conversions to a Roth holding a prior conversion. The only time you might NOT want to do that is when the recharacterization deadline for the conversion has not passed and there is a chance you might recharacterize. Leaving that account alone will avoid a more complex earnings calculation for the recharacterization, but the recharacterization can be done whether you add new funds or not.
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Re: Can I add to a converted IRA?

Postby donall » Fri Mar 22, 2013 10:44 am

Thanks Alan, that makes sense
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Re: Can I add to a converted IRA?

Postby earlyout » Fri Mar 22, 2013 11:13 am

Since simplification is your objective, your Roth IRAs can also be combined into a single Roth. Very easy to do if they are all held by the same custodian.
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Re: Can I add to a converted IRA?

Postby jimcrawford01 » Sun Mar 24, 2013 11:37 am

donall wrote:I am interested in keeping the number of accounts down and keeping things simple. If I have existing Roth IRAs that were converted three years ago from traditional IRAs, can I add additional funds to the converted Roths or do I need to open a new Roth for funds I would like to add this year?


I think it is important to be aware of the 5 yr rule that governs the Roth IRA.

CONVERSION dollars are dollar specifiic.

CONTRIBUTION dollars are account specific.

Each dollar CONVERTED has its own 5 yr clock.

Each dollar CONTRIBUTED to an existing Roth acct is included in the first CONTRIBUTED dollar's clock.

You may make assumptions about a HYBRID acct, i.e., an acct that has both CONVERTED and CONTRIBUTED dollars.

I believe that I am correct but I'm sure the BogleHeads will correct me, if not.

The usual disclaimers apply with regard to tax advice and explanations.

Jim
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Re: Can I add to a converted IRA?

Postby kaneohe » Sun Mar 24, 2013 3:09 pm

jimcrawford01 wrote:
donall wrote:I am interested in keeping the number of accounts down and keeping things simple. If I have existing Roth IRAs that were converted three years ago from traditional IRAs, can I add additional funds to the converted Roths or do I need to open a new Roth for funds I would like to add this year?


I think it is important to be aware of the 5 yr rule that governs the Roth IRA.

CONVERSION dollars are dollar specifiic.

CONTRIBUTION dollars are account specific.

Each dollar CONVERTED has its own 5 yr clock.

Each dollar CONTRIBUTED to an existing Roth acct is included in the first CONTRIBUTED dollar's clock.

You may make assumptions about a HYBRID acct, i.e., an acct that has both CONVERTED and CONTRIBUTED dollars.

I believe that I am correct but I'm sure the BogleHeads will correct me, if not.

The usual disclaimers apply with regard to tax advice and explanations.

Jim



Jim.......is there a specific lesson or message you have for the OP? I thought the clocks have to do w/ withdrawals which the OP hasn't
mentioned. Also, for withdrawals, don't the ordering rules of contributions, then conversions, then earnings determine what's being withdrawn regardless
of which account they come from or whether the accounts are combined? Agree that one should be aware of the 5 yr clocks but OP seems more concerned w/ the effect of combining "types" of accounts.
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Re: Can I add to a converted IRA?

Postby donall » Sun Mar 24, 2013 4:27 pm

jimcrawford01 wrote:
donall wrote:I am interested in keeping the number of accounts down and keeping things simple. If I have existing Roth IRAs that were converted three years ago from traditional IRAs, can I add additional funds to the converted Roths or do I need to open a new Roth for funds I would like to add this year?


I think it is important to be aware of the 5 yr rule that governs the Roth IRA.

CONVERSION dollars are dollar specifiic.

CONTRIBUTION dollars are account specific.

Each dollar CONVERTED has its own 5 yr clock.

Each dollar CONTRIBUTED to an existing Roth acct is included in the first CONTRIBUTED dollar's clock.

You may make assumptions about a HYBRID acct, i.e., an acct that has both CONVERTED and CONTRIBUTED dollars.

I believe that I am correct but I'm sure the BogleHeads will correct me, if not.

The usual disclaimers apply with regard to tax advice and explanations.

Jim


Just so I understand,
Dollars converted in 2010 have a five year clock to 2015.
Dollars added to converted IRA have a five year clock of original tIRA contribution or starts in 2013 and ends in 2018? In other words, what is considered the first contributed dollar for a converted Roth IRA?
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Re: Can I add to a converted IRA?

Postby donall » Sun Mar 24, 2013 4:33 pm

earlyout wrote:Since simplification is your objective, your Roth IRAs can also be combined into a single Roth. Very easy to do if they are all held by the same custodian.


You are right earlyout, but unfortunately I seem to have a gene that leads me to as many banks, mutual funds, etc, as possible. I am trying to buck my heritage and simplify. I've come a long way but still have a ways to go.
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Re: Can I add to a converted IRA?

Postby jimcrawford01 » Sun Mar 24, 2013 6:08 pm

donall wrote:
jimcrawford01 wrote:
donall wrote:I am interested in keeping the number of accounts down and keeping things simple. If I have existing Roth IRAs that were converted three years ago from traditional IRAs, can I add additional funds to the converted Roths or do I need to open a new Roth for funds I would like to add this year?


I think it is important to be aware of the 5 yr rule that governs the Roth IRA.

CONVERSION dollars are dollar specifiic.

CONTRIBUTION dollars are account specific.

Each dollar CONVERTED has its own 5 yr clock.

Each dollar CONTRIBUTED to an existing Roth acct is included in the first CONTRIBUTED dollar's clock.

You may make assumptions about a HYBRID acct, i.e., an acct that has both CONVERTED and CONTRIBUTED dollars.

I believe that I am correct but I'm sure the BogleHeads will correct me, if not.

The usual disclaimers apply with regard to tax advice and explanations.

Jim


Just so I understand,
Dollars converted in 2010 have a five year clock to 2015.

That is correct.

To be honest, I am not qualified to answer the next question. I can make a good guess, but I'd like to know the real answer for myself.

Dollars added to converted IRA have a five year clock of original tIRA contribution or starts in 2013 and ends in 2018? In other words, what is considered the first contributed dollar for a converted Roth IRA?




Jim
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Re: Can I add to a converted IRA?

Postby kaneohe » Sun Mar 24, 2013 6:09 pm

donall wrote:
jimcrawford01 wrote:
donall wrote:I am interested in keeping the number of accounts down and keeping things simple. If I have existing Roth IRAs that were converted three years ago from traditional IRAs, can I add additional funds to the converted Roths or do I need to open a new Roth for funds I would like to add this year?


I think it is important to be aware of the 5 yr rule that governs the Roth IRA.

CONVERSION dollars are dollar specifiic.

CONTRIBUTION dollars are account specific.

Each dollar CONVERTED has its own 5 yr clock.

Each dollar CONTRIBUTED to an existing Roth acct is included in the first CONTRIBUTED dollar's clock.

You may make assumptions about a HYBRID acct, i.e., an acct that has both CONVERTED and CONTRIBUTED dollars.

I believe that I am correct but I'm sure the BogleHeads will correct me, if not.

The usual disclaimers apply with regard to tax advice and explanations.

Jim


Just so I understand,
Dollars converted in 2010 have a five year clock to 2015.
Dollars added to converted IRA have a five year clock of original tIRA contribution or starts in 2013 and ends in 2018? In other words, what is considered the first contributed dollar for a converted Roth IRA?


By adding to converted IRA.......do you mean contributions or more conversions? Assuming you mean contributions, there is no clock.....contributions can be withdrawn at any time. If you mean conversions, each conversion starts a new 5 yr clock (assuming taxable conversions) before you can withdraw that conversion w/o penalty. The clock for your oldest Roth starts whenever you open it.....either w/ contributions or conversions.......it is only significant when you get to be >59.5 y.o.; if >59.5 y.o. and oldest Roth is >=5 y.o., you can withdraw at will w/o tax or penalty.
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Re: Can I add to a converted IRA?

Postby kaneohe » Sun Mar 24, 2013 6:15 pm

Here is a table by kawill from the fairmark.com site: some critical punctuation is missing so imagine a semi-colon after every yes or no.
Also note the ordering rules: withdrawals are contributions first, then taxable portions of conversions, etc just as they are listed in table,
with earnings last.

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-Yes (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.
Last edited by kaneohe on Sun Mar 24, 2013 7:32 pm, edited 1 time in total.
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Re: Can I add to a converted IRA?

Postby donall » Sun Mar 24, 2013 7:08 pm

kaneohe wrote:Here is a table by kawill from the fairmark.com site: some critical punctuation so imagine a semi-colon after every yes or no.
Also note the ordering rules: withdrawals are contributions first, then taxable portions of conversions, etc just as they are listed in table,
with earnings last.

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-Yes (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.


kaneohe, thanks so much for the explanation. This will help with the next step of consolidating Roth accounts.
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Re: Can I add to a converted IRA?

Postby kaneohe » Sun Mar 24, 2013 7:31 pm

Be careful w/ that table.......it tends to degrade the brain and memory because you don't have to think or remember anymore.........as long as you can find it again. :happy
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Re: Can I add to a converted IRA?

Postby Epsilon Delta » Sun Mar 24, 2013 9:35 pm

Also the table does not deal with the case of multiple conversions. Fortunately form 8606 (and instructions) and form 5329 (and instructions) are crystal clear.

Short story: the only thing that works by individual accounts is recharacterizations. Everything else is combined across all your Roth IRAs. In particular the five year rule for conversions is applied using the ordering rules for withdrawals so there is no advantage to keeping the accounts separate. Once the deadline (oct 15th of the following year) for recharacterizations passes combine away.
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Re: Can I add to a converted IRA?

Postby jimcrawford01 » Mon Mar 25, 2013 9:24 am

donall wrote:I am interested in keeping the number of accounts down and keeping things simple. If I have existing Roth IRAs that were converted three years ago from traditional IRAs, can I add additional funds to the converted Roths or do I need to open a new Roth for funds I would like to add this year?


I am running fast and trying to keep up.

I can understand my own saw with regard to the 5 yr rule :

CONVERTED dollars are dollar specific

CONTRIBUTED dollars are acct specific.

So, when I opened a Roth and CONTRIBUTED, I had a good understanding.

So, when I CONVERTED a TIRA to another, separate Roth, I had a good understanding.

I went through the 8606 drill so that I understood the withdrawal rules for my two Roth IRAs, one that had CONVERTED dollars and one that had CONTRIBUTED dollars.

My Questions :

If I were to CONTRIBUTE to the existing Roth that had previously had only CONVERTED dollars, which clock would apply to the newly CONTRIBUTED dollars?

If I were to CONVERT to the existing Roth that had previously had only CONTRIBUTED dollars, which clock would apply to newly CONVERTED dollars?

Will my saw work here and be IAW the IRS?

Jim
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Re: Can I add to a converted IRA?

Postby kaneohe » Mon Mar 25, 2013 12:35 pm

jimcrawford01 wrote:
My Questions :

If I were to CONTRIBUTE to the existing Roth that had previously had only CONVERTED dollars, which clock would apply to the newly CONTRIBUTED dollars?

If I were to CONVERT to the existing Roth that had previously had only CONTRIBUTED dollars, which clock would apply to newly CONVERTED dollars?

Jim


See the kawill table in a prior post above. My understanding is that you consider all the Roths together as a single account so in your
Roth #1 , you have Contribution B and Conversion 1
Roth #2, you have Contribution A and Conversion 2
Considering them together, you have Contributions A & B and conversion 1 and conversion 2

When you withdraw funds from any Roth, they are considered to be contributions first which you can withdraw at any time w/o penalty so there is no clock
as long as you withdraw <= (Contribution A + Contribution B). Once you withdraw more than that, the withdrawals are considered to be conversions starting with the oldest (Conversion 1) and then the youngest (Conversion 2). There are 5 yr clocks on each conversion. There are more details relating to whether the conversions were taxed or not and whether the owner was > 59.5 y.o. when withdrawals were made.
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Re: Can I add to a converted IRA?

Postby Epsilon Delta » Mon Mar 25, 2013 4:37 pm

jimcrawford01 wrote:
donall wrote:I am interested in keeping the number of accounts down and keeping things simple. If I have existing Roth IRAs that were converted three years ago from traditional IRAs, can I add additional funds to the converted Roths or do I need to open a new Roth for funds I would like to add this year?


I am running fast and trying to keep up.

I can understand my own saw with regard to the 5 yr rule :

CONVERTED dollars are dollar specific

CONTRIBUTED dollars are acct specific.

So, when I opened a Roth and CONTRIBUTED, I had a good understanding.

So, when I CONVERTED a TIRA to another, separate Roth, I had a good understanding.

I went through the 8606 drill so that I understood the withdrawal rules for my two Roth IRAs, one that had CONVERTED dollars and one that had CONTRIBUTED dollars.


There are two types of five year clocks.

The first is "global" it is started with the first conversion or contribution. This clock counts toward "qualified withdrawals". Once this clock starts the only thing that affects would be undoing the conversion or contribution by recharacterizing or withdrawing the contribution and earnings by the extended due date of the return. Other types transactions, both deposits and withdrawals, do not affect this clock. There is only one clock of this sort, it applies to all your Roth IRAs. Once this clock expires and you meet one of the other conditions for qualified withdrawals (typically attaining age 59.5) nothing else matters.

You also have a five year clock for each conversion. This determines whether withdrawing the taxable part of the conversion is subject to the 10% penalty. Again this is not reset by other contributions or withdrawals, though it is rendered mote if you withdraw or recharacterize the conversion that it governs. If you make another conversion it gets its own clock. These clocks only matter if you make a non-qualified withdrawal and the ordering rules assign the withdrawal to the taxable part of a conversion.

So additional contributions and conversions never reset any of the clocks. I'm not sure how this maps to your saw, which does not make sense to me.
jimcrawford01 wrote:My Questions :

If I were to CONTRIBUTE to the existing Roth that had previously had only CONVERTED dollars, which clock would apply to the newly CONTRIBUTED dollars?

The only clock that applies to an additional contribution is the global one that governs if withdrawals are qualified. Since a Roth already existed this clock is already running and would not be reset.
jimcrawford01 wrote:If I were to CONVERT to the existing Roth that had previously had only CONTRIBUTED dollars, which clock would apply to newly CONVERTED dollars?

The global clock, which is already running and would not be reset, would count towards qualifying the account. A new five year clock would start for the newly converted dollars.
jimcrawford01 wrote:Will my saw work here and be IAW the IRS?

Jim
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