Roth conversions

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beetroot
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Joined: Wed Jul 06, 2016 10:26 am

Roth conversions

Post by beetroot » Mon Aug 07, 2017 6:23 am

I've read many great posts here relative to Roth conversions and paying the taxes from funds outside of the IRA.
I was discussing this with friends and the idea of increasing withholding on other income such as a pension was raised.
Would this be an alternative strategy if the numbers worked out?

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samsoes
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Re: Roth conversions

Post by samsoes » Mon Aug 07, 2017 6:35 am

Absolutely; the name of the game for Roth conversions is to always answer "no" when asked to withhold taxes on the conversion transaction (the withheld amount is treated like a distribution), and to pay the taxes from funds outside the IRA. Increasing your withholding on other sources of income has the possible advantage of avoiding the need for estimated tax payments (YMMV).

Just make sure this extra tax withheld isn't preventing you from your further savings goals (paying off debt, establishing/maintaining emergency fund, etc.) .
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

beetroot
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Re: Roth conversions

Post by beetroot » Mon Aug 07, 2017 7:05 am

Thank you, wonderful news!

I'm also curious, the advice is to convert into an empty Roth. What happens moving forward when doing conversions multiple years?
Is the conversion amount moved by the end of the year (assuming no recharacterization) and replaced annually with conversions into the now empty Roth?

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samsoes
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Re: Roth conversions

Post by samsoes » Mon Aug 07, 2017 7:23 am

beetroot wrote:Thank you, wonderful news!

I'm also curious, the advice is to convert into an empty Roth. What happens moving forward when doing conversions multiple years?
Is the conversion amount moved by the end of the year (assuming no recharacterization) and replaced annually with conversions into the now empty Roth?
Each year's Roth conversion has a separate five-year clock, so separate, empty accounts makes this easier to track. Once 5 years have passed for a particular year's conversion (from Jan 1 of conversion year), it can safely comingled to the "main" Roth.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

Chip
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Joined: Wed Feb 21, 2007 4:57 am

Re: Roth conversions

Post by Chip » Mon Aug 07, 2017 8:32 am

beetroot wrote:I'm also curious, the advice is to convert into an empty Roth. What happens moving forward when doing conversions multiple years?
Is the conversion amount moved by the end of the year (assuming no recharacterization) and replaced annually with conversions into the now empty Roth?
This is what I do, though I usually move the converted assets back to the "mother Roth" after January 1. I have multiple Roth conversion accounts, as I use both the "horse race" and "leapfrog" methods to get the maximum benefit from conversions.

The five year rule mentioned isn't a factor in my case. There was never a chance I was going to withdraw conversions until after age 59.5.

BigJohn
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Re: Roth conversions

Post by BigJohn » Mon Aug 07, 2017 5:48 pm

samsoes wrote:Each year's Roth conversion has a separate five-year clock, so separate, empty accounts makes this easier to track.
Not sure how old the OP is but the separate five-year clocks disappear at age 59.5. See this post for more details viewtopic.php?p=2626277#p2626277

Even if over 59.5, still a good idea to use separate accounts until the recharacterization time limit has passed.

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elgob.bogle
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Re: Roth conversions

Post by elgob.bogle » Mon Aug 07, 2017 7:09 pm

Another advantage of multiple ROTH IRA accounts is the ability to "change your mind" on an investment exchange you just made and reverse it in a different ROTH account to avoid "round trip" issues with Vanguard. At least, that was the way it used to work before the new ETF System was put in place.

elgob

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WoodSpinner
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Re: Roth conversions

Post by WoodSpinner » Mon Aug 07, 2017 7:43 pm

samsoes wrote:
beetroot wrote:Thank you, wonderful news!

I'm also curious, the advice is to convert into an empty Roth. What happens moving forward when doing conversions multiple years?
Is the conversion amount moved by the end of the year (assuming no recharacterization) and replaced annually with conversions into the now empty Roth?
Each year's Roth conversion has a separate five-year clock, so separate, empty accounts makes this easier to track. Once 5 years have passed for a particular year's conversion (from Jan 1 of conversion year), it can safely comingled to the "main" Roth.
While I agree that converting into an empty Roth is a good play, I have never seen the advice to keep it separate for 5 years.

Are you concerned about segregating the growth vs principle?

FWIW, I would roll it into main Roth after finishing my taxes and confirming I didn't want to recharacterize it.

Thoughts?


:?:

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