Withdrawals from Roth IRA

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sidwin516
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Withdrawals from Roth IRA

Post by sidwin516 »

Say you have 150k in a Roth IRA. Say the account is 5 years old and the contributions was 50k. In year 6 u decided to take out the 50k contributions, is there any taxes or penalties? Someone posted that the gains come out first. I never read that anywhere and wanted to confirm.
MissH1967
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Re: Withdrawals from Roth IRA

Post by MissH1967 »

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Last edited by MissH1967 on Tue Jan 11, 2022 5:23 am, edited 2 times in total.
pharmermummles
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Re: Withdrawals from Roth IRA

Post by pharmermummles »

Contributions come out first. If you contributed 50K, you can withdraw 50K tax free at any time.
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celia
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Re: Withdrawals from Roth IRA

Post by celia »

Contributions come out first in the order they were made. Then conversions come out in the order they were made. The way to track it all is discussed by our resident expert, Alan S.

After reading how to calculate the Roth IRA basis, start at the top of that thread for more context.

IRA withdrawals are the subject of IRS Pub 590-B (most recent issue, although 2022 may not come out for a while).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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retiredjg
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Re: Withdrawals from Roth IRA

Post by retiredjg »

sidwin516 wrote: Tue Jan 11, 2022 2:15 am Say you have 150k in a Roth IRA. Say the account is 5 years old and the contributions was 50k. In year 6 u decided to take out the 50k contributions, is there any taxes or penalties? Someone posted that the gains come out first. I never read that anywhere and wanted to confirm.
Earnings come out last, not first.

If you have $150k in Roth IRA with $50k of that being from direct contributions, you can take the $50k out any time. There is no requirement to wait 5 years. Unfortunately, that 5 year misconception just won't go away.
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sidwin516
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Re: Withdrawals from Roth IRA

Post by sidwin516 »

Awesome. That was what I was hoping to hear. I wonder if 529 plans are calculated the same way.

My goal is to take my Roth contributions I rolled from my work 401k mega Roth in a few years and use that money to life off until u hit 55.5’if I’m working or 59.5 if I’m not working.
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retiredjg
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Re: Withdrawals from Roth IRA

Post by retiredjg »

sidwin516 wrote: Tue Jan 11, 2022 10:15 am Awesome. That was what I was hoping to hear. I wonder if 529 plans are calculated the same way.

My goal is to take my Roth contributions I rolled from my work 401k mega Roth in a few years and use that money to life off until u hit 55.5’if I’m working or 59.5 if I’m not working.
Direct contributions don't have a 5 year clock but money rolled into Roth IRA is not a direct contribution. There may be some 5 year clocks on some portion of each of those MBD contributions. Each years' rollover is evaluated separately - if there was a taxable part of the rollover/conversion, that taxable part has a 5 year clock.

There are also other ways to interpret your plan that would have different rules.

Exactly what do you want to do?
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sidwin516
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Re: Withdrawals from Roth IRA

Post by sidwin516 »

I was doing mega Roth at work. I left that job and rolled my mega Roth to my personal back door Roth IRA. I’m hoping to retire in two years and start drawing on those contributions. The accounts were open I. 2017. So I’m guessing the $85k in contribution from my mega Roth would be able to be disperse whenever but the back door would have a 5 year wait. So each year I do $6k ira then convert to Roth IRA. So in year six u can pull $6k without any issues right?

Thanks for the clarification.
GuyInFL
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Re: Withdrawals from Roth IRA

Post by GuyInFL »

sidwin516 wrote: Tue Jan 11, 2022 10:15 am Awesome. That was what I was hoping to hear. I wonder if 529 plans are calculated the same way.
Nope. 529 withdrawals include a percent of contributions and gains. Of course its not taxable if its for education. At least mine was.
nolesrule
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Re: Withdrawals from Roth IRA

Post by nolesrule »

sidwin516 wrote: Wed Jan 12, 2022 7:00 am I was doing mega Roth at work. I left that job and rolled my mega Roth to my personal back door Roth IRA. I’m hoping to retire in two years and start drawing on those contributions. The accounts were open I. 2017. So I’m guessing the $85k in contribution from my mega Roth would be able to be disperse whenever but the back door would have a 5 year wait. So each year I do $6k ira then convert to Roth IRA. So in year six u can pull $6k without any issues right?

Thanks for the clarification.
The mega backdoor Roth amounts rolled into the Roth IRA would be treated as conversions, not contributions.

For what it's worth, the after-tax money that was converted is available immediately without penalty, but because of the withdrawal ordering rules, pre-tax money from the same conversion year comes out first and would be subject to the penalty, so it's important to know how much pre-tax and after-tax money were converted each calendar year. Given that the general goal of the backdoor and mega backdoor are to get the money into Roth before there has been much growth since at the time of conversion you have to pay taxes on it, the pre-tax amounts should be small, and any penalty on withdrawal of pre-tax amounts may be insignificant.
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retiredjg
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Re: Withdrawals from Roth IRA

Post by retiredjg »

sidwin516 wrote: Wed Jan 12, 2022 7:00 am I was doing mega Roth at work. I left that job and rolled my mega Roth to my personal back door Roth IRA. I’m hoping to retire in two years and start drawing on those contributions. The accounts were open I. 2017. So I’m guessing the $85k in contribution from my mega Roth would be able to be disperse whenever but the back door would have a 5 year wait. So each year I do $6k ira then convert to Roth IRA. So in year six u can pull $6k without any issues right?

Thanks for the clarification.
More information is needed.

Have you made any direct contributions to Roth IRA? If yes, that money would come out of Roth IRA first.

You said you were "doing mega Roth at work". This can mean two different things (in-service rollover to Roth 401k or roll out to Roth IRA). Which were you doing? They are treated differently once the money gets to Roth IRA.

When did you do the ordinary backdoor Roth IRA? When you did them, did you convert the exact same amount as the contribution or were there any earnings that occurred before the conversion?

What accounts were open in 2017?

This can be a little complicated. :happy
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sidwin516
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Re: Withdrawals from Roth IRA

Post by sidwin516 »

retiredjg wrote: Wed Jan 12, 2022 9:50 am
sidwin516 wrote: Wed Jan 12, 2022 7:00 am I was doing mega Roth at work. I left that job and rolled my mega Roth to my personal back door Roth IRA. I’m hoping to retire in two years and start drawing on those contributions. The accounts were open I. 2017. So I’m guessing the $85k in contribution from my mega Roth would be able to be disperse whenever but the back door would have a 5 year wait. So each year I do $6k ira then convert to Roth IRA. So in year six u can pull $6k without any issues right?

Thanks for the clarification.
More information is needed.

Have you made any direct contributions to Roth IRA? If yes, that money would come out of Roth IRA first.

You said you were "doing mega Roth at work". This can mean two different things (in-service rollover to Roth 401k or roll out to Roth IRA). Which were you doing? They are treated differently once the money gets to Roth IRA.

When did you do the ordinary backdoor Roth IRA? When you did them, did you convert the exact same amount as the contribution or were there any earnings that occurred before the conversion?

What accounts were open in 2017?

This can be a little complicated. :happy
I’ve never directly contributed to a Roth. Always had to do conversion. At work they would convert the contribution every pay check. It was converted but left in the plan. Since leaving there, I rolled the 85k contribution into my personal Roth. I rolled $35k gains too.

Every time I did the back door I waited till the ira cleared and the gains were .01.

Back door roth was open in 2017. Mega roth at work started that year too.
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sidwin516
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Re: Withdrawals from Roth IRA

Post by sidwin516 »

nolesrule wrote: Wed Jan 12, 2022 7:44 am
sidwin516 wrote: Wed Jan 12, 2022 7:00 am I was doing mega Roth at work. I left that job and rolled my mega Roth to my personal back door Roth IRA. I’m hoping to retire in two years and start drawing on those contributions. The accounts were open I. 2017. So I’m guessing the $85k in contribution from my mega Roth would be able to be disperse whenever but the back door would have a 5 year wait. So each year I do $6k ira then convert to Roth IRA. So in year six u can pull $6k without any issues right?

Thanks for the clarification.
The mega backdoor Roth amounts rolled into the Roth IRA would be treated as conversions, not contributions.

For what it's worth, the after-tax money that was converted is available immediately without penalty, but because of the withdrawal ordering rules, pre-tax money from the same conversion year comes out first and would be subject to the penalty, so it's important to know how much pre-tax and after-tax money were converted each calendar year. Given that the general goal of the backdoor and mega backdoor are to get the money into Roth before there has been much growth since at the time of conversion you have to pay taxes on it, the pre-tax amounts should be small, and any penalty on withdrawal of pre-tax amounts may be insignificant.
No gains were ever converted. The company worked with fidelity to convert on pay day. Does that help?
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retiredjg
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Re: Withdrawals from Roth IRA

Post by retiredjg »

sidwin516 wrote: Wed Jan 12, 2022 1:06 pm
retiredjg wrote: Wed Jan 12, 2022 9:50 am
sidwin516 wrote: Wed Jan 12, 2022 7:00 am I was doing mega Roth at work. I left that job and rolled my mega Roth to my personal back door Roth IRA. I’m hoping to retire in two years and start drawing on those contributions. The accounts were open I. 2017. So I’m guessing the $85k in contribution from my mega Roth would be able to be disperse whenever but the back door would have a 5 year wait. So each year I do $6k ira then convert to Roth IRA. So in year six u can pull $6k without any issues right?

Thanks for the clarification.
More information is needed.

Have you made any direct contributions to Roth IRA? If yes, that money would come out of Roth IRA first.

You said you were "doing mega Roth at work". This can mean two different things (in-service rollover to Roth 401k or roll out to Roth IRA). Which were you doing? They are treated differently once the money gets to Roth IRA.

When did you do the ordinary backdoor Roth IRA? When you did them, did you convert the exact same amount as the contribution or were there any earnings that occurred before the conversion?

What accounts were open in 2017?

This can be a little complicated. :happy
I’ve never directly contributed to a Roth. Always had to do conversion. At work they would convert the contribution every pay check. It was converted but left in the plan. Since leaving there, I rolled the 85k contribution into my personal Roth. I rolled $35k gains too.
Think of your Roth IRA as 3 buckets: 1. contributions, 2. conversions, 3. earnings that have occurred inside Roth accounts (both 401k and IRA). As you take money out of Roth IRA, it comes out in that same order, starting with contributions.

As I currently understand it, this $85k contribution from your IRRs rolls into the "contributions" bucket in your Roth IRA. This is different from what we used to think. I don't have the knowledge to explain exactly why and have not fully investigated it myself. It is the guidance as I currently understand it from Alan S. Contact Alan S. if you want to know more.

The $35k gains were earnings that occurred inside your Roth 401k. The $35k rolled into the earnings bucket of the Roth IRA.

Every time I did the back door I waited till the ira cleared and the gains were .01.
These backdoor "contributions" are in the "conversion" bucket in your Roth IRA. Since there was no taxable portion for any of these conversions, none carry a 5 tax year clock. If there had been any earnings, this would be a little more complex.

Earnings - whatever is not a contribution or a conversion. Earnings come out last. In order to avoid either tax or penalty, you must be over 59.5 and it must have been at least 5 tax years since your first contribution to Roth IRA (contribution to Roth 401k does not count here).


If I understand your IRA correctly, the $85k and all your backdoor contributions are available immediately. The rest is earnings. Your first contribution to Roth IRA was in 2017 - so the 5 year qualification clock has just finished running. Therefore, your Roth IRA will be qualified when you reach (or did reach) age 59.5.

Withdrawals from Roth IRA are tracked on Form 8606, Part III. There is a worksheet in the instructions to help you fill in line 22 and line 24.
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retiredjg
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Re: Withdrawals from Roth IRA

Post by retiredjg »

nolesrule wrote: Wed Jan 12, 2022 7:44 am The mega backdoor Roth amounts rolled into the Roth IRA would be treated as conversions, not contributions.
This is the part where my understanding has changed. Based on Alan S's more recent comments, I now believe those IRRs roll into contributions, not conversions.
nolesrule
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Re: Withdrawals from Roth IRA

Post by nolesrule »

retiredjg wrote: Wed Jan 12, 2022 1:43 pm
nolesrule wrote: Wed Jan 12, 2022 7:44 am The mega backdoor Roth amounts rolled into the Roth IRA would be treated as conversions, not contributions.
This is the part where my understanding has changed. Based on Alan S's more recent comments, I now believe those IRRs roll into contributions, not conversions.
You may be correct. I now recall that discussion. It is a bit confusing.
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retiredjg
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Re: Withdrawals from Roth IRA

Post by retiredjg »

nolesrule wrote: Wed Jan 12, 2022 2:07 pm
retiredjg wrote: Wed Jan 12, 2022 1:43 pm
nolesrule wrote: Wed Jan 12, 2022 7:44 am The mega backdoor Roth amounts rolled into the Roth IRA would be treated as conversions, not contributions.
This is the part where my understanding has changed. Based on Alan S's more recent comments, I now believe those IRRs roll into contributions, not conversions.
You may be correct. I now recall that discussion. It is a bit confusing.
I'm still working through it myself. :happy
aaaaaa111111
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Re: Withdrawals from Roth IRA

Post by aaaaaa111111 »

retiredjg wrote: Wed Jan 12, 2022 1:36 pm Think of your Roth IRA as 3 buckets: 1. contributions, 2. conversions, 3. earnings that have occurred inside Roth accounts (both 401k and IRA). As you take money out of Roth IRA, it comes out in that same order, starting with contributions.
When you say "it comes out in that same order", does that mean "the smart thing to do is to make sure you take them out in this order" or "this is what will always happen by default when withdrawing, you don't actually need to think about it"? I assume the latter but wanted to be absolutely certain (not that I plan on touching my IRAs any time soon).
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retiredjg
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Re: Withdrawals from Roth IRA

Post by retiredjg »

aaaaaa111111 wrote: Wed Jan 12, 2022 9:38 pm
retiredjg wrote: Wed Jan 12, 2022 1:36 pm Think of your Roth IRA as 3 buckets: 1. contributions, 2. conversions, 3. earnings that have occurred inside Roth accounts (both 401k and IRA). As you take money out of Roth IRA, it comes out in that same order, starting with contributions.
When you say "it comes out in that same order", does that mean "the smart thing to do is to make sure you take them out in this order" or "this is what will always happen by default when withdrawing, you don't actually need to think about it"? I assume the latter but wanted to be absolutely certain (not that I plan on touching my IRAs any time soon).
The first dollars that come out are assumed to be contributions if there is anything in that bucket. When that bucket is dry, the next dollars that come out are assumed to be conversions (noting that some conversions will have a 5 tax year clock on some or all of the conversion). When that bucket is dry, the last money to come out comes from the earnings bucket.

You do actually have to think about it so that you'll know when you dip into dollars that carry a penalty and/or tax. It is up to you to keep records of how and when money gets into your Roth IRA so that you will know when you dip into dollars that might carry a penalty and/or tax.
aaaaaa111111
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Re: Withdrawals from Roth IRA

Post by aaaaaa111111 »

retiredjg wrote: Thu Jan 13, 2022 8:20 amThe first dollars that come out are assumed to be contributions if there is anything in that bucket. When that bucket is dry, the next dollars that come out are assumed to be conversions (noting that some conversions will have a 5 tax year clock on some or all of the conversion). When that bucket is dry, the last money to come out comes from the earnings bucket.

You do actually have to think about it so that you'll know when you dip into dollars that carry a penalty and/or tax. It is up to you to keep records of how and when money gets into your Roth IRA so that you will know when you dip into dollars that might carry a penalty and/or tax.
Okay, makes sense, thanks. And yes as long as the shares automatically sell in the order contributions → conversions → earnings, I should be good since I have recorded each transaction and thus know the dollar amount of each bucket.
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retiredjg
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Re: Withdrawals from Roth IRA

Post by retiredjg »

It's not that the shares sell in any particular order.

For the purpose of withdrawal, you only have dollars, not shares, in a Roth IRA. If you have $10k in direct contributions over the years, the first 10k dollars you take out are assumed or designated to be from contributions no matter what shares are sold to get it.
dozer183e
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Re: Withdrawals from Roth IRA

Post by dozer183e »

retiredjg wrote: Tue Jan 11, 2022 9:09 am
sidwin516 wrote: Tue Jan 11, 2022 2:15 am Say you have 150k in a Roth IRA. Say the account is 5 years old and the contributions was 50k. In year 6 u decided to take out the 50k contributions, is there any taxes or penalties? Someone posted that the gains come out first. I never read that anywhere and wanted to confirm.
Earnings come out last, not first.

If you have $150k in Roth IRA with $50k of that being from direct contributions, you can take the $50k out any time. There is no requirement to wait 5 years. Unfortunately, that 5 year misconception just won't go away.
Is this the same rule for a Roth 403(b)?
Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.
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retiredjg
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Re: Withdrawals from Roth IRA

Post by retiredjg »

dozer183e wrote: Thu Jan 13, 2022 7:55 pm
retiredjg wrote: Tue Jan 11, 2022 9:09 am
sidwin516 wrote: Tue Jan 11, 2022 2:15 am Say you have 150k in a Roth IRA. Say the account is 5 years old and the contributions was 50k. In year 6 u decided to take out the 50k contributions, is there any taxes or penalties? Someone posted that the gains come out first. I never read that anywhere and wanted to confirm.
Earnings come out last, not first.

If you have $150k in Roth IRA with $50k of that being from direct contributions, you can take the $50k out any time. There is no requirement to wait 5 years. Unfortunately, that 5 year misconception just won't go away.
Is this the same rule for a Roth 403(b)?
No.

Roth 403bs (as well as traditional 403bs) have different completely different and much more restrictive rules.
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