So as a novice i have watched thousands of these investment/tax webinars. This is one of the best i have ever seen both the information and the delivery. Great Job
Great overview! Thanks for doing this video. I'm hoping you can help me with a question I have: My husband and I each own Traditional IRA accounts that were funded with after-tax contributions (its the only IRAs we own, that is we don't own any pre-tax/deductible IRAs). We are each planning to do a roth conversion of the full accounts this year. One of our accounts would be converted with earnings of $7k (current value greater than contributions as reported on form 8606) but the other's account will be converted at a loss of $2k (current value less than contributions as reported on form 8606). My understanding for the one at a loss it gets converted at the lower value and you never can deduct the loss....but since we are Married Filing Jointly doesn't the reporting all get combined on line 4b of the 1040 and therefore the impact from both will get offset such that the result on our tax return will be $5k earnings added to our ordinary income? Or will the $2k not be reported on line 4b of the 1040? What do you think? Also, is there a downside to converting the one with a loss?
The latter...the $2k loss from the one account will not offset the $7k of taxable conversion on the other. That $2k loss isn't really a loss in this scenario. It's simply just a conversion that's non-taxable. As such, your joint return will show $7k of taxable conversion on line 4b of the 1040
There is an optimum amount to convert. It takes a fairly serious analysis to determine that value. You have to optimize the utility of your money given all your tax and income implications. I've noticed that some of the planners have a software package to figure that out for you. It is a different value each year. By utility I mean that I used the anticipated value of my accounts at age 85 and derated the value of my IRA by the expected tax I'd have to pay.
Great presentation! Couple of points. As I understand taxes on a Roth conversion are due April 15 the following year. No need to worry about quarterly estimated taxes on the year of conversion. Not sure I understood but the five year rule on a Roth conversion (after 59 1/2) is basically no penalties but one pays taxes on the earnings if withdrawn
Thanks, I'm glad you liked the video! Regarding when taxes are due, taxes on conversions are no different than taxes on wages, interest, capital gains, etc. It's a pay-as-you go system where you're supposed to make ample withholdings or estimated payments throughout the course of the year otherwise there may be underpayment interest penalties. And regarding how much is "ample" withholdings or payments, that's a big rabbit hole to get into here. But ultimately, you may or may not be penalized for waiting until April 15th to pay tax on conversions (or any other source of taxable income).
If I leave an employer with whom I opened a Roth 401k but it has been less than 5 years since I opened it and I roll over that account into a Roth IRA that is over 5 years old, will that new money adopt the Roth IRA eligibility or will it still be restricted because it came from a Roth 401K that did not meet the time requirement?
Once in the Roth IRA, it will be the Roth IRA's status toward meeting the five year rule that will matter...the Roth 401(k)'s status in meeting the five year rule will not matter at that point. This can also work in reverse, unfortunately. Such as the ROth 401(k) is 10 years old, the person leaves that job and then rolls it over to their first Roth IRA. At that point, the person will be starting fresh in meeting the five year clock in the Roth IRA...they will not get any credit for the fact that the Roth 401(k) was already 10 years old :(
What if a spouse inherited traditional ira when the spouse dies, is the surviving spouse eligible for a step up basis? Do you need to fill out paperwork for that through your brokerage? Thanks for your reply in advance!
Hi. IRAs are never stepped up. From a tax perspective, they're really no different when they're inherited than when they were owned by their original owner; the money is taxed as ordinary income when it's taken out As for how to actually inherited a spouse's IRA, reach out to the custodian of the account and they can walk through what's needed
Good question. I've honestly never come across this before but, to my knowledge, you should be able to convert directly from a SEP IRA to a Roth IRA just like you can from a non-SEP traditional IRA to a Roth IRA. But to be sure, check with the custodian of your SEP IRA and see what they say
Hi Andy, pls clarify . I stopped working,living expenses from the sale of my house which I paid off my mortgage before sale.hoping to last 5 years. I’m 58 , married filing jointly . I’m doing Roth conversion , $80,000 per year to keep at 12% tax bracket but I withheld that 12% to pay the tax. Have a nest egg of $600,000.I’m getting different feedback one of which is , pay the tax from own savings not from the deducting it from$80,000. Any feedback you can share? Appreciate it.
If you have enough cash/assets in savings to pay the tax that way, that's probably better so that every dollar you take out of the IRA goes into the Roth IRA and gets invested. Otherwise, if you're paying tax from the IRA, the amount you're withholding for taxes is coming out of the IRA (and that distribution itself is increasing your taxes) but not making it into the Roth IRA and not getting invested. But don't worry too much about this; this is one of those topics where I thing most people make too big of a deal about paying taxes out of the IRA. It's not really THAT big of a no-no, in my opinion. While I think it's probably better to pay the taxes out of other savings, if doing so means you're making cash savings uncomfortably low, then don't it.
I am planning to move my 401k. I have been told they have to generate 2 checks, one which will be after tax money that is in my 401k. They wanted to know whether I wanted the check made out to me or to the new custodian for a Roth IRA. Can I create a Roth IRA account and have that money deposited into that account?
Yes, you can open a Roth IRA at the custodian of your choosing. And then the rollover check from the 401(k) after-tax money can be made out to the custodian of your Roth IRA so the money can get rolled/deposited into the Roth IRA.
@@RetirementPlanningEducation Thank you Andy. I should have clarified that I just recently retired so from watching your videos I didn't think I would be able to open a Roth IRA so was unsure what to do with that money.
@@peaceamongtrees4965 Anyone can open a Roth IRA at any point, regardless of employment status. And anyone can do a conversion from a traditional IRA to a Roth IRA. And anyone can do a rollover of a Roth 401(k) to a Roth IRA. But in order to directly "contribute" money into a Roth IRA, you need to have earned income (i.e. wages or self-employment); maybe that's what you were thinking of? In which case, yes, you can't contribute money into a Roth IRA if you're retired (unless you're married and your spouse has earned income).
What does - save some taxable funds to fill up the standard deduction, mean? A std deduction is a fixed $ amount. How do you fill it up? Thanks for any clarification.
My standard deduction for MFJ in 2020 was $24,800. So that means the first $24,800 of income are taxed at 0%. So the point is you want to have at least that much taxable income. If I converted all my money to ROTH now, paying 12% or more tax I would loose out on the $24,800 taxed at 0% in future years.
1:03:32 Facebook User: "To Clarify, do roth conversions penalty free after 5 years you open the account? Even if your 59.5?" - I think what he/she wanted to ask is if the Roth conversion amount can be withdrawn penalty free after 5 years of opening the account even if you're less than age 59.5?... The answer is that you must wait 5 years after the conversion to withdrawal the conversion penalty free. The distribution order from Roth IRA is first from total contribution amount, then from total converted amount, then finally earnings. Because penalty only applies on earnings, no penalty applies to the conversion amount provided the conversion took place at least 5 years ago. I believe the way they count the years is that the conversion for the year is applies as if it were done retroactively on January 1st of that year. So if you were to convert on 7/23/2021, after 1/1/2026 the converted amount (but not the earnings from it) can be withdrawn penalty free and because it is money you were taxed already, tax free as well even if you are below age 59 1/2.
Seems too good to be true. There's an income limit for Roth for an initial contribution. So what's the catch? If I'm a high earner I can just get around the income limit by doing a conversion.
No catch. I'm honestly not sure why the government will let you convert $500,000 from your IRA to your Roth IRA even if you make $1,000,000 in earnings but won't let you contribute ANYTHING if you make more than a couple hundred thousand dollars (if married), or about $140k (if single). Maybe it's because you pay tax on amounts you convert and the government likes getting more taxes now than they otherwise would???
@@RetirementPlanningEducation let's just say I have no IRA, but make over the limits. Correct me if I'm wrong, I can contribute to an IRA and immediately convert it to Roth and pay the taxes (or just don't claim deduction on it).
@@kohort1 Yes, that's called a "back door" Roth IRA contribution. That can be done, but direct Roth IRA contributions cannot...it doesn't really make sense. The potentially snag with the back door contribution (which wouldn't apply in the scenario you gave because you mentioned you don't already have a traditional IRA), is for people who DO already have traditional IRAs with pre-tax money in them. If you make an after-tax (i.e. non-deductible) contribution to your IRA and then convert it to your Roth, some of that conversion will be deemed as being a conversion of your pre-tax money. Which means you'll have to pay tax on it when you convert it. That's not necessarily the end of the world, but it makes the back door process not as tax clean as just being able to make a straight up direct Roth contribution.
@@RetirementPlanningEducation right....that's not much different than paying the tax to begin with except I'm guessing you have to pay the tax on growth of what's converted as well and you might be in a higher income bracket. Right? So, if I am deductibility limits for a trad contribution, I'll have already paid the tax, anyway, once I back door it right? Sorry my brain is spinning. I'm subscribing now.
So as a novice i have watched thousands of these investment/tax webinars. This is one of the best i have ever seen both the information and the delivery. Great Job
Thank you!
Great info and so timely for me in my 1st year of retirement! Thanks for sharing your knowledge Andy!!
Great overview! Thanks for doing this video. I'm hoping you can help me with a question I have: My husband and I each own Traditional IRA accounts that were funded with after-tax contributions (its the only IRAs we own, that is we don't own any pre-tax/deductible IRAs). We are each planning to do a roth conversion of the full accounts this year. One of our accounts would be converted with earnings of $7k (current value greater than contributions as reported on form 8606) but the other's account will be converted at a loss of $2k (current value less than contributions as reported on form 8606). My understanding for the one at a loss it gets converted at the lower value and you never can deduct the loss....but since we are Married Filing Jointly doesn't the reporting all get combined on line 4b of the 1040 and therefore the impact from both will get offset such that the result on our tax return will be $5k earnings added to our ordinary income? Or will the $2k not be reported on line 4b of the 1040? What do you think? Also, is there a downside to converting the one with a loss?
The latter...the $2k loss from the one account will not offset the $7k of taxable conversion on the other. That $2k loss isn't really a loss in this scenario. It's simply just a conversion that's non-taxable. As such, your joint return will show $7k of taxable conversion on line 4b of the 1040
@@RetirementPlanningEducation That makes sense. Thanks so much for your quick response!
Thank you, Andy! Great info.
thank you!
There is an optimum amount to convert. It takes a fairly serious analysis to determine that value. You have to optimize the utility of your money given all your tax and income implications. I've noticed that some of the planners have a software package to figure that out for you. It is a different value each year. By utility I mean that I used the anticipated value of my accounts at age 85 and derated the value of my IRA by the expected tax I'd have to pay.
Great presentation! Couple of points. As I understand taxes on a Roth conversion are due April 15 the following year. No need to worry about quarterly estimated taxes on the year of conversion. Not sure I understood but the five year rule on a Roth conversion (after 59 1/2) is basically no penalties but one pays taxes on the earnings if withdrawn
Thanks, I'm glad you liked the video! Regarding when taxes are due, taxes on conversions are no different than taxes on wages, interest, capital gains, etc. It's a pay-as-you go system where you're supposed to make ample withholdings or estimated payments throughout the course of the year otherwise there may be underpayment interest penalties. And regarding how much is "ample" withholdings or payments, that's a big rabbit hole to get into here. But ultimately, you may or may not be penalized for waiting until April 15th to pay tax on conversions (or any other source of taxable income).
If I leave an employer with whom I opened a Roth 401k but it has been less than 5 years since I opened it and I roll over that account into a Roth IRA that is over 5 years old, will that new money adopt the Roth IRA eligibility or will it still be restricted because it came from a Roth 401K that did not meet the time requirement?
Once in the Roth IRA, it will be the Roth IRA's status toward meeting the five year rule that will matter...the Roth 401(k)'s status in meeting the five year rule will not matter at that point.
This can also work in reverse, unfortunately. Such as the ROth 401(k) is 10 years old, the person leaves that job and then rolls it over to their first Roth IRA. At that point, the person will be starting fresh in meeting the five year clock in the Roth IRA...they will not get any credit for the fact that the Roth 401(k) was already 10 years old :(
Awesome Andy !!🎯
Thank you. Very insightful.
What if a spouse inherited traditional ira when the spouse dies, is the surviving spouse eligible for a step up basis? Do you need to fill out paperwork for that through your brokerage? Thanks for your reply in advance!
Hi. IRAs are never stepped up. From a tax perspective, they're really no different when they're inherited than when they were owned by their original owner; the money is taxed as ordinary income when it's taken out
As for how to actually inherited a spouse's IRA, reach out to the custodian of the account and they can walk through what's needed
@@RetirementPlanningEducation thank you for your reply!
Hi Andy, SEP IRA is under the umbrella of "traditional " correct? Conversations from that type to a Roth works fine too?
Good question. I've honestly never come across this before but, to my knowledge, you should be able to convert directly from a SEP IRA to a Roth IRA just like you can from a non-SEP traditional IRA to a Roth IRA. But to be sure, check with the custodian of your SEP IRA and see what they say
Hi Andy, pls clarify . I stopped working,living expenses from the sale of my house which I paid off my mortgage before sale.hoping to last 5 years. I’m 58 , married filing jointly . I’m doing Roth conversion , $80,000 per year to keep at 12% tax bracket but I withheld that 12% to pay the tax. Have a nest egg of $600,000.I’m getting different feedback one of which is , pay the tax from own savings not from the deducting it from$80,000. Any feedback you can share? Appreciate it.
If you have enough cash/assets in savings to pay the tax that way, that's probably better so that every dollar you take out of the IRA goes into the Roth IRA and gets invested. Otherwise, if you're paying tax from the IRA, the amount you're withholding for taxes is coming out of the IRA (and that distribution itself is increasing your taxes) but not making it into the Roth IRA and not getting invested.
But don't worry too much about this; this is one of those topics where I thing most people make too big of a deal about paying taxes out of the IRA. It's not really THAT big of a no-no, in my opinion. While I think it's probably better to pay the taxes out of other savings, if doing so means you're making cash savings uncomfortably low, then don't it.
@@RetirementPlanningEducation thank you so much for your feedback, it helped . Good luck and more power to your channel !!
I am planning to move my 401k. I have been told they have to generate 2 checks, one which will be after tax money that is in my 401k. They wanted to know whether I wanted the check made out to me or to the new custodian for a Roth IRA. Can I create a Roth IRA account and have that money deposited into that account?
Yes, you can open a Roth IRA at the custodian of your choosing. And then the rollover check from the 401(k) after-tax money can be made out to the custodian of your Roth IRA so the money can get rolled/deposited into the Roth IRA.
@@RetirementPlanningEducation Thank you Andy. I should have clarified that I just recently retired so from watching your videos I didn't think I would be able to open a Roth IRA so was unsure what to do with that money.
@@peaceamongtrees4965 Anyone can open a Roth IRA at any point, regardless of employment status. And anyone can do a conversion from a traditional IRA to a Roth IRA. And anyone can do a rollover of a Roth 401(k) to a Roth IRA. But in order to directly "contribute" money into a Roth IRA, you need to have earned income (i.e. wages or self-employment); maybe that's what you were thinking of? In which case, yes, you can't contribute money into a Roth IRA if you're retired (unless you're married and your spouse has earned income).
@@RetirementPlanningEducation Thank you.
Solid tax planning advice. Thanks
If I have a Roth and IRA, do I still have to take RMD from Roth?
If you have a Roth IRA, it does not have RMDs. Inherited Roth IRAs do have RMDs, though.
Roth 401(k)s DO have RMDs
Thank you
What does - save some taxable funds to fill up the standard deduction, mean? A std deduction is a fixed $ amount. How do you fill it up? Thanks for any clarification.
My standard deduction for MFJ in 2020 was $24,800. So that means the first $24,800 of income are taxed at 0%. So the point is you want to have at least that much taxable income. If I converted all my money to ROTH now, paying 12% or more tax I would loose out on the $24,800 taxed at 0% in future years.
@@cceerr11 Got it. Thanks!
1:03:32 Facebook User: "To Clarify, do roth conversions penalty free after 5 years you open the account? Even if your 59.5?" - I think what he/she wanted to ask is if the Roth conversion amount can be withdrawn penalty free after 5 years of opening the account even if you're less than age 59.5?... The answer is that you must wait 5 years after the conversion to withdrawal the conversion penalty free. The distribution order from Roth IRA is first from total contribution amount, then from total converted amount, then finally earnings. Because penalty only applies on earnings, no penalty applies to the conversion amount provided the conversion took place at least 5 years ago. I believe the way they count the years is that the conversion for the year is applies as if it were done retroactively on January 1st of that year. So if you were to convert on 7/23/2021, after 1/1/2026 the converted amount (but not the earnings from it) can be withdrawn penalty free and because it is money you were taxed already, tax free as well even if you are below age 59 1/2.
Yes the taxes tend to go up for the middle class, tax cuts go the rich, the poor don't have the resources to complain
Seems too good to be true. There's an income limit for Roth for an initial contribution. So what's the catch? If I'm a high earner I can just get around the income limit by doing a conversion.
No catch. I'm honestly not sure why the government will let you convert $500,000 from your IRA to your Roth IRA even if you make $1,000,000 in earnings but won't let you contribute ANYTHING if you make more than a couple hundred thousand dollars (if married), or about $140k (if single).
Maybe it's because you pay tax on amounts you convert and the government likes getting more taxes now than they otherwise would???
@@RetirementPlanningEducation let's just say I have no IRA, but make over the limits. Correct me if I'm wrong, I can contribute to an IRA and immediately convert it to Roth and pay the taxes (or just don't claim deduction on it).
@@kohort1 Yes, that's called a "back door" Roth IRA contribution. That can be done, but direct Roth IRA contributions cannot...it doesn't really make sense.
The potentially snag with the back door contribution (which wouldn't apply in the scenario you gave because you mentioned you don't already have a traditional IRA), is for people who DO already have traditional IRAs with pre-tax money in them. If you make an after-tax (i.e. non-deductible) contribution to your IRA and then convert it to your Roth, some of that conversion will be deemed as being a conversion of your pre-tax money. Which means you'll have to pay tax on it when you convert it.
That's not necessarily the end of the world, but it makes the back door process not as tax clean as just being able to make a straight up direct Roth contribution.
@@RetirementPlanningEducation right....that's not much different than paying the tax to begin with except I'm guessing you have to pay the tax on growth of what's converted as well and you might be in a higher income bracket. Right? So, if I am deductibility limits for a trad contribution, I'll have already paid the tax, anyway, once I back door it right? Sorry my brain is spinning. I'm subscribing now.