Incredible!! Someone finally makes a video that gets ordering rules right that includes FIFO and taxable/non-taxable. Of course its Rob Berger. There is no one else like you on RUclips. Time and again you have done the research I couldn’t or confirmed the research I did but couldn’t confirm definitively anywhere else. Thank you for your time and expertise.
Rob Berger does provide incredibly valuable insights. How has understanding ordering rules impacted your investment strategy, and what other financial topics are you interested in exploring next?
Very good description. Many people get the conversion 5 year rule wrong. A simple thing to remember that once you are 591/2, no rules apply provided you had a roth account 5 years old. You can withdraw from a roth account any money anytime without any penalty and taxes. Once you retire, a very good way to withdraw from you tax deferred retirement accounts (IRA/401K) is to do roth conversion instead of withdrawing the money into a bacnk account and use the Roth account as checking account. This makes the income predictable and keep the left-over unused money tax-free forever.
@malaybasu961 My understanding, after 59-1/2, is you can take out any contributions or rollovers and no penalty/taxes apply. It's only on the interest (earnings) that you would have to meet the 5 year rule. (And, the interest is always the last to come per IRS rules. Am I wrong???
@@cottagemail4066 Somehow my comment got removed. This may be due to an external link. Once you are 59.5 years old, no rules apply to you provided you held a Roth account 5 years old. Search "KAWII roth table" in Bogleheads wiki.
Withdrawing from an IRA (or 401k) into a Roth and using that as your income source is fine IF YOU ARE NOT SUBJECT TO RMDs. The RMD amount can not be placed into a Roth. If can be used to live on or invested in a brokerage account. Additional money can be withdrawn from the IRA (or 401k) and placed into a Roth but not the RMD.
@@cgmoog terminology. Taking money from a 401k and putting it into a Roth is not WITHDRAWING , it is a CONVERSION. hence the different treatment. As RMDs cannot be “converted” and must be withdrawn (distributions) it’s sorta in the name.
@@cgmoog That's a good point. However, it does not matter. You use the RMD to pay taxes on the roth conversion instead of using the RMD for expenses and use the Roth account for all expenses. This is equivalent as direct roth conversion with tax witheld but in the long run will save a lot of money. After 591/2 you also should not convert with tax withheld. You let the whole amount accumulate gains and pay the taxes by directly withdrawing from the roth before next April. You get a whole year return free of cost using government money. The trick is not keep any money idling outside of retirement account and use every penny to do roth conversion. And use roth account for all expenses.
Always good to contribute however much up to one's earned income. Not sure what benefit the son would be getting on a $100, $1000 or even the full $7k Roth IRA contribution for 2024. If the son wanted access to his contributions to a Roth, he can take those out at any time without a penalty and there is no 5-year rule dealing with mere contributions. What the son could not withdraw is the earnings on the $100-$7000, which that first year would be pretty low. If the son already had a traditional IRA and did a conversion to the Roth, yes there might be a 5 year rule there somewhere, but I don't think there is anything truly applicable to the 20-year old or is there if he just wanted to withdraw the contribution only. Hopefully any one opening a Roth IRA doesn't use the account for small expenses. I have heard of "in plan conversions" where if someone has been putting money into their work 401k, and the company also offers a Roth 401k, if the company allows it, the traditional contribution can be converted to the Roth, but will create taxable event for that year. I haven't heard of anyone actually doing this yet, but it sounded interesting. I have opened and funded Roth accounts for 2 adult children and 1 teen grandkid as they all have earned income. I trust they will all be responsible with my effort to hellp them.
@@AbsalomMcVeyif you really think taxes and wealth confiscation are going to run rampant in the future what makes you think Roth accounts are safe. Rules can be changed.
I opened a Roth for both of my kids and have been depositing an amount equal to their full income, or the upper limit, into it every year. And when my oldest started a full-time job, her 401k is a Roth until she gets into a much higher tax bracket. And even then - maybe, depending on the difficulty task of forecasting her retirement tax bracket.
@@KarenDemillethe benefit is that $7,000 will be $50,000 in today’s dollars when they retire. The $43,000 gain is completely untaxed, as was the deposit, due to the standard deduction.
Toward the very end you probably should have mentioned something about the aggregation rule that applies to Roth conversions. That Rule is found at the bottom-right of page 33 through the top-left of page 34 of IRS Pub 590-B. It applies when you make more than one Roth conversion in a tax year. Basically all conversions or rollovers in a year are treated as one conversion to the extent that any taxable portion is aggregated with any other taxable portion and any non-taxable portion is aggregated with any other non-taxable portion. Also you glossed over what was meant by rollovers. In the context of the Ordering Rules, the only rollovers that matter are ones from a Pre-tax account into a Roth IRA. Also you should make a video that talks about how designated Roth subaccount (employer sponsored retirement plan) distribution rules work and how they relate to Roth IRAs and Roth IRA distribution rules.
This is an amazing "complete guide" for these weird Roth IRA rules! The Roth IRA conversion ladder has been my strategy for early retirement/financial independence for several years now. Currently, I am on year 3 of making my conversions from Traditional to Roth. Because I no longer work a W-2 and I am frugal with my spending, I have never paid any income tax on my conversions. In the mean time, I have a regular taxable investment account that provides me with funds during my 5-year waiting period.
"I have never paid any income tax on my conversions" - We're different - I PAID Fed/State income tax when I did a Trad IRA conversion to a ROTH. I would think you would be subject to taxes with your conversions.
I have much lower taxable income and I contribute to an HSA accountto further reduce AGI. I also qualify for the saver's credit. It's taxable income, but I strategically kept it at an amount that didn't result in any net federal income tax. I also live in an income tax-free state.@@AndrewPorter-u5s
Leveraging the Roth IRA conversion ladder for early retirement is strategic and tax-efficient. How do you balance between converting to Roth IRAs and managing your taxable investments for financial independence?
@@AndrewPorter-u5s My tax return shows very low income because I am self employed and not working a w-2 job. With the standard deduction, and saver's credit, my tax bill on my conversions end up being $0
@@StressLessFinancial I currently only use my taxable investments for my asset withdrawals, and my Roth IRA conversions are staying in my Roth IRA for now until I no longer have any taxable account assets.
Thank you. I was trying to setup a spreadsheet to track roth and order of withdrawal and 5 year clocks. this video definitely helped define my template! thank you again
Keep in mind, though, that the conversions are NOT lumped. Each conversion has its own 5-year time period. When withdrawals from conversions commence, they're deemed to be first-in, first-out (FIFO)
@@wernermueller9004 I thought that wasn't the case once on is 59.5, as long as at least one of the Roth accounts are 5 years or older. Am I understanding this wrong?
Conversion from regular Ira to Roth triggers tax event. converted amount is treated as ordinary income and tax withheld based on your estimated tax rate. So if your tax rate is 20%. You would have 20%. tax withheld usually by brokerage when you make the Roth conversion.
Thanks for the good information and great explanation of overcomplicated rules. I do like that you always reference source materials in your videos, so you can read on your own and do further research if needed.
It's reassuring to have clear explanations backed by reliable sources. How do you approach further research to deepen your understanding of complex financial topics?
Tax laws can be so complex, and it’s super helpful to break them down like this. Understanding how different policies can impact our finances is crucial for making informed decisions.
Making profitable investments during this time of political change can be risky without that insight. For me, working with an adviser is the best first step to navigate these complexities and make informed choices.
This is a great video as always but I wish Rob would have begun by saying "if you open your first Roth IRA at or before age 54 and all you ever do is contribute (no conversions) then starting at age 59 1/2 your distributions will all be tax- and penalty-free." I think a lot of wage earners like me just open and contribute without ever messing with conversions. The vast majority probably open a Roth before age 54---I was a relative latecomer to finance but still opened mine in my early 40s. The discussion about backdoor Roths was worth the wait though, so I have no major complaint with the video.
Reminder the documentation you need to file every year is stored on your previous tax forms. You will need to reenter/update that information for every year you contribute.
Just completed my first year of retirement. Currently 62 and drawing social security. Beyond that, I have an IRA (all withdrawals taxed as regular income); a smaller Roth IRA (no tax on any withdrawals); and a smaller still regular stock account (capital gains tax). This first year I drew totally from the Roth, which has been wonderful because it's all tax free. However after gaining a better understanding of RMDs, I've decided to do two relatively large Roth conversions, one by month's end, and another in early 2024. Plan right now is to pay the taxes sparked by the conversions from the stock account. I'll also have slightly higher Medicare premiums to contend with for one yr (from the 2024 conversion). After that though, path to a tax-free existence later into retirement should be fairly straightforward.
The calculation is not so straightforward. You need to calculate your IRMA ceilings. Also, don't convert the entire IRA money to Roth. Keep at least the amount projected standard deduction multiplied by your life expectancy in traditional IRA. Those are tax free money and you should not pay taxes on those. Also markets are quite high. Wait for it to drop before roth conversion.
@@malaybasu961 - If your stock or the market corrects is a great time for a conversion, but predicting it is market timing. I got lucky this year my stock (I do like for like conversion with my brokerage in 24-48 hours) tanked in January and I pulled the trigger on a conversion chunk. No one knows if/when the market might correct. I suppose if I was concerned about it I'd dollar cost average over the year in mini chunks I guess. Otherwise, you might end up doing a conversion at a higher rate by waiting. Because the market is "expensive" on some or other score doesn't mean it'll drop in a given year.
Sort of true. If you do an in-plan conversion, the step of rolling it out to a Roth IRA is redundant. The in-plan conversion means you already have it in a designated Roth subaccount in your retirement plan. If your plan options are good you could just leave the money in the plan and wait until much later to do the rollover. BTW, the original Mega backdoor Roth IRA contribution involved doing an in-service distribution of a designated After-Tax subaccount to a Roth IRA. The subaccount needs to be in-service distribution eligible. My last employer offers both types of Mega backdoor Roth contribution options.
The last thing you said was "Keep good documentation." I was getting curious wondering if this is all being kept track of correctly and efficiently. For me, I just have one Roth account. Hopefully that makes my tax prep easier.
By far the best explanation on Roth accounts, really appreciated how you used the IRS Rules to guide and inform in laymen language. Definitely earned a new sub, thank you!
Great video! I will keep it handy. You might have mentioned (if I understand correctly) that IRA's and ROTH's are individual, spouses must be considered separately and are not aggregated together (I don't know about spousal IRAs), even if you file taxes jointly. An easy point to get confused for some. If you said it, I missed it.
Yes all retirement accounts are individually owned by each owner and never combined with the exception if one spouse passes away and the surviving spouse is the beneficiary, the surviving spouse can put their deceased spouses IRA into their own. There are other options for a spouse inheriting their partners IRA, and I don't think how they file their taxes matters. Folks can have multiple Roth IRA accounts for what ever reasons and that one person can combine their various accounts, but there is no combining IRA accounts between spouses to calculate RMDs.
LOVE your video's!!! Do you have a video, or can you do one, when someone is in their 60's, never invested in market, but got a nested, and wants to invest in market and live off dividends. Keep up the great work!!
The conversion five year rule is to prevent you from circumventing the early distribution penalty. There is no early distribution penalty on non-deductible contributions, that's why the five year rule doesn't apply to that.
Great explanation. FI Tax guy is worth looking more into! Particularly in regards to tax issues when retiring before 59.5yrs old. First in first out is interesting... let me see if I've got this right... In 2023, you contribute $5000 of after tax disposable money to Traditional IRA, then convert to Roth IRA, during which time that $5000 has grown to $6000. 1) you convert and pay income tax on the $1000 gain. 2) you have now converted 'contributed' $6000 to Roth IRA, $1000 of which was taxable AKA deductible. 3) you can withdraw $5000 'non deductible' without the 5yr rule penalty. BUT... Since first in-first out means the deductible $1000 "appears first" when the IRS looks at it, you appear to have withdrawn $1000 of taxable '5yr rule' money and $4000 of non-taxable 'no 5yr rule' money. As a result, you pay 10% penalty on that $1000 EVEN THOUGH YOU ARE WITHDRAWING the non-taxable conversion. Therefore, if you convert any after tax money from Traditional IRA alongside a gain , you cannot avoid paying 10% penalty on something...!
@mwp6662 - The conversions are 'taxable' or 'non-taxable', not 'deductible' or 'non deductible'. Deductibility applies specifically to T-IRA contributions, but has nothing to do with conversions. Correct. You can access the $5,000 non-taxable conversion without paying the 10% early withdrawal penalty, but before you do that you must withdraw the $1,000 taxable conversion, which would incur a $100 penalty ... at least in your example. This is a very good argument for doing the conversion on a backdoor Roth contribution quickly.
Good overview of the Roth IRA…if you were to open a Roth IRA in your 20s/30s I assume once the 5yr rule expires you can do as many conversions as you want from a 401k into a RothIRA beyond the 59.5age yr penalty free to make disbursements whenever you want? I guess I don’t understand the 5yr rule on a per conversion basis from a traditional 401k and will do some research but may want to use this as an episode..
Thanks Rob. I was new to the US in 2022 and I opened a Roth IRA and contributed $500 (was testing). I forgot about it and although my income doesn’t allow contributions I did it as I was unaware. I withdrew the contribution (it had fallen in value). I didn’t make any contributions in 2022. My tax folks filed and there seemed to be no penalty since I withdrew my contribution. Now in 2023 I did a backdoor roth (non deductible Ira to immediate conversion to Roth IRA). I hope that is right. My question is in 2024 can I use the same Ira I opened in vanguard for conversion to Roth IRA? This is a non Deductible Ira which I immediately convert to Roth. The Ira value remains 0 throughout the year except one or two days in which I receive money before conversion. Thanks.
What about inherited Roths ? In many cases these are set up to leave to heirs without tax consequences. 2018 secure act rules say inherited IRAs must be withdrawn overten years. Do five year rules apply?
Important to point out the rules of convertion vs contribution. My accountant says that conversions need to be done by each given year end. So a 2023 conversion needs to be done by year end 2023.
Yes and no. There are no dollar or income limits on conversions, so you can do them whenever you like. Or better yet, you should do them in the year your taxes dictate it appropriate. But it's when you do that conversion that dictates when you report it. It's not when you report it that dictates when you do the conversion.
Yea i agree. No dollar or income limits. There are consequences though. Just wanted to clarify Rob's comments about when you can declare/make a convertion is different than when you can declare/make a contribution. That distinction wasn't mentioned in the video.
@@blownaway13 - There are no time restrictions on when you can make a contribution, nor is there a restriction on when you can make a conversion. You can make them early and often - just don't contribute more than you are allowed in a given year.
Yes. The only point I'm making is that the date you make the conversation is the year it is applied for your tax return. You can't make a convertion on April 1st 2024 AND count it as a 2023 conversation on your 2023 tax return. On the other hand, you can make a contribution April 1st 2024 for the 2023 tax year. I don't think Rob made that distinction.
Thank you, Rob! Question: if someone opens up their first Roth IRA at age 70 and only puts into it conversion money from a traditional IRA/401k, how does the first 5-year rule apply? Is that conversion money considered a "contribution," and any subsequent earnings on that "contribution" are taxed if withdrawn before age 75?
My understanding is if this is the first Roth IRA, Earnings are subject to taxation until the account is open for 5 years. The amount converted to the Roth would not be subject to taxation because tax was paid the year it was converted. Example 70 year old converted $100,000 to a Roth IRA in 2024. They can withdraw up to $100,000 total over the next 5 years. In 2030 and beyond all funds are tax free on withdraw for the account owner.
one thing the 5 year rule does that no one realizes is make it more difficult to double dip on a simple account vs non simple accounts. Also, for the roth IRA there are some weird strategies where you could open a roth IRA, put 6-12k in there, and make it disappear from the FAFSA/divorce/other tax triggering event/some bankrupcy, and then take it right back out as cash yo.
Just trying to understand why my 26 yr old (just short of meeting 5 yr rule )who withdrew his entire Roth IRA around $ 5,000 just got a 1099 R showing entire amount as distribution , not just the approx. 125.00 in earnings. He got tired of FL credit union saying “you should go to a branch “when he had moved to NC. No wonder people don’t save for retirement since IRS always makes things so complicated & costly.
Assuming I understand the law correctly, I think it is worth mentioning that if an investor has a sizable IRA then a backdoor conversion is not practical, because when you make the conversion, the IRS will assume that you convert your IRA in proportion to the pretax and after tax balances in ALL your IRAs. To quote from Investopedia: “… if most of your IRA contributions were deducted from your income, and if your IRA has accumulated earnings or made investments that have appreciated over a long period, then most of the funds and investments that you convert to a Roth IRA likely will count as taxable income at the time of the conversion”. So, if you have a $90,000 traditional IRA originally funded with pretax funds, and contribute $10,000 after tax funds to an IRA, when you convert $10,000 to Roth, $9,000 will be treated as converting pretax dollars (since 90% of the IRA was from pretax sources) - so you will have taxable income in that year of $9,000 on the conversion.
Great video, but at a certain amount of complexity, part of me just wants to throw it all in a brokerage account and use deductions and Traditional contributions to get my taxable income down to $44,625, in which case I don't pay any taxes on dividends or long term capital gains for US stocks. Simpler way to achieve that same goal with no restrictions
I never filed a non deductible IRA contribution, the reason was I have had my Roth for years and years. Imma over 59.5 and I have passed the 5 year rule. So no issues as long as I can prove 5 years. That could be hard due to broker transfers. But I have records of trade transactions in such account. So I have proof of first day of first account.
Also since it was early IRA the non taxable contributions were suppose to be for the fact of putting over your limits on traditional. Anyway I am free and clear.
Inherited Roth IRAs are treated differently. You have 10 years after death of owner to withdraw everything for non-spouse. No 5 year waiting period. If you're a spouse, you can treat like it's your own.
Will you please advise on Roth investment strategies for an account earmarked for heirs and never be drawn from? We will begin to convert to Roth for our severely disabled son. You are a gem. Thank you for your expertise.
Is there any reason for a person to keep money converted from 401k's into separate IRA accounts? Some say liability protection is better but I thought that only applied while the money was actually in a 401k.
I was under the understanding that if you are past the 59 1/2 age, and that knowing the first conversion falls under the 5 year rule, if you have a subsequent conversion to a Roth IRA, any subsequent conversion falls under a new 5 year rule, even if you are older than 59 1/2 years?
Rob, so I have read that Earnings on conversions to Roth IRAs are subject to taxation if withdrawn before 5 years since the tax year of the conversion. Regardless if you already meet the rule for having a Roth for 5 years AND regardless if you are 59.5 or older. Example, a 60 year old coverts $10,000 from a traditional IRA to a Roth IRA in 2023 and put this in a new Vanguard Roth. They have an existing Roth IRA with Schwab since 2015 (5 year rule met). Then they withdraws $11,000 dollars from the Vanguard account in 2025 consisting of $1,000 in Earnings and $10,000 in conversions (which they paid tax on in 2023 when converted). Is the $1,000 in Earnings subject to taxation because it was withdrawn before 2029, 5 years after the conversion? Lets assume for this example this person had only 1 other Roth IRA (Schwab) opened 2015 and had zero dollars left in the account because they had withdrawn all contributions and earnings in 2024. So the only Roth IRA remaining was the Vanguard with conversion funds in it. Let me know what you think.
If u have unearned income like pension social security. U can’t contribute or do conversions because you’re not working if u do. You’ll be taxed on unearned incomes
Great Video, how does the 5 year requirement work with the upcoming IRS changes forcing all catch up contributions into Roth 401Ks for those over 50? When does the clock start, at the time of contribution or the conversion from Roth 401K to Roth IRA? Thanks
Love these videos! Question for you, or one of your viewers… I just completed my first Roth conversion (12/23/2023), I’m age 58, and I am planning to pay taxes from my savings account. Myra question is: When are the taxes on my conversion due, and how do I go about paying them! Thank you in advance!
When I do Roth conversions, I have a really good idea on what my tax liability will be for the year. If I know I am going to owe less that $1K, I can file my tax return in April. Otherwise, I file my tax return by the end of January. This is based on your Roth conversion done the end of December. I have done Roth conversions earlier in the year and have made estimated tax payments to the IRS based on the amount of taxes I would owe with the conversion. Just remember to use IRS Form 8606 to report the conversion when filing your tax return.
Thanks Rob. Is the 59& 1/2 age before the tax year of withdrawal or can it be during tax year ? I don’t understand what IRS is losing by making it just age 59.
I enjoyed this content. Although I have been watching less yt and doing more research. My retirement contributions are not making my 401k any better, should I buy popular index funds in a brokerage account, is this a better alternative to outperform and rebuild my retirement?
Hey Rob, you missed the “rule of 55” If you retire in the year you turn 55 and separate from your company. You leave it in your company plan so you can access your plan without the 10% penalty as long as you started your 401k Roth at 50. The plan has met the 5 year rule. You could take your Roth out at 55 right? As long as you don’t roll it over to your brokerage Roth IRA. Then you would have to wait till 59 1/2. The key is to leave it in your company plan to have access to the rule of 55,
DANGER! You do *NOT* want to use the "Rule of 55" to take distributions from a designated Roth subaccount! The Pro-Rata Rule applies to all employer sponsored plan distributions. This means that every distribution contains part of your earnings! And the Rule of 55 only acts as an exception to the early withdrawal (10%) penalty. It does not act as an exception to the tax on earnings!
With the rule of 55, you must leave your 401k with the former employer's plan. You can make penalty free withdrawals. After turning 59 1/2, you can rollover into an IRA and do normal Roth conversions.
@@RBzee112 - Let me restate what I said earlier: The Rule of 55 is absolutely worthless when it comes to distributions from a Roth 401(k) subaccount. The Pro-rata Rule ensures that a portion of every distribution will be taxable because it includes a portion of your earnings, even if the distribution will be exempt from the 10% early withdrawal penalty. You are almost always better served by rolling a Roth 401(k) into a Roth IRA, even if you retire early. The Roth IRA Ordering Rules give you tax and penalty free access to your contributions even if you are not yet 59 1/2.
Excellent video. If I roll over a Roth 401k (for example let’s say $20k, half contribution and half earnings) into a Roth IRA, how is that money classified (contribution vs conversion vs earnings) in the Roth and to which portions of that rollover does the 5 year rule apply?
Thanks for the tutorial. I have a question about Roth IRA earnings within a conversion. You mentioned that for a given conversion if the 5 year rule is not satisfied, independent of the 591/2 rule that you'd have to pay the 10% penalty, but what about any earnings accrued within that converted Roth? Would these earnings be taxed as ordinary income if distributed in violation of the 5 year rule for conversions? Or is it accurate to say that the only potential taxation for conversions is limited to 10%? Thanks again.
Thanks! Do you have a video about IRS pro-rata rules for Roth conversion when converting from traditional IRA where you have both after-tax and before- tax dollars in any of your traditional IRAs?
My question is If I convert my Traditional IRA to a Roth IRA over 10 years then I should have 10 different holding periods One for each year of conversion correct? Or will the five year start over with the last conversion?
what about a roth 401k. I opened a roth 401k in 2013 and a roth IRA in 2023. Then I started rolling over roth money from the roth 401k to the IRA because it has better options. When does the clock start ticking? 2013 or 2023?
So here is a question that I wasn’t quite sure about. So let’s say I have a Roth 401(k) I then roll that over to my Roth IRA. The Roth IRA is existed for well over five years. Am I allowed to withdraw my personal contributions that came in from the Roth 401(k) right away?
Rob your videos are great and very explanatory. Thanks for that❤ Qq: I have a employee 401k. Does that mean I can’t really have an IRA because I will not get the tax benefits of having an IRA?
Can you talk about QDRO (qualified domestic relations order) with regard to these info: I’m 66 yo, Qdro settlement is from a 401k account from a former spouse. What are the penalty and tax consequences if during that transfer, I take out say $25k. I receive a low ss income but being in California, ss income is not a taxable income. Also, do I need to move those funds to an Ira account? I do have a Roth IRA acct where I would move those funds to. Thanks for your anticipated answer.
The after tax conversion is true but then the aggregation rule kicks in. If that is your only IRA then you’re good to go but if you have multiple IRA’s, you have to aggregate them. There is also a 6 month rule to convert a Non-deductible IRA to a Roth. You can no longer do it like the next day, after opening it.
There is no such 6-month rule. Some advisors fear the IRS's Stepwise Transaction Doctrine if they don't do something like this, but if you read the IRS court ruling you'd know that simply waiting an arbitrary amount of time doesn't prevent you from running afoul of this doctrine. There are several good reasons why the Stepwise Transaction Doctrine does not apply to backdoor Roth IRA contributions, but it's too long to bother with here. Suffice it to say that advisors are just making shit up when they make this type of recommendation. It would probably be better if they consulted a lawyer instead before giving this particular piece of advice.
I’m 69, retired, and don’t have any Roth IRAs. I’ve been advised to convert to Roth IRAs. Why would I want to convert anything if I can’t touch it for 5 years?
Example: Can I make a contribution of $5,000 to a traditional IRA every 2 weeks (when I get paid) and immediately move the money to a Roth IRA a few days later so that after a year I have performed 26 conversions to Roth for a total of $130,000 (way over the Roth contribution limit)?
When inheriting a Roth IRA you have to transfer the original Roth IRA funds into a custodian beneficiary Roth IRA account, but its not clear if the beneficiary's account or the original owner's account needs to have existed for 5 years for earnings to be tax free. The 1099R gave me a T code. Will I be taxed on earnings from my inherited Roth IRA as a non-spouse beneficiary if my beneficiary Roth account holding the funds was opened only 2 years ago but my mother's original Roth was well over 5 years old? Does the original owner or the beneficiary need to have held ownership of the Roth IRA funds for over 5 years for the distributed earnings to be tax free?
Question. My understanding is that one is okay to convert a ROTH 401K into their ROTH IRA and will be able to withdraw penalty and tax free at 59.5. Both will have been in existence for over 5 years at the 59.5 years point. Is this correct or does some 5 year rule trigger when that conversion is made if done at 57 years? Great video btw!
I pay in after tax money and plan to withdraw at 60. I tell people if you're making less than 100k focus on after tax money so you don't get taxed. All your doing is paying the government and not yourself.
Do you have to wait 5 full years to pull out the contributions from the conversion? Or can you do the conversion on 12/31/24 and pull them out 1/1/29? Thanks.
Incredible!! Someone finally makes a video that gets ordering rules right that includes FIFO and taxable/non-taxable. Of course its Rob Berger. There is no one else like you on RUclips. Time and again you have done the research I couldn’t or confirmed the research I did but couldn’t confirm definitively anywhere else. Thank you for your time and expertise.
Rob Berger does provide incredibly valuable insights. How has understanding ordering rules impacted your investment strategy, and what other financial topics are you interested in exploring next?
Very good description. Many people get the conversion 5 year rule wrong. A simple thing to remember that once you are 591/2, no rules apply provided you had a roth account 5 years old. You can withdraw from a roth account any money anytime without any penalty and taxes. Once you retire, a very good way to withdraw from you tax deferred retirement accounts (IRA/401K) is to do roth conversion instead of withdrawing the money into a bacnk account and use the Roth account as checking account. This makes the income predictable and keep the left-over unused money tax-free forever.
@malaybasu961 My understanding, after 59-1/2, is you can take out any contributions or rollovers and no penalty/taxes apply. It's only on the interest (earnings) that you would have to meet the 5 year rule. (And, the interest is always the last to come per IRS rules. Am I wrong???
@@cottagemail4066 Somehow my comment got removed. This may be due to an external link. Once you are 59.5 years old, no rules apply to you provided you held a Roth account 5 years old. Search "KAWII roth table" in Bogleheads wiki.
Withdrawing from an IRA (or 401k) into a Roth and using that as your income source is fine IF YOU ARE NOT SUBJECT TO RMDs. The RMD amount can not be placed into a Roth. If can be used to live on or invested in a brokerage account. Additional money can be withdrawn from the IRA (or 401k) and placed into a Roth but not the RMD.
@@cgmoog terminology. Taking money from a 401k and putting it into a Roth is not WITHDRAWING , it is a CONVERSION. hence the different treatment. As RMDs cannot be “converted” and must be withdrawn (distributions) it’s sorta in the name.
@@cgmoog That's a good point. However, it does not matter. You use the RMD to pay taxes on the roth conversion instead of using the RMD for expenses and use the Roth account for all expenses. This is equivalent as direct roth conversion with tax witheld but in the long run will save a lot of money. After 591/2 you also should not convert with tax withheld. You let the whole amount accumulate gains and pay the taxes by directly withdrawing from the roth before next April. You get a whole year return free of cost using government money. The trick is not keep any money idling outside of retirement account and use every penny to do roth conversion. And use roth account for all expenses.
Incredibly thorough coverage of an insanely confusing combination of Roth IRA issues. Sir, I salute you!
One takeaway for me is to have my 20-year old son open a Roth this year, even if he just puts $100 in it. Just to get that 5-year clock ticking. 😂
Always good to contribute however much up to one's earned income. Not sure what benefit the son would be getting on a $100, $1000 or even the full $7k Roth IRA contribution for 2024. If the son wanted access to his contributions to a Roth, he can take those out at any time without a penalty and there is no 5-year rule dealing with mere contributions. What the son could not withdraw is the earnings on the $100-$7000, which that first year would be pretty low. If the son already had a traditional IRA and did a conversion to the Roth, yes there might be a 5 year rule there somewhere, but I don't think there is anything truly applicable to the 20-year old or is there if he just wanted to withdraw the contribution only. Hopefully any one opening a Roth IRA doesn't use the account for small expenses. I have heard of "in plan conversions" where if someone has been putting money into their work 401k, and the company also offers a Roth 401k, if the company allows it, the traditional contribution can be converted to the Roth, but will create taxable event for that year. I haven't heard of anyone actually doing this yet, but it sounded interesting. I have opened and funded Roth accounts for 2 adult children and 1 teen grandkid as they all have earned income. I trust they will all be responsible with my effort to hellp them.
Taxes and wealth confiscations will become so bad in the future that I strongly recommend your son max out his Roth IRA every year of contribution!!!!
@@AbsalomMcVeyif you really think taxes and wealth confiscation are going to run rampant in the future what makes you think Roth accounts are safe. Rules can be changed.
I opened a Roth for both of my kids and have been depositing an amount equal to their full income, or the upper limit, into it every year. And when my oldest started a full-time job, her 401k is a Roth until she gets into a much higher tax bracket. And even then - maybe, depending on the difficulty task of forecasting her retirement tax bracket.
@@KarenDemillethe benefit is that $7,000 will be $50,000 in today’s dollars when they retire. The $43,000 gain is completely untaxed, as was the deposit, due to the standard deduction.
Toward the very end you probably should have mentioned something about the aggregation rule that applies to Roth conversions. That Rule is found at the bottom-right of page 33 through the top-left of page 34 of IRS Pub 590-B. It applies when you make more than one Roth conversion in a tax year. Basically all conversions or rollovers in a year are treated as one conversion to the extent that any taxable portion is aggregated with any other taxable portion and any non-taxable portion is aggregated with any other non-taxable portion.
Also you glossed over what was meant by rollovers. In the context of the Ordering Rules, the only rollovers that matter are ones from a Pre-tax account into a Roth IRA.
Also you should make a video that talks about how designated Roth subaccount (employer sponsored retirement plan) distribution rules work and how they relate to Roth IRAs and Roth IRA distribution rules.
This is an amazing "complete guide" for these weird Roth IRA rules! The Roth IRA conversion ladder has been my strategy for early retirement/financial independence for several years now. Currently, I am on year 3 of making my conversions from Traditional to Roth. Because I no longer work a W-2 and I am frugal with my spending, I have never paid any income tax on my conversions. In the mean time, I have a regular taxable investment account that provides me with funds during my 5-year waiting period.
"I have never paid any income tax on my conversions" - We're different - I PAID Fed/State income tax when I did a Trad IRA conversion to a ROTH. I would think you would be subject to taxes with your conversions.
I have much lower taxable income and I contribute to an HSA accountto further reduce AGI. I also qualify for the saver's credit. It's taxable income, but I strategically kept it at an amount that didn't result in any net federal income tax. I also live in an income tax-free state.@@AndrewPorter-u5s
Leveraging the Roth IRA conversion ladder for early retirement is strategic and tax-efficient. How do you balance between converting to Roth IRAs and managing your taxable investments for financial independence?
@@AndrewPorter-u5s My tax return shows very low income because I am self employed and not working a w-2 job. With the standard deduction, and saver's credit, my tax bill on my conversions end up being $0
@@StressLessFinancial I currently only use my taxable investments for my asset withdrawals, and my Roth IRA conversions are staying in my Roth IRA for now until I no longer have any taxable account assets.
Thank you. I was trying to setup a spreadsheet to track roth and order of withdrawal and 5 year clocks. this video definitely helped define my template! thank you again
Great info, would love to see you do a video on inherited IRA’s. Thanks for keeping us informed:-)
Agreed, especially if the loved one passed in 2020 or later, triggering the SECURE Act requirements. Thanks Rob!
Outstanding explanation! I have old Roth IRA’s and only recently been doing Roth conversions…good to know the 5 years are lumped!
Keep in mind, though, that the conversions are NOT lumped. Each conversion has its own 5-year time period. When withdrawals from conversions commence, they're deemed to be first-in, first-out (FIFO)
@@wernermueller9004 It is an up to 5 year time period, all concluding at age 59 1/2 assuming the first Roth acct is 5+ years old.
Not if you are 59 1/2 or older.
@@wernermueller9004 I thought that wasn't the case once on is 59.5, as long as at least one of the Roth accounts are 5 years or older. Am I understanding this wrong?
What one learn from reading Mr Ed Scott book for hrs, can learn from this 1/2 video. Thanks for your time and making complicated topics so simple
Conversion from regular Ira to Roth triggers tax event. converted amount is treated as ordinary income and tax withheld based on your estimated tax rate. So if your tax rate is 20%. You would have 20%. tax withheld usually by brokerage when you make the Roth conversion.
Thanks for the good information and great explanation of overcomplicated rules. I do like that you always reference source materials in your videos, so you can read on your own and do further research if needed.
It's reassuring to have clear explanations backed by reliable sources. How do you approach further research to deepen your understanding of complex financial topics?
Tax laws can be so complex, and it’s super helpful to break them down like this. Understanding how different policies can impact our finances is crucial for making informed decisions.
Making profitable investments during this time of political change can be risky without that insight. For me, working with an adviser is the best first step to navigate these complexities and make informed choices.
Hmmm this is quite interesting, Please can you leave the info of your investment advisor here? I’m in dire need for one.
I just googled her and I'm really impressed with her credentials; I reached out to her since I need all the assistance I can get.
That was the best explanation I've ever heard of the Roth IRA rules. This answered all my questions. Thank you!
I think this was part of the "Tax Accountants Full Employment Act" when it was passed by Congress. Just a guess. :)
🤣🤣🤣
Rob - you did a great job explaining this. Not to say that I understood it all - but now I know what I am still foggy on. THX!
@Rob Berger - This is very helpful! Would you consider a "part 2" to discuss the same topic for Roth 401k taxes and penalties?
This is a great video as always but I wish Rob would have begun by saying "if you open your first Roth IRA at or before age 54 and all you ever do is contribute (no conversions) then starting at age 59 1/2 your distributions will all be tax- and penalty-free." I think a lot of wage earners like me just open and contribute without ever messing with conversions. The vast majority probably open a Roth before age 54---I was a relative latecomer to finance but still opened mine in my early 40s. The discussion about backdoor Roths was worth the wait though, so I have no major complaint with the video.
I just open my first Roth im 26 i got vanguard bonds van stocks and van high div and some stocks in big tech idk what im doing
I’m just getting ready to go down the Roth path. This is invaluable advice. Thanks!
Reminder the documentation you need to file every year is stored on your previous tax forms. You will need to reenter/update that information for every year you contribute.
Just completed my first year of retirement. Currently 62 and drawing social security. Beyond that, I have an IRA (all withdrawals taxed as regular income); a smaller Roth IRA (no tax on any withdrawals); and a smaller still regular stock account (capital gains tax). This first year I drew totally from the Roth, which has been wonderful because it's all tax free. However after gaining a better understanding of RMDs, I've decided to do two relatively large Roth conversions, one by month's end, and another in early 2024. Plan right now is to pay the taxes sparked by the conversions from the stock account. I'll also have slightly higher Medicare premiums to contend with for one yr (from the 2024 conversion). After that though, path to a tax-free existence later into retirement should be fairly straightforward.
The calculation is not so straightforward. You need to calculate your IRMA ceilings. Also, don't convert the entire IRA money to Roth. Keep at least the amount projected standard deduction multiplied by your life expectancy in traditional IRA. Those are tax free money and you should not pay taxes on those. Also markets are quite high. Wait for it to drop before roth conversion.
@@malaybasu961 - If your stock or the market corrects is a great time for a conversion, but predicting it is market timing. I got lucky this year my stock (I do like for like conversion with my brokerage in 24-48 hours) tanked in January and I pulled the trigger on a conversion chunk. No one knows if/when the market might correct. I suppose if I was concerned about it I'd dollar cost average over the year in mini chunks I guess. Otherwise, you might end up doing a conversion at a higher rate by waiting. Because the market is "expensive" on some or other score doesn't mean it'll drop in a given year.
@@malaybasu961great point on the IRMA.
Some companies also allow you to contribute after tax money, do an in-plan-conversion and then roll it into a Roth. This is known as megabackdoor roth
Sort of true. If you do an in-plan conversion, the step of rolling it out to a Roth IRA is redundant. The in-plan conversion means you already have it in a designated Roth subaccount in your retirement plan. If your plan options are good you could just leave the money in the plan and wait until much later to do the rollover.
BTW, the original Mega backdoor Roth IRA contribution involved doing an in-service distribution of a designated After-Tax subaccount to a Roth IRA. The subaccount needs to be in-service distribution eligible. My last employer offers both types of Mega backdoor Roth contribution options.
Playing AD&D as a kid was good training for dealing with this insane complexity.
Great content! It's the clearest discussion I've heard.
The last thing you said was "Keep good documentation." I was getting curious wondering if this is all being kept track of correctly and efficiently. For me, I just have one Roth account. Hopefully that makes my tax prep easier.
By far the best explanation on Roth accounts, really appreciated how you used the IRS Rules to guide and inform in laymen language. Definitely earned a new sub, thank you!
I really appreciate you doing this video. You have done a great job of making this easy to grasp.
Well done!
Thank you for this presentation and all the others!
Pro rata rule has to be part of the conversation.
Great video! I will keep it handy. You might have mentioned (if I understand correctly) that IRA's and ROTH's are individual, spouses must be considered separately and are not aggregated together (I don't know about spousal IRAs), even if you file taxes jointly. An easy point to get confused for some. If you said it, I missed it.
Yes all retirement accounts are individually owned by each owner and never combined with the exception if one spouse passes away and the surviving spouse is the beneficiary, the surviving spouse can put their deceased spouses IRA into their own. There are other options for a spouse inheriting their partners IRA, and I don't think how they file their taxes matters. Folks can have multiple Roth IRA accounts for what ever reasons and that one person can combine their various accounts, but there is no combining IRA accounts between spouses to calculate RMDs.
Why would I get taxed on a ROTH Ira after the age of 591/2!? 🤨I thought growth was tax free
Very informative video. A great deal to digest, however. I'll need to return to it, probably several times.
Thanks Rob - another great informational video!
Great explanation and I learned some things I didn’t know before. Thank you.
I think the Boglehead wiki has a table that summarizes the first 5-year rule visually
I’ll have to research more about conversions before I retire, not sure I completely comprehend yet
Check my comment above. Search "KWAII roth table" in google. That's a very simple reference table.
LOVE your video's!!! Do you have a video, or can you do one, when someone is in their 60's, never invested in market, but got a nested, and wants to invest in market and live off dividends. Keep up the great work!!
Thank you. Very comprehensive and easy to understand.
Thanks Rob! For explaining this - very helpful! 😎🏆
The conversion five year rule is to prevent you from circumventing the early distribution penalty. There is no early distribution penalty on non-deductible contributions, that's why the five year rule doesn't apply to that.
Great explanation. FI Tax guy is worth looking more into! Particularly in regards to tax issues when retiring before 59.5yrs old.
First in first out is interesting... let me see if I've got this right...
In 2023, you contribute $5000 of after tax disposable money to Traditional IRA, then convert to Roth IRA, during which time that $5000 has grown to $6000.
1) you convert and pay income tax on the $1000 gain.
2) you have now converted 'contributed' $6000 to Roth IRA, $1000 of which was taxable AKA deductible.
3) you can withdraw $5000 'non deductible' without the 5yr rule penalty.
BUT...
Since first in-first out means the deductible $1000 "appears first" when the IRS looks at it, you appear to have withdrawn $1000 of taxable '5yr rule' money and $4000 of non-taxable 'no 5yr rule' money.
As a result, you pay 10% penalty on that $1000 EVEN THOUGH YOU ARE WITHDRAWING the non-taxable conversion.
Therefore, if you convert any after tax money from Traditional IRA alongside a gain , you cannot avoid paying 10% penalty on something...!
@mwp6662 - The conversions are 'taxable' or 'non-taxable', not 'deductible' or 'non deductible'. Deductibility applies specifically to T-IRA contributions, but has nothing to do with conversions.
Correct. You can access the $5,000 non-taxable conversion without paying the 10% early withdrawal penalty, but before you do that you must withdraw the $1,000 taxable conversion, which would incur a $100 penalty ... at least in your example. This is a very good argument for doing the conversion on a backdoor Roth contribution quickly.
Can you address or talk more about the backdoor Roth. You didn't say much about them in this talk. Great job explaining Roths. Thanks
Good overview of the Roth IRA…if you were to open a Roth IRA in your 20s/30s I assume once the 5yr rule expires you can do as many conversions as you want from a 401k into a RothIRA beyond the 59.5age yr penalty free to make disbursements whenever you want? I guess I don’t understand the 5yr rule on a per conversion basis from a traditional 401k and will do some research but may want to use this as an episode..
You are an outstanding communicator! Thank you for this~ ;-)
We are going to talk about this or that in a minute. Man, you got that phrase down!
Thanks Rob. I was new to the US in 2022 and I opened a Roth IRA and contributed $500 (was testing). I forgot about it and although my income doesn’t allow contributions I did it as I was unaware. I withdrew the contribution (it had fallen in value). I didn’t make any contributions in 2022. My tax folks filed and there seemed to be no penalty since I withdrew my contribution. Now in 2023 I did a backdoor roth (non deductible Ira to immediate conversion to Roth IRA). I hope that is right. My question is in 2024 can I use the same Ira I opened in vanguard for conversion to Roth IRA? This is a non Deductible Ira which I immediately convert to Roth. The Ira value remains 0 throughout the year except one or two days in which I receive money before conversion. Thanks.
What about inherited Roths ? In many cases these are set up to leave to heirs without tax consequences. 2018 secure act rules say inherited IRAs must be withdrawn overten years. Do five year rules apply?
Important to point out the rules of convertion vs contribution. My accountant says that conversions need to be done by each given year end. So a 2023 conversion needs to be done by year end 2023.
Yes and no. There are no dollar or income limits on conversions, so you can do them whenever you like. Or better yet, you should do them in the year your taxes dictate it appropriate. But it's when you do that conversion that dictates when you report it. It's not when you report it that dictates when you do the conversion.
Yea i agree. No dollar or income limits. There are consequences though. Just wanted to clarify Rob's comments about when you can declare/make a convertion is different than when you can declare/make a contribution. That distinction wasn't mentioned in the video.
@@blownaway13 - There are no time restrictions on when you can make a contribution, nor is there a restriction on when you can make a conversion. You can make them early and often - just don't contribute more than you are allowed in a given year.
Yes. The only point I'm making is that the date you make the conversation is the year it is applied for your tax return.
You can't make a convertion on April 1st 2024 AND count it as a 2023 conversation on your 2023 tax return.
On the other hand, you can make a contribution April 1st 2024 for the 2023 tax year.
I don't think Rob made that distinction.
Thank you, Rob! Question: if someone opens up their first Roth IRA at age 70 and only puts into it conversion money from a traditional IRA/401k, how does the first 5-year rule apply? Is that conversion money considered a "contribution," and any subsequent earnings on that "contribution" are taxed if withdrawn before age 75?
My understanding is if this is the first Roth IRA, Earnings are subject to taxation until the account is open for 5 years. The amount converted to the Roth would not be subject to taxation because tax was paid the year it was converted. Example 70 year old converted $100,000 to a Roth IRA in 2024. They can withdraw up to $100,000 total over the next 5 years. In 2030 and beyond all funds are tax free on withdraw for the account owner.
@@kevincrosby1917 So conversions do not require an additional 5 year hold?
Excellent content thank you!
one thing the 5 year rule does that no one realizes is make it more difficult to double dip on a simple account vs non simple accounts. Also, for the roth IRA there are some weird strategies where you could open a roth IRA, put 6-12k in there, and make it disappear from the FAFSA/divorce/other tax triggering event/some bankrupcy, and then take it right back out as cash yo.
Just trying to understand why my 26 yr old (just short of meeting 5 yr rule )who withdrew his entire Roth IRA around $ 5,000 just got a 1099 R showing entire amount as distribution , not just the approx. 125.00 in earnings.
He got tired of FL credit union saying “you should go to a
branch “when he had moved to NC. No wonder people don’t save for retirement since IRS always makes things so complicated & costly.
Excellent. Answered all my questions
Nice job. Helped a lot. Thanks
Yikes! Exactly why trying to do the right thing is so difficult under our tax laws.
Informative. Thanks Rob 👌
Assuming I understand the law correctly, I think it is worth mentioning that if an investor has a sizable IRA then a backdoor conversion is not practical, because when you make the conversion, the IRS will assume that you convert your IRA in proportion to the pretax and after tax balances in ALL your IRAs. To quote from Investopedia: “… if most of your IRA contributions were deducted from your income, and if your IRA has accumulated earnings or made investments that have appreciated over a long period, then most of the funds and investments that you convert to a Roth IRA likely will count as taxable income at the time of the conversion”. So, if you have a $90,000 traditional IRA originally funded with pretax funds, and contribute $10,000 after tax funds to an IRA, when you convert $10,000 to Roth, $9,000 will be treated as converting pretax dollars (since 90% of the IRA was from pretax sources) - so you will have taxable income in that year of $9,000 on the conversion.
See form 8606. It has the calculations you need.
Very good information thanks
Great video, but at a certain amount of complexity, part of me just wants to throw it all in a brokerage account and use deductions and Traditional contributions to get my taxable income down to $44,625, in which case I don't pay any taxes on dividends or long term capital gains for US stocks. Simpler way to achieve that same goal with no restrictions
I never filed a non deductible IRA contribution, the reason was I have had my Roth for years and years. Imma over 59.5 and I have passed the 5 year rule. So no issues as long as I can prove 5 years. That could be hard due to broker transfers. But I have records of trade transactions in such account. So I have proof of first day of first account.
Also since it was early IRA the non taxable contributions were suppose to be for the fact of putting over your limits on traditional.
Anyway I am free and clear.
Are you going to cover how all these rules apply to inherited Roth IRAs?
Inherited Roth IRAs are treated differently. You have 10 years after death of owner to withdraw everything for non-spouse. No 5 year waiting period. If you're a spouse, you can treat like it's your own.
Will you please advise on Roth investment strategies for an account earmarked for heirs and never be drawn from? We will begin to convert to Roth for our severely disabled son. You are a gem. Thank you for your expertise.
Is there any reason for a person to keep money converted from 401k's into separate IRA accounts? Some say liability protection is better but I thought that only applied while the money was actually in a 401k.
I was under the understanding that if you are past the 59 1/2 age, and that knowing the first conversion falls under the 5 year rule, if you have a subsequent conversion to a Roth IRA, any subsequent conversion falls under a new 5 year rule, even if you are older than 59 1/2 years?
Great information ❤
Thank you. Great info. FYI your last chapter time is off by 10 minutes
I don't watch many videos but this was well worth it.
I was told u can’t contribute or do conversions if u don’t work even if you’re retired and isn’t taken Social Security
Rob, so I have read that Earnings on conversions to Roth IRAs are subject to taxation if withdrawn before 5 years since the tax year of the conversion. Regardless if you already meet the rule for having a Roth for 5 years AND regardless if you are 59.5 or older. Example, a 60 year old coverts $10,000 from a traditional IRA to a Roth IRA in 2023 and put this in a new Vanguard Roth. They have an existing Roth IRA with Schwab since 2015 (5 year rule met). Then they withdraws $11,000 dollars from the Vanguard account in 2025 consisting of $1,000 in Earnings and $10,000 in conversions (which they paid tax on in 2023 when converted). Is the $1,000 in Earnings subject to taxation because it was withdrawn before 2029, 5 years after the conversion? Lets assume for this example this person had only 1 other Roth IRA (Schwab) opened 2015 and had zero dollars left in the account because they had withdrawn all contributions and earnings in 2024. So the only Roth IRA remaining was the Vanguard with conversion funds in it. Let me know what you think.
If u have unearned income like pension social security. U can’t contribute or do conversions because you’re not working if u do. You’ll be taxed on unearned incomes
Great Video, how does the 5 year requirement work with the upcoming IRS changes forcing all catch up contributions into Roth 401Ks for those over 50? When does the clock start, at the time of contribution or the conversion from Roth 401K to Roth IRA? Thanks
Very detailed explanation, I understand it really well and I’m stupid
Thank you very much
So how does a rollover Roth 401(k) work? 5 year conversion rules or tax and penalty free contributions (on that part)?
Love these videos!
Question for you, or one of your viewers…
I just completed my first Roth conversion (12/23/2023), I’m age 58, and I am planning to pay taxes from my savings account.
Myra question is: When are the taxes on my conversion due, and how do I go about paying them!
Thank you in advance!
When I do Roth conversions, I have a really good idea on what my tax liability will be for the year. If I know I am going to owe less that $1K, I can file my tax return in April. Otherwise, I file my tax return by the end of January. This is based on your Roth conversion done the end of December. I have done Roth conversions earlier in the year and have made estimated tax payments to the IRS based on the amount of taxes I would owe with the conversion. Just remember to use IRS Form 8606 to report the conversion when filing your tax return.
Thanks Rob. Is the 59& 1/2 age before the tax year of withdrawal or can it be during tax year ? I don’t understand what IRS is losing by making it just age 59.
I enjoyed this content. Although I have been watching less yt and doing more research. My retirement contributions are not making my 401k any better, should I buy popular index funds in a brokerage account, is this a better alternative to outperform and rebuild my retirement?
I would go with index funds.. Most actively managed funds don't beat index finds long term..
Thanks for the awesome information! I need some aspirin....
Treasury Direct is a pain too. Not fed bashing but the feds are v reg and rule bound.
Hey Rob, you missed the “rule of 55” If you retire in the year you turn 55 and separate from your company. You leave it in your company plan so you can access your plan without the 10% penalty as long as you started your 401k Roth at 50. The plan has met the 5 year rule. You could take your Roth out at 55 right? As long as you don’t roll it over to your brokerage Roth IRA. Then you would have to wait till 59 1/2. The key is to leave it in your company plan to have access to the rule of 55,
DANGER! You do *NOT* want to use the "Rule of 55" to take distributions from a designated Roth subaccount! The Pro-Rata Rule applies to all employer sponsored plan distributions. This means that every distribution contains part of your earnings! And the Rule of 55 only acts as an exception to the early withdrawal (10%) penalty. It does not act as an exception to the tax on earnings!
This was a Roth IRA video. The rule of 55 is for 401k accounts so he didn't miss the rule of 55.
With the rule of 55, you must leave your 401k with the former employer's plan. You can make penalty free withdrawals. After turning 59 1/2, you can rollover into an IRA and do normal Roth conversions.
@@RBzee112 - Let me restate what I said earlier: The Rule of 55 is absolutely worthless when it comes to distributions from a Roth 401(k) subaccount. The Pro-rata Rule ensures that a portion of every distribution will be taxable because it includes a portion of your earnings, even if the distribution will be exempt from the 10% early withdrawal penalty.
You are almost always better served by rolling a Roth 401(k) into a Roth IRA, even if you retire early. The Roth IRA Ordering Rules give you tax and penalty free access to your contributions even if you are not yet 59 1/2.
Great explanation! Thanks for doing the homework most of us wouldn't =)
I had the 5yr rule satisfied. Then my broker closed my roth ira due to inactivity and gave my money to the state's unclaimed property division.
Very helpful!
Excellent video. If I roll over a Roth 401k (for example let’s say $20k, half contribution and half earnings) into a Roth IRA, how is that money classified (contribution vs conversion vs earnings) in the Roth and to which portions of that rollover does the 5 year rule apply?
Thanks for the tutorial. I have a question about Roth IRA earnings within a conversion. You mentioned that for a given conversion if the 5 year rule is not satisfied, independent of the 591/2 rule that you'd have to pay the 10% penalty, but what about any earnings accrued within that converted Roth? Would these earnings be taxed as ordinary income if distributed in violation of the 5 year rule for conversions?
Or is it accurate to say that the only potential taxation for conversions is limited to 10%?
Thanks again.
0MG...."i know it's a lot".....lol... we have
been trying to negotiate converting this year and looking forward, tax-wise...wish it was simpler
Deciding how much and figuring out how to convert are actually separate topics! This is only about the tax treatment of distributions!
Thanks! Do you have a video about IRS pro-rata rules for Roth conversion when converting from traditional IRA where you have both after-tax and before- tax dollars in any of your traditional IRAs?
My question is
If I convert my Traditional IRA to a Roth IRA over 10 years then I should have 10 different holding periods One for each year of conversion correct? Or will the five year start over with the last conversion?
what about a roth 401k. I opened a roth 401k in 2013 and a roth IRA in 2023. Then I started rolling over roth money from the roth 401k to the IRA because it has better options. When does the clock start ticking? 2013 or 2023?
So here is a question that I wasn’t quite sure about. So let’s say I have a Roth 401(k) I then roll that over to my Roth IRA. The Roth IRA is existed for well over five years. Am I allowed to withdraw my personal contributions that came in from the Roth 401(k) right away?
so principal contribution removed from roth will not be penalized? earnings can stay compounding tax free and no penalties until 5 year rule?
Rob your videos are great and very explanatory. Thanks for that❤
Qq: I have a employee 401k. Does that mean I can’t really have an IRA because I will not get the tax benefits of having an IRA?
Can you talk about QDRO (qualified domestic relations order) with regard to these info: I’m 66 yo, Qdro settlement is from a 401k account from a former spouse. What are the penalty and tax consequences if during that transfer, I take out say $25k. I receive a low ss income but being in California, ss income is not a taxable income.
Also, do I need to move those funds to an Ira account? I do have a Roth IRA acct where I would move those funds to.
Thanks for your anticipated answer.
The after tax conversion is true but then the aggregation rule kicks in. If that is your only IRA then you’re good to go but if you have multiple IRA’s, you have to aggregate them. There is also a 6 month rule to convert a Non-deductible IRA to a Roth. You can no longer do it like the next day, after opening it.
There is no such 6-month rule. Some advisors fear the IRS's Stepwise Transaction Doctrine if they don't do something like this, but if you read the IRS court ruling you'd know that simply waiting an arbitrary amount of time doesn't prevent you from running afoul of this doctrine.
There are several good reasons why the Stepwise Transaction Doctrine does not apply to backdoor Roth IRA contributions, but it's too long to bother with here. Suffice it to say that advisors are just making shit up when they make this type of recommendation. It would probably be better if they consulted a lawyer instead before giving this particular piece of advice.
I’m 69, retired, and don’t have any Roth IRAs. I’ve been advised to convert to Roth IRAs. Why would I want to convert anything if I can’t touch it for 5 years?
Example: Can I make a contribution of $5,000 to a traditional IRA every 2 weeks (when I get paid) and immediately move the money to a Roth IRA a few days later so that after a year I have performed 26 conversions to Roth for a total of $130,000 (way over the Roth contribution limit)?
When inheriting a Roth IRA you have to transfer the original Roth IRA funds into a custodian beneficiary Roth IRA account, but its not clear if the beneficiary's account or the original owner's account needs to have existed for 5 years for earnings to be tax free. The 1099R gave me a T code.
Will I be taxed on earnings from my inherited Roth IRA as a non-spouse beneficiary if my beneficiary Roth account holding the funds was opened only 2 years ago but my mother's original Roth was well over 5 years old?
Does the original owner or the beneficiary need to have held ownership of the Roth IRA funds for over 5 years for the distributed earnings to be tax free?
The extent that IRS goes to make taxes complicated and life miserable for citizens is unbounded. What is worth is that we pay them to do this to us.
Doesn’t the pro rata rule apply for conversions on non-deductible IRAs apply if you immediately convert to a Roth?
Question. My understanding is that one is okay to convert a ROTH 401K into their ROTH IRA and will be able to withdraw penalty and tax free at 59.5. Both will have been in existence for over 5 years at the 59.5 years point. Is this correct or does some 5 year rule trigger when that conversion is made if done at 57 years? Great video btw!
I pay in after tax money and plan to withdraw at 60. I tell people if you're making less than 100k focus on after tax money so you don't get taxed. All your doing is paying the government and not yourself.
Do you have to wait 5 full years to pull out the contributions from the conversion? Or can you do the conversion on 12/31/24 and pull them out 1/1/29? Thanks.