Roth Conversions

Submitted by Rich Stetler on Wed, 2017-02-08 23:31

I am 66 years old. I converted 20% of my TIRA in an annuity to a Roth this year and plan to convert 20% each year for 5 years. When will I be able to withdraw my contributions and or interest? Do I have to wait 5 years? If so, when does the 5 years start? Is it a factor that I am over 59 1/2?

Rich



Submitted by Alan - IRA critic on Wed, 2017-02-08 23:51

Assuming that these conversions are your first Roth contributions, you can withdraw the amount you converted any time you wish without tax or penalty. But any earnings on the conversions will be taxed if withdrawn before 5 years from the year of the first Roth conversion. The entire balance of the Roth becomes tax free 1/1/2022 since the 5 year holding period starts 1/1/2017. Meanwhile, any earnings would come out last, only after you withdraw all the conversion money tax and penalty free. You can see that you have tax free access to almost the entire Roth balance from Day 1 since you will have very little in earnings the first couple years.

Submitted by Steve Hagedorn on Thu, 2017-02-09 02:18

Consider this:

  • In year One (age 66): Create 5 Roth conversion accounts each consisting of 20% of your annuity total. Invest each account in very distinct investments (do your homework). At the end of year one only convert one of the five accounts that has produced the greatest gain. This gain is a tax free Roth gain and will make that year’s taxable Roth conversion much more strategic. Recharacterize the remaining four accounts.
  • Year Two (age 67): The other four accounts that got recharacterized back to tax deferred status are once again divided into four parts now, (25%) each into four separate Roth conversion Accounts. With these 4 roth conversion accounts you repeat the process… always cherry picking the roth conversion account that has the greatest gain as the account to convert. The remaining three accounts are recharacterized.
  • Year three (age 68): Three Roth conversion accounts (33% of remaing tax deferred). Repeat the process.
  • Year Four (Age 69): Two Roth conversion accounts (50% each of the remaining tax deferred)
  • Remember these have to be separate distinct Roth conversion accounts (5 accounts, 4 accounts, 3 accounts, 2 accounts and finally 1 account). Each account stands alone.

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