ROTH CONVERSION

Submitted by Rene Nourse on Fri, 2019-11-08 00:25

My client, who is married, is age 57, has $350,000 in her IRA and wants to convert half of it to a Roth. Will the Roth IRA withdrawals after 5 years be completely tax-free?



Submitted by Alan - IRA critic on Fri, 2019-11-08 00:42

Yes, if this is her first Roth contribution of any kind, and she does it this year, her Roth IRA will be fully qualified and tax free on 1/1/2024. If she contributed in any manner to a Roth before 2015, her Roth IRA will be fully qualified at age 59.5. Prior to 59.5 any distribution of taxable conversion money from a conversion done this year will be subject to the 10% penalty, but no income tax.

Submitted by Rene Nourse on Fri, 2019-11-08 01:52

I was under the impression that if you convert a portion of an IRA to a Roth, that the IRS will only recognize a portion of the Roth earnings as tax free since they view Roth and traditional IRAs as one big IRA bucket. Additonally, I have read that in order to retain the tax free nature of a Roth conversion, that it would be best to move whatever portion of the IRA that will not be converted into an employer’s plan, such as a 401k or 403b, then convert what is left over in the IRA to a Roth

Submitted by Alan - IRA critic on Fri, 2019-11-08 03:15

  • There is no single bucket combining both TIRA and Roth accounts. Roth IRA earnings at any point in time is the amount by which total Roth value exceeds Roth basis. Roth basis is regular contributions plus conversions and basis included in certain rollovers to the Roth IRA from a designated Roth (401k or 403b) and from pre tax qualified plans. A Roth IRA owner must track the amount of their Roth IRA regular contribution and conversion basis in order to know if any distribution contains any earnings or not. After the Roth IRA is qualified and completely tax free, no more tracking is needed.
  • A back door Roth is a ND TIRA contribution and conversion to a Roth IRA. This conversion is tax free if there are no pre tax amounts in TIRAs at year end. Rolling pre tax amounts to qualified employer plans eliminates them by year end. If they are still in the TIRA at year end, the back door conversion will be mostly taxable.

Submitted by Rene Nourse on Fri, 2019-11-08 16:49

Thank you!

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