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So... I just retired at 62. I plan to start converting my IRA into my Roth (which I opened decades ago) big-time next year. The top of the 24% bracket is about $165K. So... can I just convert $165K on January 3,2022 and then withdraw from the Roth if needed for living expenses in 2022? I feel like this satisfies the 5-year rule, but I don't want to make a giant mistake.
I know some aim for the top of the 22% bracket, but I feel like I can earn that 2% back by getting better than the 5.5% return used for modeling by my planner, who assumed 50-50 stocks-bonds. I've read some advice that says it's a wash under that assumption. Any opinions on that?
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Consider state taxes.

How are you going to pay state and federal taxes?
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So... I just retired at 62. I plan to start converting my IRA into my Roth (which I opened decades ago) big-time next year. The top of the 24% bracket is about $165K. So... can I just convert $165K on January 3,2022 and then withdraw from the Roth if needed for living expenses in 2022? I feel like this satisfies the 5-year rule, but I don't want to make a giant mistake.
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Keep in mind that the $165,000 you're looking at is TAXABLE income, which is all income after all deductions. Will you have no income, other than what you take -or convert - from the IRA? And you have to consider the standard or itemized deductions, as well. Ignoring those things "could" be a giant mistake.

Bill
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Good point about the taxes. The bracket limit is more like $170K in 2002. I can add my schedule A deductions to that amount (which include state tax on the conversion if paid as estimated tax in 2022) but I have to pay both Fed and NC tax. I wanted to keep it simple in my post. I’m worried about converting and withdrawing in the same year. My understanding is that it’s ok because I’m >59.5. My question is solely about the 5-year rule. Can I put money in and take it out in the same year? I’m just interested because it seems convenient.
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I’m worried about converting and withdrawing in the same year.

Wondering what this will get you versus just taking the distribution of the amount you would withdraw ?
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You are over 59 1/2 which means there will be no penalty on distributions.

The order of distributions is:
1.) Contributions which can be withdrawn at any time without additional taxes
2.) Conversions
3.) Earnings - both 5 year rules apply for earnings to be qualified

My understanding is that taxes are already paid on converted amounts therefore no taxes would apply when distributed regardless of when distributed. Since you are over 59 1/2, no early withdrawal penalties would apply.
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Have you considered incomes taxes on your modeling of ROTH conversions? Income taxes on $165,000 are significant. If you are considering that you might need part of it for living expenses in 2022 that implies that you don't have sufficient other assets to cover your projected living expenses.

The most "successful" ROTH conversions after retirement (which are ones that result in more assets) are for funds that are expected never to be used. When the reduced investment assets because of pre-paying taxes, it isn't a clear cut decision.

The decision is different if this is for estate planning where prepaying income taxes decreases estate taxes and income taxes for the recipient.
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You are over 59 1/2 which means there will be no penalty on distributions.

Actually, the OP's Roth account has been open for more than 5 years AND the OP is over 59 1/2 - that makes any Roth distributions qualified distributions, so there will be no taxes or penalties.

The order of distributions is:

Order of distributions doesn't matter in the OP's case, because the OP's distributions are qualified distributions.

AJ
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The most "successful" ROTH conversions after retirement (which are ones that result in more assets) are for funds that are expected never to be used.

Well, it depends on how you define "successful". Many people are paying taxes earlier on money that they do intend to use later in retirement, but if they left it in the tax deferred accounts would result in significantly higher tax rates on much of the distribution. Thus, people are trying to optimize taxes over their lifetime, instead of optimizing just annually. In many cases, optimizing just annually results in sub-optimal lifetime results.

Personally, I find it more "successful" to manage taxes to keep at or below a 28% bracket during your entire retirement than to stay in a 0% - 15% bracket for 8 or 10 years, and then be forced into a 30%+ bracket for the rest of your retirement.

AJ
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Actually, the OP's Roth account has been open for more than 5 years AND the OP is over 59 1/2 - that makes any Roth distributions qualified distributions, so there will be no taxes or penalties.


Does it matter if the conversion is going into a new Roth account if you have an existing Roth that has been open for more than 5 years? DH and I are now in the process of doing Traditional to Roth conversions, but the conversions are going into a newly established Roth vs. into the Roth account that already exists and has existed for more than 5 years. I'm just trying to understand if I need to be paying attention to dates for the time when we finally do withdraw from the Roth.

I'm pretty sure the answer is no, and that having any Roth for more than 5 years is sufficient, but I wasn't sure and figured I should ask.
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1) It's convenient - I make one conversion at the beginning of the year. I don't have to do calculations as the end of the year approaches. I'm guaranteed I converted as much as I could and stay in my bracket. (OK, I might want to tweak a little at the end of the year, but it wouldn't be a crisis if I didn't.)
2) I get all the money into the Roth compounding tax free as soon as possible.
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My question is solely about the 5-year rule.

There are two different 5 year rules related to Roth IRAs.

One is related to conversions. To make a penalty-free withdrawal of conversions, the conversion must be in the account for 5 years OR you need to be over 59.5 years of age. ***

The other is related to qualified distributions, which makes the withdrawal of earnings both tax and penalty free. This one requires you to have had a Roth IRA open for 5 tax years AND be over 59.5 years of age.

If I remember your fact situation correctly, you are in your early 60s and you opened your Roth IRA sometime in the early 2000s (well over 5 years ago). Therefore, you meet both of these rules. You can withdraw converted amounts without penalty and you can withdraw earnings without tax or penalty.

--Peter


*** The point of this rule is to keep you from avoiding the early withdrawal penalty on IRA accounts. Without it, anyone could avoid the penalty by converting the money to a Roth and immediately withdrawing it. Yes, it is imperfect, but it's better than nothing.
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Personally, I find it more "successful" to manage taxes to keep at or below a 28% bracket during your entire retirement than to stay in a 0% - 15% bracket for 8 or 10 years, and then be forced into a 30%+ bracket for the rest of your retirement.

AJ


I'm not disagreeing. There are so many moving parts in the decision that it isn't a simple decision. Filling low tax brackets with conversions is very reasonable.

Long term care expenses later in retirement can be significant. If all of IRAs are converted to ROTH then it may result in unnecessarily paying taxes early but large RMDs can result in significant taxes.

We have been converting some of out TIRAs to ROTH over the past few years. Converting $165,000 may or may not be reasonable. It will trigger a large state and federal income tax bill.
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Actually, the OP's Roth account has been open for more than 5 years AND the OP is over 59 1/2 - that makes any Roth distributions qualified distributions, so there will be no taxes or penalties.

No penalties but I'm still not completely convinced that each conversion doesn't have it's own 5 year waiting period for qualified distributions of earnings.
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No penalties but I'm still not completely convinced that each conversion doesn't have it's own 5 year waiting period for qualified distributions of earnings.

You're mixing two things there. There's a test for penalty-free withdrawal of conversions. And there's a test for tax and penalty free withdrawal of earnings. Two different tests, although both involve 5 year periods.

Back up a couple of posts in the thread where I went over those two different tests.

However, you are correct that each conversion carries its own test for penalty-free withdrawal from a Roth. But since the OP is over 59.5, he has met that test and the 5 year wait is irrelevant. (The test being: 5 years OR 59.5. He's over 59.5, so he meets the test without looking at the time portion.)

--Peter
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I'm pretty sure the answer is no, and that having any Roth for more than 5 years is sufficient, but I wasn't sure and figured I should ask.

You're correct - having any funded Roth IRA in your SSN for at least 5 tax years is sufficient to meet the 5-year rule for having qualified distributions.

AJ
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No penalties but I'm still not completely convinced that each conversion doesn't have it's own 5 year waiting period for qualified distributions of earnings.

I'm confused as to why you think that, in an IRA, earnings for conversions have their own 5-year waiting period to be qualified. Earnings from conversions are treated the same as any other earnings in the Roth IRA and will be subject to taxes and penalties if the distribution is not qualified. Waiting 5 years after the conversion does not make a distribution of the earnings from a conversion qualified, or exempt the distribution from penalties and taxes, as appropriate. The only way that a distribution of any earnings from a Roth IRA will not be subject to taxes and penalties is if the distribution is a qualified distribution. Per IRS Pub 590-B https://www.irs.gov/pub/irs-pdf/p590b.pdf

What Are Qualified Distributions?

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit.

2. The payment or distribution is:
a. Made on or after the date you reach age 591/2,
b. Made because you are disabled (defined earlier),
c. Made to a beneficiary or to your estate after your death, or
d. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).


AJ
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You're mixing two things there. There's a test for penalty-free withdrawal of conversions. And there's a test for tax and penalty free withdrawal of earnings. Two different tests, although both involve 5 year periods.

Thank you. I missed your earlier post. My confusion was how qualified earnings were defined.
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AJ,

My confusion was that all earnings are treated equally. I now understand.
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Thank you. I missed your earlier post.

Glad I could help.

--Peter
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The most "successful" ROTH conversions after retirement (which are ones that result in more assets) are for funds that are expected never to be used.

As long as you are not in a couple where someone suddenly dies or even a couple when one dies which does tend to happen at some point.
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