Ask Liz Weston

Get smart with your money

Roth conversion

Q&A: When it comes to Roth IRAs, 59½ and 5 are the magic numbers

By

Dear Liz: You recently answered a question about Roth conversions, saying that each conversion triggered its own five-year holding period. It was my understanding that after age 59½, the five-year rule doesn’t apply and earnings aren’t taxed.

Answer: The rules for Roth IRAs can be complicated, and they’re different for accounts that you fund directly versus those that are funded through conversions.

If you contribute directly to a Roth, you can withdraw your contributions any time without tax or penalty. You can withdraw earnings tax free if you’re 59½ or older and the account has been open for at least five years.

But as mentioned in the previous column, the five-year holding period applies to each conversion you make from another retirement account into a Roth. What goes away after age 59½ is the 10% penalty for early withdrawal, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Earnings withdrawn before five years can be taxed as income. However, it’s assumed that any withdrawals are principal first, so you’d have to withdraw the entire conversion amount before earnings would be taxed.

Luscombe notes that some people set up separate accounts for each conversion to make tracking the five-year periods easier. That could be especially helpful if they plan to make substantial withdrawals that could include earnings before the last conversion amount hits its five-year mark. Once all the five-year periods have expired, the accounts can be combined into one.

Q&A: Roth conversions and holding periods

By

Dear Liz: Eight years ago I converted a number of stocks from an IRA to a Roth IRA and paid the taxes. Now I am in a position to convert the last shares but want to do it incrementally over the next four years. Does each conversion then require its own five-year waiting period or will anything in the existing Roth now qualify to be withdrawn at any time?

Answer: The IRS requires five-year holding periods before earnings can be withdrawn tax-free from Roth accounts. The five-year rule applies separately to each Roth conversion, so the partial conversions you’re contemplating will each have their own five-year holding period, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

That’s different from regular Roth accounts, where the five-year rule starts the year the account was first opened and isn’t triggered again by subsequent contributions, Luscombe says.

Q&A: Need help with your IRA? Call a CPA, or maybe a PFS

By

Dear Liz: My husband and I have substantial pre-tax savings in our workplace retirement plans and IRAs. Based on where those balances would be in retirement, we would definitely be paying more in taxes than now, and face the potential of running out of money if forced to withdraw it all. You often refer people to the Garrett Planning Network for fiduciary financial planners. Is there a similar organization for tax planners who can provide a strategy for rolling over our pre-tax accounts in order to take part of the hit now, and reduce taxes later? The financial planners we’ve found through Garrett have some tax knowledge, but refer us to tax professionals for more in-depth tax analysis.

Answer: Many fee-only financial planners work with tax professionals such as certified public accountants — CPAs — to craft Roth conversion plans that can reduce future taxes. If you want an all-in-one pro, though, you could consider hiring a CPA who is a personal financial specialist, or PFS. The PFS credential is similar to the certified financial planner credential, but is granted only to CPAs. To find one in your area, you can use the American Institute of CPAs’ directory at https://www.aicpa-cima.com/directories. Click the plus sign next to “Find a credential/designation holder,” select “PFS” in the box titled “Credential/designation name” and then input your location.

Q&A: Ask a tax pro before Roth conversion

By

Dear Liz: I’m almost 70, still working, and I’ve got a decent-size IRA as well as a 403(b) that I plan to move to an IRA when I retire. Because I have a pension and other investments, I don’t think I’ll ever need the money in the IRA and 403(b). Should I convert to a Roth now so my kids (31 and 28) won’t have to pay taxes when they inherit it? I’ve got the cash to cover the taxes for the Roth conversion.

Answer: That would be a generous move, but you should consult a tax pro to make sure you understand the implications.

As you know, converting a pre-tax retirement account such as an IRA, 401(k) or a 403(b) to a Roth IRA can generate a sizable income tax bill. Such conversions can push you into a higher tax bracket and, if you’re on Medicare, also may increase your premiums.

You may want to spread the conversion over several years, converting just enough each year to “fill out” your tax bracket and avoid Medicare surcharges. A tax pro can help with those calculations.

Thursday’s need-to-know money news

By

Today’s top story: Who should consider a Roth conversion now? Also in the news: Morgan Stanley’s new cash account, how to make a savings plan, and an important student loan deadline.

Who Should Consider a Roth Conversion Now?
The Secure Act brings new options.

Should You Check Out Morgan Stanley’s New Cash Account?
A look at the benefits.

How to Make a Savings Plan
A roadmap to a better financial life.

Don’t get caught by surprise by this deadline if you’re paying off student loans
Time to re-certify your income.

Who should consider a Roth conversion now?

By

If you’ve saved a lot for retirement, or your parents have, you could be affected by recent changes in the rules about retirement distributions.

The recently enacted Secure Act eliminated the “stretch IRA,” a strategy used by affluent investors to pass tax-advantaged money to their heirs. The stretch IRA allowed nonspouse beneficiaries — typically children and grandchildren — to take money out of an inherited IRA gradually over their lifetimes. The new law requires most IRAs inherited by people other than spouses to be drained within 10 years, which can lead to much higher tax bills for heirs. (Spouses still have the option of treating an inherited IRA as their own and taking money out over their lifetimes.)

At the same time, the Secure Act delayed when required minimum distributions have to begin for most retirement account owners, increasing the age for mandatory distributions from 70 1/2 to 72. In my latest for the Associated Press, why financial planners say the changes make a Roth conversion attractive for big savers.