Opinion: I'm so confused: How do I treat withdrawals from a Roth IRA?

[MULTIZ321]

Opinion: I'm so confused: How do I treat withdrawals from a Roth IRA?

I’m so confused: How do I treat withdrawals from a Roth IRA?

Getting tangled up in the ‘five-year rule’

www.marketwatch.com

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Richard

 

[pedro47]

Roth IRA withdraws are tax free because they were already taxes.

This is why I have Fidelity and Vanguard managing our IRA accounts and our Roth IRA counts.

 

[Talent312]

Roth IRA withdraws are tax free because they were already taxed.

Yes, but the article is really discussing violations of the 5-year holding rule.
The confusion stems from drawing $$ converted from non-Roth accounts.
Solution: Don't convert any $$ you might need in LT 5 years. <duh>


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[pedro47]

Talent312, I agree with your post. Money in a ROTH accounts are $$$, you should not need to touch for ten (10) years IMHO.

Your regular IRA RMD percentages also should, be a little lower after age 80 1/2.

 

[VacationForever]

Talent312, I agree with your post. Money in a ROTH accounts are $$$, you should not need to touch for ten (10) years IMHO.

Your regular IRA RMD percentages also should, be a little lower after age 80 1/2.

IRA RMD percentages keep going up and do not come down.

 

[capjak]

I think pedro312 means if you convert the traditional IRA to a Roth IRA than the Traditional IRA will have less money in it and therefore at 72 (new law for 2020) the RMDs should be less due to the lower value of the traditional IRA.

 

[Talent312]

If IRS publishes tables that are different for those who started at age 70.5 (DW) vs. those who will start at age 72 (me)... The latter will have higher %'s due to the lifespan being 1.5 yrs shorter. For me, this entails setting up separate spreadsheets -- one for her and one for me.
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[VacationForever]

If IRS publishes tables that are different for those who started at age 70.5 (DW) vs. those who will start at age 72 (me)... The latter will have higher %'s due to the lifespan being 1.5 yrs shorter. For me, this entails setting up separate spreadsheets -- one for her and one for me.
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From my understanding, IRS is redoing the table to account for longer life expectancy, and not because of RMD starting at 72. I do not believe the divisor or percentage will be different for the same age in the new table.

 

[VacationForever]

ROTH IRA conversion is beneficial if one expects to pay higher income tax rate later due to RMD of self, surviving spouse and beneficiaries. Any Traditional IRA withdrawal by a surviving spouse will be taxed as a single, which means paying at a much higher income tax bracket, when compared to when both are alive. Beneficiaries, presumably their working children will be paying higher income tax rate when adding inherited Traditional IRA RMD to their income. Also, if the deceased is from a tax free state and children live in a state with income tax, more taxes will be paid on withdrawal.

The downside of ROTH IRA conversion is that you are handing over taxes from taxable account early, which means you lose the potential growth in that money. Moreover, inheritance of taxable account gets a step up in cost basis.

Decisions, decisions, decisions.

 

[Talent312]

ROTH IRA conversion is beneficial if one expects to pay higher income tax rate later due to RMD of self, surviving spouse and beneficiaries. Any Traditional IRA withdrawal by a surviving spouse will be taxed as a single, which means paying at a much higher income tax bracket, when compared to when both are alive...

A surviving spouse won't have a dead spouse's other income (like SS), either. So maybe their draws will be subject to a similar tax bracket. Or maybe they'll remarry. As for me, I see no need to advance my tax payments by converting. At least, if I'm dead, "I" won't be paying the tax.
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[VacationForever]

A surviving spouse won't have a dead spouse's other income (like SS), either. So maybe their draws will be subject to a similar tax bracket. Or maybe they'll remarry. As for me, I see no need to advance my tax payments by converting. At least, if I'm dead, "I" won't be paying the tax.
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If Traditional IRA is not rolled over and how it impacts the surviving spouse in terms of taxes. Higher incomes than what is used in the example will push surviving spouse to the 30-something percent tax range.

Here is an example where surviving spouse paying higher taxes and IRMAA penalties:
Spouse A SS: $20K
Spouse B SS: $40K
RMD A: $45K
RMD B: 40K
Taxable interests/dividends: $40K
Total when both are alive: $185K
Highest bracket after taking standard deductions ($161K): last dollars taxed at 22%
Medicare for each does not incur IRMAA penalties, $144.60 per month

Spouse A dies. Spouse A inherits Spouse B RMD.
Spouse B SS: $40K
RMD total: 85K
Taxable interests/dividends: $40K
Spouse B total after Spouse A dies: $165K
Highest bracket after taking standard deductions ($153K): last $68,800 taxed at 24%
Spouse B Medicare is now at $376+51.40 = 427.40 per month

2019 Tax brackets

TAX RATE	SINGLE	HEAD OF HOUSEHOLD	MARRIED FILING JOINTLY OR QUALIFYING WIDOW	MARRIED FILING SEPARATELY
Source: IRS
10%	$0 to $9,700	$0 to $13,850	$0 to $19,400	$0 to $9,700
12%	$9,701 to $39,475	$13,851 to $52,850	$19,401 to $78,950	$9,701 to $39,475
22%	$39,476 to $84,200	$52,851 to $84,200	$78,951 to $168,400	$39,476 to $84,200
24%	$84,201 to $160,725	$84,201 to $160,700	$168,401 to $321,450	$84,201 to $160,725
32%	$160,726 to $204,100	$160,701 to $204,100	$321,451 to $408,200	$160,726 to $204,100
35%	$204,101 to $510,300	$204,101 to $510,300	$408,201 to $612,350	$204,101 to $306,175
37%	$510,301 or more	$510,301 or more	$612,351 or more	$306,176 or more

 

[CalGalTraveler]

We are doing yearly backdoor conversions from non-deductible Traditional IRA contributions into Roth. We set up a separate Roth account to keep track of the 5 year rule on conversions. Vanguard will let you set up multiple Roth accounts for this purpose.

 

[capjak]

and remember the tax rates will increase, as the new tax rates expire....

 

[Ralph Sir Edward]

Once the account is set up, you have a 5 year tax vesting. You can make more regular contributions, without affecting the vesting date, but not conversions. So if you want to reconvert another existing block of money, set up a new separate account. If you pull money out of a non-vested account, there is a 10% penalty even i there is no other taxes. (What you have paid taxes on, can be pulled out without any more taxes being paid, but with penalty. What you earned in the account, in the non vested period, is subject to being taxed, if in the non-vested window. Once the 5 year window is reached, those withdrawals are tax free. The accounting is any withdrawal goes against initial contributions first, and earning last.)