June 5, 2019 11:21 PM
- Yes. When determining the taxable and nontaxable amounts of a Roth conversion, your IRAs are treated in aggregate. The age of your traditional IRAs is not relevant. The fact that you made your nondeductible traditional IRA contributions to any particular IRA is irrelevant. The pro-rata calculation is done on Form 8606 using the total of your nondeductible traditional IRA contributions previously reported on your most recently filed Form 8606 (and any current-year nondeductible contributions, if any), the amounts of your conversions and other traditional IRA distributions and the total of the year-end balances in your traditional IRAs, if any amounts remain.
- Since you are over age 60, any distribution you receive is free of any early-distribution penalty. The 5-year rule for conversions does not apply since it is only used to determine if the conversion amount is subject to an early-distribution penalty when distributed from the Roth IRA before age 59½. However, there is a different 5-year rule that is used to determine if earnings that occur in your Roth IRAs are tax free, qualified distributions when distributed. This 5-year rule is satisfied 5 years after the beginning of the year for which you first make a Roth IRA contribution. If your first Roth IRA is established by a Roth conversion in 2018, distributions occurring after 2022 will be qualified distributions, entirely tax free no matter how much is distributed from your Roth IRAs. Until then your tax-free distributions are limited to the converted amounts plus any regular Roth IRA contributions you might have made. Under the ordering rules for Roth IRA distributions, earnings are distributed last.
- To maximize the benefit of a Roth conversion, pay the taxes on the conversion with other, after-tax funds, rather than using a retirement-account distribution to pay the taxes. By paying the taxes with other funds you maximize the amount that you get into Roth IRAs to be able to grow tax free (once your Roth IRAs are qualified). In doing this, decline tax withholding on the Roth conversion and, if necessary to avoid a tax underpayment penalty, make an estimated tax payment. If you have taxes withheld from the traditional IRA distribution that is being converted to Roth you'll have to come up with funds from another source to complete an indirect Roth conversion of the portion withheld for taxes.
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