Taxable portion of Roth distribution?

[anonymouse1]

I've converted all of my traditional IRA to Roth over the course of 2022-2024 (had done a Roth conversion in 1999 as well).  I separated them by year to a new Roth opened that year, because I know there's a 5-yr countdown on each conversion (with each conversion counted as being done on January 1 of that year regardless of the actual date).  My brokerage told me I didn't need to separate them out like that.  So in 2024 I did a direct rollover from my TSP to a traditional IRA with my broker, and converted most of it before December 31 2024.  I converted the rest in January 2025 and put it in the same "Rollover Roth" account I opened in 2024 (separate from my original contributory Roth and contributory Traditional rolled over to "2024 Converted Roth").  But since they told me I didn't need to separate Roth accounts by conversion year, I rolled over more funds from my TSP in 2025 and converted all of those to the same "Rollover Roth" account before the end of the year.  Now they tell me that when I go to take a distribution from *any* Roth (even the one I've had since 1999) I will have to fill out form 8606 to see how much is taxable.

The instructions for 8606 say "

Part III—Distributions From Roth IRAs

Complete Part III to figure the taxable part, if any, of your 2025 Roth IRA distributions.

Line 19

Don’t include on line 19 any of the following.

1. Distributions that you rolled over, including distributions made in 2025 and rolled over after December 31, 2025 (outstanding rollovers).

2. Recharacterizations.

3. Distributions that are a return of contributions under Return of IRA Contributions, earlier.

4. Distributions made on or after age 59½ if you made a contribution (including a conversion or a rollover from a qualified retirement plan) for any year from 1998 through 2020.

5. A one-time distribution to fund an HSA. For details, see Pub. 969.

6. Qualified charitable distributions (QCDs). For details, see Are Distributions Taxable? in chapter 1 of Pub. 590-B.

7. Distributions made upon death or due to disability if a contribution was made (including a conversion or a rollover from a qualified retirement plan) for any year from 1998 through 2020.

8. Qualified distributions from Part IV of your 2025 Form(s) 8915-F, if any, you repaid in 2025 no later than the deadline for repayment.

9. Distributions that are incident to divorce. The transfer of part or all of your Roth IRA to your spouse under a divorce or separation agreement isn’t taxable to you or your spouse."

So I take it that since I opened a Roth in 1999, (and I should add I'm over 59 1/2), even if I take a distribution from my Rollover Roth that I converted to in 2024-2025 before 2029, none of it is taxable and line 19 would be zero?  What if I made a backdoor Roth contribution/conversion in 2028, and then took from that (separate account) in 2029?  I'm getting different answers from Schwab and TSP (because I was considering doing an in-plan Roth conversion in TSP this year to start that separate 5-yr clock rolling, but they told me that if I converted $100,000 in 2026 and $100,000 in 2027 and in 2031 tried to pull $120,000 that $20,000 of that would be taxable).

Can anyone please explain to me the 5-yr rule on conversions, are conversions taxable AGAIN (since you paid taxes the year of conversion) if you pull them out before 5 years, or is it only the earnings that are taxable?  If you have an account (like the TSP or my Rollover Roth) that has mixed conversions from different years in it, do the conversions come out first when making a distribution, so anything converted less than 5 years ago is taxable (AGAIN!), or does the custodian track the converted amount for each year AND its earnings (like TSP told me they would - Schwab doesn't), and the order of withdrawal is 1.  Oldest converted amount (already taxed) 2.  Earnings on oldest conversion (not taxed if conversion was made 5+ years earlier), 3.  Next oldest converted amount (already taxed) or if 2 and 3 are switched?  Or do you just fill out form 8606 like Schwab said and as long as the account (Roth IRA or Roth TSP/Roth 401K) was opened with either a contribution or conversion over 5 years earlier, then line 19 on the 8606 is zero?

My husband just started a Roth 401K and plans on retiring in 2029, so we're looking at possibly drawing on my oldest Roth in 2029, and may draw on my converted Roths opened in 2022 and 2023.  We could potentially draw on our Roths converted in 2024 (he mixed all his contributions and conversions into one account) in 2030 - we thought this would be fine since they'd be over 5 years old.  I'm looking at doing an in-plan conversion with the TSP every year for the next 10-12 years before I hit RMD age, and after he retires he'll convert some of his traditional 401K as well to minimize RMDs, but we will need to take some money out of Roths from 2031-2037 to live on while keeping in a lower tax bracket, and since we're still going to be doing Roth conversions during that period, some of our accounts are going to be less than 5 years old.

[dmertz]

"My brokerage told me I didn't need to separate them out like that."

While there is no benefit to doing the conversions to separate accounts, you still must track the amount of each conversion separately.

"Now they tell me that when I go to take a distribution from *any* Roth (even the one I've had since 1999) I will have to fill out form 8606 to see how much is taxable."

For distributions made prior to reaching age 59½, that's correct.  This has always been the case whether or not you have multiple Roth IRA accounts.  However, since you are over age 59½ and your first Roth IRA contribution was for some year prior to 2021, distributions made from any of your Roth IRAs in 2025 and beyond are qualified Roth IRA distributions which are not reportable on Form 8606 or Form 5329.

5-year conversion clocks no longer apply after age 59½.  The 5-year conversion clocks are only used to determine if a Roth IRA distribution is subject to any early-distribution penalty, and you are not subject to  an early-distribution penalty on any Roth IRA distribution made after age 59½.

"we're looking at possibly drawing on my oldest Roth in 2029"

For tax purposes, it makes no difference which Roth IRA a ordinary Roth IRA distribution comes from.  You've already satisfied the 5-year qualification and the age 59½ requirements for your own Roth IRAs.

[anonymouse1]

Thank you.  According to the parts of the instructions for Form 8606 that I've highlighted in red, it appears that the number on line 19 of the form would be 0 and I would not continue filling out the form as none of my Roth IRA distributions would be taxable since I opened the Roth in 1999.  I understand that Roth employer plans like my TSP and my husband's 401K have separate start dates, so if I opened a Roth TSP by doing a conversion this year, I would not be able to draw from it tax-free until 2031?  The question is, what portion of that Roth TSP withdrawal would be taxable in 2030?  I will have paid tax on the conversion amounts already, so is it just the earnings that would be taxable if I made a withdrawal in the first 5 years?  Are conversion amounts considered to be withdrawn first, or are conversions and earnings withdrawn on a pro-rata basis so if conversion amounts that have already been taxed aren't taxed again, a small percentage of the distribution due to the earnings will be taxed the year of distribution?

I could avoid this entirely I suppose by continuing to do a direct rollover from my TSP to a traditional IRA, then convert that to a Roth since it appears the Rollover Roth would inherit the opening date of my first Roth, but unless my husband rolls his Roth 401K to a Roth IRA upon retirement, he would have to wait 5 years from 2025 (when he opened his Roth 401K with an in-plan conversion) to withdraw from that tax-free.

[anonymouse1]

Oh, and by "you must track each conversion separately" do you mean the year (so 1099-R) or each little conversion made within the year (cash $xxxx.xx on 4/15/2024, stock XYZ 10 shares @ $xxx.xx on 7/31/2024, etc,)?  I can download my transaction history for all "journaled" funds and shares since I've been with this brokerage (2020), I don't know how long they will keep those available.  I have most of my paper records from 1999 (I think that was the only time I converted anything, the rest of the Roth was contributions starting in 1999) but may not have all, and I've sold most of the mutual funds and stocks that were converted at that time, and invested the money in other things - do I need to be able to track the dividends, capital gains, and stock splits on all of my original stocks converted from my traditional IRA in 1999?  I'm afraid that will be an impossible task.  I thought you didn't need to track basis in a Roth?

[dmertz · Accepted solution]

Because your distributions are now qualified distributions, your tax return is not to include Part III.  That makes any instruction for line 19 meaningless to you.

I think that your understanding is generally correct.  Until a Roth 401(k) is qualified (5-year and age qualifications met), distributions are a proportionate mix of nontaxable and taxable amounts because there are no distribution ordering rules like the ones for a Roth IRA.  However, if one is already eligible for qualified distributions from a Roth IRA and that person is eligible to take a distribution from the Roth 401(k), that person could roll funds from the Roth 401(k) over to a Roth IRA and then take a Roth IRA distribution to take advantage of the fact that distributions from the Roth IRA are qualified distributions, tax free.  That's one reason I always suggest that a person establish a Roth IRA before age 55 if they can, just to get the Roth IRA qualification clock running.

If you have no basis in nondeductible traditional IRA contributions, there is no benefit to rolling traditional 401(k) funds first to a traditional IRA and then doing a Roth conversion compared to simply taxably rolling the traditional 401(k) funds directly to a Roth IRA.

Regarding tracking Roth conversions, that's done by year.  If you have met the requirements for qualified distributions, there is no need to know anything about the amount and timing of any past (or future) Roth conversions.

[anonymouse1]

Thanks - because the Roth TSP and traditional TSP must be invested identically, and distributions are taken on a pro-rata basis across all investments, I think I'm going to keep moving TSP money to an IRA, then converting (I do it with this intermediate step because of reports that the TSP has messed up direct rollovers to a Roth IRA, and also because it gives me more flexibility to keep money in the traditional IRA if we're close to a tax cliff by the end of the year, or even send it back to the TSP though that means it's not earning anything until the TSP processes the incoming rollover).  The Roth 401K and traditional 401K also have to be invested the same way, though I'm not sure if distributions are pro-rata or can be directed.  So my husband should probably just roll his 401Ks to IRAs when he retires, even though they got rid of RMDs on the Roth 401Ks.  But given the liability protection differences between IRAs rolled over from employer plans and contributory IRAs, I will advise him to start a separate traditional and Roth IRA for his 401K rollovers.

[dmertz]

A TSP participant can choose whether a particular distribution be made from the traditional account, the Roth account or both.  Until the Roth TSP account is qualified, distributions from the Roth TSP are a proportionate mix of nontaxable and taxable amounts of the funds in the Roth TSP account.  The same is separately true of the traditional account.  See page 6 of the TSP's Distributions pamphlet.

https://www.tsp.gov/taking-money-from-your-account/

No part of the Roth TSP is permitted to be rolled over to a traditional IRA.

Errors in rolling over funds from the traditional TSP account directly to a Roth IRA are likely the result of the participant preparing the request form incorrectly.  The form has a clear way to indicate whether the destination is to be rolled over to a traditional IRA or a Roth IRA.  However, if one has no basis in nondeductible traditional IRA contributions, it makes no difference if the funds are moved first to a traditional IRA or not other than having two Forms 1099-R to deal with instead of one.  Certainly it can be helpful to put the funds in the traditional IRA first if it's necessary to wait until close to the end of the year to determine how much to convert to Roth.

[anonymouse1]

Of course you can't roll part of a Roth account into a traditional account!  I was referring to the TSP policy of taking distributions (traditional or Roth) pro-rata across all investments.  So if you have 50% of your TSP (traditional or Roth) in the C fund, 25% in F and 25% in G, and you want to take $10,000 out, they will take $2500 out of the G and sell $2500 worth of shares from the F fund and $5000 from the C fund - you can't direct them to take the whole $10,000 from the G fund.

[dmertz]

The TSP's Distributions pamphlet (https://www.tsp.gov/publications/tspbk25.pdf) clearly states on page 6:

If you have both traditional and Roth money in your account and are leaving some money in your account, you can specify that your distribution should come only from your traditional money, only from your Roth money, or pro rata.

For tax purposes, how the TSP accomplishes the particular distribution from the various investments in the traditional or Roth account is irrelevant.