turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

Can I convert to Roth without tax consequences?

I retired in 2021, rolling over my 401K to an IRA.  I also have a separate investment account that was always paid into with post-tax dollars and I have paid taxes on dividends every year.  If I take money out of that account, is there a tax consequence?  Would there be a tax consequence if I converted it to a Roth first...or can I even convert it without a tax consequence?  Thanks for your help. 

x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

1 Best answer

Accepted Solutions

Can I convert to Roth without tax consequences?


@KAM73 wrote:

Got it, thank you.  One more question...if I take money out of this post-tax account (that I have paid taxes on the dividends all along), is whatever amount I take out taxable?  It feels like it shouldn't be since taxes have been paid all along, but I know not to assume anything when it comes to taxes.  🙂  I'm just trying to figure out the best option to do some needed home repairs.  Thanks!


Your broker will have to advise you.  You can also look at your account statement for "unrealized gains."  That's what you will pay tax on.

 

Your broker account invests in stocks or mutual funds.  Those instruments may pay dividends or interest.  They also increase in value (share price appreciation).  Dividends may be taxable or non-taxable.  Sometimes dividends are not taxable because they are reinvested in new shares.

 

Suppose you invest $10,000.  At the end of the year, the account is worth $11,000, which is comprised of $200 of dividends, $50 of interest, and $750 of price appreciation.  You pay tax on the dividends and interest but not the price appreciation, and your cost basis in the account is increased to $10,250.  The $750 increase in value that you don't pay tax on is your unrealized gains.  It's not taxable until you actually realize the gains (make them real) by selling the stock.  Unrealized gains aren't real because share prices sometimes go down instead of up.   Gains or losses become real when you sell them at whatever price.

 

Then at the end of the second year, the account is worth $12,000.  You pay tax on $400 of dividends and $100 of interest.  In addition, you have a taxable capital gain of $100, because one of your mutual funds sold some stock that had increased in value.  Your cost basis is now $10,850 and you have unrealized gains of $1,150.

 

If you then sell everything and cash out, you will pay capital gains tax on the realized gain of $1,150.  But you don't pay tax on the amount originally invested, and you don't pay tax on the increase in value that was already taxed.

 

Your broker keeps track of all this for you.

 

In addition, if you have several investments, and some have gained value and others have lost value, you can choose to only sell the investments that lost value (which will give you a deductible loss, up to certain limits).  Or, if you sold one investment with a gain and another investment with a loss, the gain and loss would cancel each other out.  This all depends on what you actually invested in, and your broker should be able to advise you.

View solution in original post

12 Replies
AmyC
Expert Alumni

Can I convert to Roth without tax consequences?

Money moved from a pre-tax account to an after tax account creates a tax on the income moved. So, let's say you have $100,000 in your 401k and $10,000 of it was from post tax savings, then   $90,000 would be taxable income since it was saved without paying taxes on the income.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

Can I convert to Roth without tax consequences?

Sorry I wasn't clear.  Not touching the IRA.  The other fully post-tax account was what I was asking about.  I just put the IRA info in there in case that made a difference on any post-tax accounts.

ColeenD3
Expert Alumni

Can I convert to Roth without tax consequences?

The funds you are referring to, I assume, are in a standard brokerage account. This type of account is not able to be rolled into a retirement account. You would have to sell the investment and either have a gain or loss on the sale. You would only be able to make a contribution, possibly subject to limits, into an IRA.

Can I convert to Roth without tax consequences?

Got it, thank you.  One more question...if I take money out of this post-tax account (that I have paid taxes on the dividends all along), is whatever amount I take out taxable?  It feels like it shouldn't be since taxes have been paid all along, but I know not to assume anything when it comes to taxes.  🙂  I'm just trying to figure out the best option to do some needed home repairs.  Thanks!

DanaB27
Expert Alumni

Can I convert to Roth without tax consequences?

It depends, if you take a Qualified Distribution from your Roth IRA then this will not be taxable.

 

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:

    1. Made on or after the date you reach age 59½,

    2. Made because you are disabled (defined earlier),

    3. Made to a beneficiary or to your estate after your death, or

    4. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

Can I convert to Roth without tax consequences?

To clarify, I don't have a Roth.  Just a normal run of the mill investment account...completely funded with post-tax dollars, and having paid taxes on the dividends earned each year.  So, if I now withdraw money from that account, is it taxable?  It seems like I've already paid taxes on it and on the earning from it, but I don't want to assume.  Thanks!

JohnB5677
Expert Alumni

Can I convert to Roth without tax consequences?

You are correct!  If you sell assets from your investment account, those transactions may be taxable. However, cash withdrawn for the purpose of creating a ROTH IRA will not be taxed a second time.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

Can I convert to Roth without tax consequences?


@KAM73 wrote:

Got it, thank you.  One more question...if I take money out of this post-tax account (that I have paid taxes on the dividends all along), is whatever amount I take out taxable?  It feels like it shouldn't be since taxes have been paid all along, but I know not to assume anything when it comes to taxes.  🙂  I'm just trying to figure out the best option to do some needed home repairs.  Thanks!


Your broker will have to advise you.  You can also look at your account statement for "unrealized gains."  That's what you will pay tax on.

 

Your broker account invests in stocks or mutual funds.  Those instruments may pay dividends or interest.  They also increase in value (share price appreciation).  Dividends may be taxable or non-taxable.  Sometimes dividends are not taxable because they are reinvested in new shares.

 

Suppose you invest $10,000.  At the end of the year, the account is worth $11,000, which is comprised of $200 of dividends, $50 of interest, and $750 of price appreciation.  You pay tax on the dividends and interest but not the price appreciation, and your cost basis in the account is increased to $10,250.  The $750 increase in value that you don't pay tax on is your unrealized gains.  It's not taxable until you actually realize the gains (make them real) by selling the stock.  Unrealized gains aren't real because share prices sometimes go down instead of up.   Gains or losses become real when you sell them at whatever price.

 

Then at the end of the second year, the account is worth $12,000.  You pay tax on $400 of dividends and $100 of interest.  In addition, you have a taxable capital gain of $100, because one of your mutual funds sold some stock that had increased in value.  Your cost basis is now $10,850 and you have unrealized gains of $1,150.

 

If you then sell everything and cash out, you will pay capital gains tax on the realized gain of $1,150.  But you don't pay tax on the amount originally invested, and you don't pay tax on the increase in value that was already taxed.

 

Your broker keeps track of all this for you.

 

In addition, if you have several investments, and some have gained value and others have lost value, you can choose to only sell the investments that lost value (which will give you a deductible loss, up to certain limits).  Or, if you sold one investment with a gain and another investment with a loss, the gain and loss would cancel each other out.  This all depends on what you actually invested in, and your broker should be able to advise you.

Can I convert to Roth without tax consequences?

"if I take money out of this post-tax account "

 

take your cash any time you want, it doesn't go on your tax return !

IRS requires that SELL transactions be reported.

Can I convert to Roth without tax consequences?

@fanfare 

Technically correct, but not very practical. I have a Merrill Lynch account invested in various ETFs, with less than 1% in cash.  There is very little money that I could withdraw without selling something.  

Can I convert to Roth without tax consequences?

now who's nitpicking ?

Can I convert to Roth without tax consequences?


@fanfare wrote:

now who's nitpicking ?


Possibly true.  But I also don't want to confuse the taxpayer into thinking they can withdraw without selling.  It's possible, but unlikely.  I don't think a lot of people use broker accounts to hold large amounts of cash.  

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question
Manage cookies