Can I Do A Roth Conversion Before Age 59 ½? #222
Age 59 ½ is the magic age at which you can start taking distributions from retirement accounts without a penalty. This listener is wondering if he can convert part of his IRA to a Roth IRA even though he’s not 59 ½. And if he goes ahead with the conversion, will it be subject to the 10% penalty? Listen to this episode to find out.
You will want to hear this episode if you are interested in...
[1:09] Attend a Retirement Readiness Review Workshop
[2:26] The basics of a Roth IRA/Roth conversion
[5:18] The first way you can do a Roth conversion
[8:20] How to do a conversion with an existing IRA
[9:00] What can be converted to a Roth IRA?
[9:45] When a Roth conversion makes sense
The basics of a Roth IRA/Roth conversion
A Roth IRA is a way to save for retirement if you want some tax-free income in retirement. The challenge is that you don’t receive a deduction on any contributions that you make because you’re putting money into a Roth account after you've already been taxed on it.
Most other retirement accounts are funded with pre-tax money. It reduces your taxable income in the year you make the contribution which saves you federal and state taxes. However, when you make a withdrawal in retirement, you’ll have to pay taxes on it.
The good news? You can do a Roth conversion before age 59 ½ without being penalized—but there are some rules you have to follow.
Rules regarding Roth conversions before 59 1/2
The five-year rule dictates that if you make a Roth conversion and withdraw any of the money within five years, that money is subject to a 10% penalty. Secondly, if you do a Roth conversion and take a withdrawal before age 59 ½, you’ll get hit with the 10% penalty.
You have to be willing to leave the money alone for a while to avoid the 10% penalty. You also want the money in the account to benefit from the tax-free growth. Any gains won’t be taxed when you withdraw it after 59 ½.
How to do a Roth conversion
You can take money from a 401K plan and convert some of it to a Roth IRA. If the 401K provider doesn’t offer a Roth option, you’d need to open a traditional IRA and Roth IRA at the same company (let’s say Charles Schwab).
You’d then need to reach out to your 401K plan provider and let them know you want to do a rollover to the new IRA. They make a check payable to Charles Schwab to be deposited into your traditional IRA.
Then you have to complete paperwork requesting the Roth conversion and pay the taxes on the conversion. I’m in favor of paying the tax separately. Why? More money being converted is going to the Roth IRA. If you reduce the conversion to pay the tax, it won’t be as powerful.
It only takes a couple of weeks to move the money to the IRA. Then you have to invest the money in the Roth IRA.
How does it work with an existing IRA? When does it make sense to do a Roth conversion? Listen for all the details.
Resources Mentioned
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