The Cash Flow Clock: For Retirees - Book - Page 66
The Cash Flow Clock
Conversions – Roth conversions are when we transfer
assets from tax deferred accounts into tax free Roth
accounts. The tax is due in the year that the
conversion is made. There are no government limits
on the amount that can be converted. We can convert
no matter how much money we are making. There is
also no earned income restriction. We can convert at
any time, even if we are no longer working.
When we make Roth conversions, we can withhold
the taxes from our IRA. The net amount will go into
the Roth and any growth will be tax free. But there is
a better way.
We cannot convert non-qualified assets to Roth
accounts, but we can use them to pay tax on our
conversions. If we can pay the taxes from our
savings or other non-qualified assets, then the full
amount of the conversion ends up in the Roth, giving
us more assets to grow tax free. This is the most tax
efficient way to do a conversion, as long as we have
sufficient assets to cover the taxes.
If we are under 59.5, this is the only way we should
pay taxes on our conversion. If we withhold for
taxes, the amount withheld will be subject to a 10%
penalty, in addition to the tax. We want to avoid this
penalty if we can.
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