Traditional 401 to a ROTH IRA

Technical topics regarding tax preparation.
#1
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TP retiring at age 60 and wants to move his Traditional 401 to a ROTH IRA (not established yet) over the next two years before starting social security at age 62. He wants to move as much as he can into the ROTH IRA without hitting the 22% tax bracket. He'll only be getting a pension and some other small amounts of income so he should have room to convert some each year without hitting 22% bracket.

If he'd establish a ROTH IRA on 1/1/21 and move some of his Traditional 401 to the ROTH IRA he could at anytime withdraw the ROTH IRA contributions without tax consequence but would have to wait 5 years from 1/1/21 to withdraw earnings without tax consequences, correct?

Also, if anyone would have other suggestions I might want to offer him in this case, that would be great!
Thanks!
 

#2
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If he'd establish a ROTH IRA on 1/1/21 and move some of his Traditional 401 to the ROTH IRA he could at anytime withdraw the ROTH IRA contributions without tax consequence but would have to wait 5 years from 1/1/21 to withdraw earnings without tax consequences, correct?


Not correct. Under Treasury Regulation 1.408A-6, Q&A-2, for the purposes of this 5-year rule the clock starts the first time any money is funded into any Roth IRA, whether by contribution or conversion. So the ROTH start date for a first contribution made between 1/1/20 and 4-15-21 is 1/1/20 not 1/1/21. 5 full tax years must pass to satisfy the 5 year holding period, 2020,21,22,23,and 2024. 1/1/25 starts his qualified distribution period.
Note he could take tax free ROTH distributions up to his basis anytime as he is over 59 1/2. (withdrawals within 5 years of conversion by someone who is already over age 59 1/2 are not subject to the early withdrawal penalty, regardless of the 5-year conversion rule, simply because being over age 59 1/2 itself is an exception to the penalty)
 

#3
lucyko  
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He's going to incur a substantial reduction in social security by starting benefits at age 62 . Anyway he could stretch that out a few more years to have a higher benefit while at the same time converting more of his IRA to a Roth and still be in teh 22% bracket .
 


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