I am 66 and considering a 401(k) conversion to a traditional IRA and then into laddered Roth IRA CDs. I plan to live on the interest earned by the CDs, but I have been told that if I withdraw the interest within five years of the conversion, it will be taxed. Is that true?
No. The interest you withdraw won’t be taxed, but it’s easy to understand the confusion.
The law does set a five-year waiting period before earnings may be withdrawn from a Roth tax-free, regardless of the age of the IRA owner. You don’t have to worry about that, though, thanks to the so-called ordering rule. It holds that the first money withdrawn from a Roth IRA is considered to be money you put in by annual contributions -- and it comes out tax- and penalty-free at any age. Once you’ve withdrawn all your contributions, you begin to dip into converted amounts (tax-free at any age and penalty-free for those age 59½ and older). Only after you have withdrawn all the contributions and converted amounts do you tap into earnings, which will be taxed if you withdraw them within five years of the conversion.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
So you needn’t fret that the money you’ll be withdrawing is really interest earned on the CDs. That’s not the way the law sees it. Only after you have depleted all contribution and converted amounts does the IRS think you’re dipping into earnings. And, if five years have passed since the conversion, that money will be tax-free, too.For more information, see FAQs on the Roth Conversion Rules.
-
Here's How To Get Organized And Work For YourselfWhether you’re looking for a side gig or planning to start your own business, it has never been easier to strike out on your own. Here is our guide to navigating working for yourself.
-
How to Manage Risk With Diversification"Don't put all your eggs in one basket" means different things to different investors. Here's how to manage your risk with portfolio diversification.
-
Getting Out of an RMD Penaltyretirement When your brokerage firm miscalculates your required minimum distributions, you have recourse.
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
-
It’s Not Too Late to Boost Retirement Savings for 2018
retirement Some retirement accounts will accept contributions for 2018 up until the April tax deadline.
-
How to Correct a Mistake on Your RMDs from IRAsretirement If you didn't take out the correct required minimum distribution because your brokerage firm made a mistake, the IRS may show some leniency.
-
Ways to Spend Your Flexible Spending Account Money by March 15 Deadline
spending Many workers will be hitting the drugstore in the next few days to use up leftover flexible spending account money from 2018 so they don’t lose it.
-
Making the Most of a Health Savings Account Once You Turn Age 65
Making Your Money Last You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.
-
Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing
IRAs Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.
-
When You Can Expect to Receive Your Tax Refund
taxes The quickest way to receive your tax refund is to file electronically and have the money directly deposited into your bank account.
