Pre 59 1/2 Roth Conversions

Hey welcome to this two minute tax tip on pre 59.5. Roth IRA conversion. What happens? Well there’s a lot of times if you want to visualize what your tax diversification looks like I went back to my classroom and pulled out some of my old Klunder cash for visualization. All right. So what we find here at Centennial Wealth, a lot of times people have a really good hefty amount here in this tax deferred account.

Can totally make sense why that happens. They might have some in their savings account or in like a brokerage account. But then when it gets over to the Roth IRA or Roth for one or any kind of tax free accounts, it’s empty. So what we do is we look at your individualized and build out an individualized long term tax plan, and then we figure out, you know, how we can help you get tax diversified at the most efficient rate possible.

So one of the things that happens is if you’re 59.5 and you want to look at these Roth conversions, you have to be careful. So we’re going to try to mimic this so that you can better visualize it. So let’s say that you wanted to do a Roth IRA conversion before 59.5. Take it out of this bucket and put it into this bucket.

You can do that. Now when you do that, it creates a taxable event. And so we have to have a place that we can pay for those taxes penalty free. And so if we pay for the taxes out of this through withholding, what happens is, it’s subject to a 10% early withdrawal penalty. So what we want to do is say, okay, we’re going to bake that into the plan.

Move it over here. We have a tax liability. Now we can use these funds to pay for that tax liability that was created. Once we get to here now, okay, now we have to be we have to have this principal in here for five years, to avoid the five year rule. If you have questions on tax diversification, call us anytime.