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Start the 5-Year Roth Clock for Railroad Retirement

Video Retirement Financial Planning Investing Taxes


Make sure your five-year Roth IRA clock is ticking when it comes to a tax free railroad retirement.

Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara, Highball Advisors, and today we're going to talk about a really great tool that I like to use with my clients as we try to build tax free retirement income, and that's really through Roths and Roth conversions. It really all starts by opening up that Roth and starting the five-year clock. What am I talking about, right? There's rules inside the Roth that means you have to have a Roth open for five years before you can take a conversion amount or earnings amount of your Roth out tax free.

All right. Let's step back and learn about the Roth real quick just to refresh everybody's memory. Right? A Roth is a tax free retirement account. All right? The only contribution that you can make in it are after tax contributions. Right? Inside there you'll have contributions. That annual, hey, I can make up to $6,000 a year. Over 50, I can make $7,000 a year contribution into a Roth IRA, assuming you're not earning too much money. All right? Then you can also put conversions in there. Right? I talk about that all the time. Roth conversions taking money from your regular traditional IRA that's tax deferred, and converting it, paying the ordinary income taxes and putting it to a tax-free Roth. All right?

Then what else can be in the Roth is the earnings, right, from your investments, stocks appreciate, bonds appreciate, and those are the three things in there. However, you need to open up that Roth account for five years before you take it out in retirement. Otherwise, you're going to get penalized on it. It's starting that five year, what we call a forever o'clock. Let's say, in this example here I put up on the board, let's say you're 50 years old and you open up a Roth, and you put $6,000 in it. Okay? That clock now is starting for you. At 50, right, once you get to 55, your forever clock is done, which is great news because when you want to do other things in life, like conversions, those type of things, over at 59 and a half, that can all come out and not wait five years.

Let me just show you here. If I put this $6,000 in, right, you could always take out the contribution right away without penalties. All right? It's only the earnings where you'll get the penalty. Let's say at 53, you do a conversion, maybe a $20,000 conversion, that type of thing. That's going to have a separate clock. You have to wait five years before you can get the conversion amount out of that if you wanted to take the money out. That's the five-year clock. However, that's not your forever clock. That's just a five-year clock. If you did another conversion at 55, that would have another clock on it, right, that type of thing.

What happens is, as you've done the five-year clock, you get to 59 and a half, you have no restrictions now on taking back your contributions, your conversions and your earnings. Right? All bets are off, no more restrictions, and off you go to the races. All right? 59 and a half is the big thing. You want to get the Roth IRA started at probably about five years before that. What will happen is let's say if you're a railroader and you retire at 58 and you want to do some conversions, right? You're still going to have to, if you don't have any Roths open, you got to wait five years. Let's say, if you did a sizeable conversion at 58, well, 59 and a half doesn't mean as much because now you have to wait to 63, right, because you don't have the five years yet.

What I recommend is open up that Roth IRA. You can put $100, $200 in there, whatever, but that will satisfy the five-year requirement. Then as you get closer, you can start thinking about some tax planning ideas. It's all about getting prepared for railroad retirement. It's not like you wake up in the morning and go I'm retiring today. Okay? No, all these things have to be done well in advance. This is one of those things that have to be done well in advance is set that five-year forever clock for you. Right? 59 and a half, get that Roth opened up by 54 and a half, right, so that way you'll be ready for retirement.

Feel free to reach out to me to discuss these Roth conversions. Very important. I go through this in my boarding for railroad retirement assessment. For those at or near or in retirement, this is really good stuff. Great tax planning ideas here. Sign up for that. Subscribe to my YouTube channel. Click on the notification bell. We're over 4,000 subscribers, very excited about that. Then everyone, until next time, please stay safe, stay on track and take care. So long everybody. Bye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved from Highball Advisors, and all rights are reserved.