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Roth IRA withdrawals are Tax free, but in the Lifetime Planner they show as tax Deferred?

Doug Klanecky

We have several accounts that have been converted from Tax deferred IRA's to Tax free Roth IRA accounts. In the Lifetime planner, these always show as Tax deferred, ,not tax free. Over a ~20 year retirement, this makes a huge difference in planning. In the account details tab, tax deferred is a yes or no, but there's no way to leave both blank, or use a tax free yes or no. Any ideas how to work around this seeming oversight?

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Chris_QPW

If the accounts are created as Roth IRA accounts, then the Lifetime planner does calculate them correctly, even though it isn't clear that they do so.

This sort harks back to the history of Quicken that Roth IRA were an "add on". Here are the details on a Roth IRA account:

And now a traditional IRA account:

Notice that the only difference is selecting Traditional instead of Roth, the "Tax deferred" stays the same.

There isn't a "tax free" setting. The reason the developers can get away with this is because a more accurate phrase for "Tax deferred" would be "No effect on taxes". For instance, it has been noted many times that you can't record the tax ramifications of an IRA account in that account. You have to first transfer the gross amount to taxable account and do the split there.

So, in Quicken, including in Lifetime planner the taxes aren't directly associated with that account, instead they are done in another section of the fields/calculations. Basically, it doesn't matter if the money comes out of a traditional IRA or a Roth IRA for the field of the "withdraw" what matters is what they do in the tax field.

In a copy of my data file, I removed all sources of income other than Roth IRA accounts, notice there isn't any tax taken out:

Now with IRA/401K:

Crenshaw

Excellent explanation. I wish Quicken "Help" explained this. Thank you.

Scooterlam

@Paul Guagliardo You may want to have a look and vote for this Lifetime Planner Idea that requests better breakouts of Tax Free v. Tax Deferred withdrawals. Voting lets Quicken product team know of users interest in particular features.

https://community.quicken.com/discussion/7898294/lifetime-planner-idea-improve-how-roth-iras-are-displayed-and-modelled-in-ltp

Mark1104

@Doug Klanecky - part of the 'headache' is that the distributions from a Roth IRA is ONLY tax free if

a) you are over 59.5 years old AND the Roth has been open for 5 years at the point of distribution.

The IRS presumes that distributions occur in this order:

if you are over 59.5 years old:

all CONTRIBUTIONS - they are tax free upon distribution
all CONVERSIONS - they are tax free upon distribution
ALL EARNINGS - they are TAXABLE if the ROTH has been open for less than 5 years.

if you are under 59.5 years old

all CONTRIBUTIONS - they are tax free upon distribution
all CONVERSIONS - they are tax free upon distribution (but the 10% penalty applies if the conversion occured within the past 5 years)
ALL EARNINGS - they are TAXABLE and subject to a 10% penalty.

note: if you have multiple Roth accounts only 1 of them needs to be open for 5 calendar years to satisfy the 5 year requirement for all your Roth accounts. So an account opened on 12/31/22 gets credit for an entire calendar year.