Roth 5 year redux
Hi Ed,
I am reading confusing information about the Roth IRA 5 year distribution rules.
In 2003 I transfered $1k from a trad ira to create a new roth ira in 2003.
In 2004 I transferred $100k from the same trad ira to the roth ira. All taxes were paid on the conversion. All funds are from rollover, no contributions.
I will be 59 on July 5, 2009.
It is my understand that the soonest I may take all the amounts out without tax and penalty is January 1, 2010.
I would appreciate your thoughts.
Permalink Submitted by Edward Czapor on Fri, 2008-02-01 21:45
Since you have estsblished a Roth for at least 5 years, all withdrawals will be qualified, tax and penalty free upon reaching age 591/2. In your case this would be Jan. 5, 2010. Both converted amounts ($1k and $100k) could be withdrawn without tax and penalty in 2009, since you have met the 5 year holding for conversions for both, and this represents your basis in the IRA’s. The $1k could be withdrawn in 2008 if desired, since the 5 year rule applies to each conversion on a FIFO basis.
Permalink Submitted by Frank on Sat, 2008-02-02 17:48
What about the money that has accumulated in it beyond the initial converted amounts of $1k & $100k ?
Permalink Submitted by Alan Spross on Sat, 2008-02-02 18:46
The earnings become tax free after the Roth has become qualified. To become qualified as of age 59.5, 5 years including the initial year of your Roth must have passed. You accomplished that on 1/1/08. Therefore the earnings will be tax free when you reach 59.5 on 1/5/2010. Also, note that any withdrawals you take out prior to that are not considered to have come from earnings until all your regular and conversion contributions have been withdrawn.
In summary, in 2008, the most you can withdraw tax and penalty free is 1k.
In 2009, you could withdraw up to 100k tax and penalty free.
In 2010, you can withdraw any remaining amounts in the Roth tax and penalty free as of January 5th.
If you meet another exception other than age 59.5, the above conclusions would be altered (eg disability, first home exception etc)
Permalink Submitted by [email protected] on Fri, 2008-02-08 17:20
After reviewing the posts, attending training classes and comparing those to Publication 590, I remain confused about withdrawing funds following a conversion and following the initial establishment of a Roth. I too have received various answers from “expert” IRA trainers. I since that part (but only part) of the problem my be pre vs post 591/2 senarios. Here are my specifics:
1. Prior to 591/2 can I withdraw my conversion amount without penalty any time after I have completed the conversion?
2. Prior to 591/2 can I withdraw my regular Roth IRA contribution amount without penalty.
3. Does 591/2 have anything to do with the above answers?
4. How do earning vs contributions effect the above answers?.
5. Assuming I established a Roth IRA five yrs and 1 day ago, can I now convert my tradtional IRA to a Roth IRA and consider that the five year rule for withdrawals has been met, even though Pub 590, page 64 says each conversion has a separate 5 yr rule? If so, can that remain a separte account or must I combine to two in order to satisfy the rule.
6. Do the withdrawal rules apply only to earnings and not to contributions or conversion amounts?
Thanks for the help.
hhg
Permalink Submitted by Alan Spross on Sat, 2008-02-09 00:27
1) No. Prior to 59.5, any distributions coming from conversions held under 5 years are subject to the 10% penalty. If you have older conversions, that money comes out first, tax and penalty free, but if you withdraw those that have not reached the 5 year requirement, the penalty would apply. But, note that there are other exceptions besides age 59.5, which would waive the penalty.
2) Yes, you can withdraw regular Roth contributions at any time without tax or penalty.
3) Age 59.5 is the most frequent exception to the early withdrawal penalty, and also one of the two requirements for a distribution to be qualified as tax free. The other is the 5 year holding period.
4) Regular contributions – see 2 above
Conversion contributions – become penalty free after 5 years OR after age 59.5.
Earnings – always taxable until Roth is qualified by meeting 5 year holding requirement AND age 59.5 or other exception such as disability. Also subject to penalty if taxable and prior to 59.5.
5) There are two separate 5 year requirements. In your example, each conversion DOES have to meet a separate 5 year test OR you must be 59.5 to avoid penalty on conversions. This holds true even if your original Roth contribution was 10 years ago.
6) Distributions are subject to the “ordering rules” until they are qualified. That means that regular contributions come out first, conversions next from oldest to newest and earnings last. Each of those is subject to it’s own rules regarding taxes and penalty. It does not matter if you have several accounts. For taxation rules, they are all considered as one combined Roth IRA.
Note that there is a special exception for up to 10,000 for first time homebuyers that would affect the above statements.
Permalink Submitted by Bill Briner on Tue, 2008-02-12 14:16
Wow! Great questions and even greater answers. I finally understand when and to which parts (contribution vs. earnings) early withdrawal penalties apply to ROTH Conversions.