Accessing funds in a converted Roth IRA
I am advising a client to convert a small traditional (rollover) IRA to a Roth IRA, paying the taxes on the conversion now for the potential tax free growth in the future.
I know that one of the features of a self-funded Roth IRA is that you can withdraw your [i]contributions[/i] free of taxes and penalties – providing a potential “emergency fund” of sorts – but I wasn’t sure how the rules differed for Roth conversions. Is the entire balance (after conversion) considered an after-tax contribution that can be accessed without taxes/penalty? Or would their be taxes/penalties whenever any funds from a converted IRA is tapped before 59 1/2?
Permalink Submitted by Alan Spross on Fri, 2008-08-29 22:16
If this will be the only client’s Roth IRA, then he cannot withdraw conversion dollars until 5 calendar years are completed without penalty. There is a 10% early withdrawal penalty, but no ordinary taxes.
However, there are certain exceptions to the penalty, the most likely being that he has reached age 59.5. Then there is no tax or penalty. For other penalty exceptions, see Pub 590, p 53.
But there is more to consider if this is NOT his only IRA. If he has an IRA that he has made regular contributions to, then those contributions always come out first without tax or penalty. This is true even if he takes those distributions from the conversion account because all his Roth IRA accounts are combined for tax purposes.