Distributions from a Roth Conversion
If a person meets all requirements to convert a traditional IRA to a Roth and pays the required tax to do so, when can they begin to make withdrawals tax free. Assuming they are over 591/2, I have been told by one source that immediate withdrawals up to the after tax principal converted would be tax free, but withdrawals cannot include gains as those would be taxed during the first five years? Is this accurate? I’m getting a lot of conflicting info. Thanks in advance for accurate replies.
Permalink Submitted by Al Fry on Sat, 2009-02-14 18:47
Correct. No conlict there. However the five year period starts with a pesons first Roth. Thats why everyone eligible shouve have one ASAP..
Permalink Submitted by Edward Czapor on Sat, 2009-02-14 18:50
Yes, that information is accurate. However, if there were any regular Roth contributions, they would be considered withdrawn first up to the principal comtributed. Also if a Roth was established prior to the conversion, the 5 year holding for taxation would start on Jan. 1 of the year of thr first Roth contribution. Contributed amounts, converted amounts, and finally earnings are withdrawn in that order. If a Roth has been established for at least 5 years and at least age 591/2, thrn all withdrawals including earnings are qualified, and therefore tax and penalty free.
Permalink Submitted by Alan Spross on Sat, 2009-02-14 18:54
Yes, it is accurate as a general statement.
But here are some additional factors:
1) If the Roth owner had already met the 5 year holding period from the date of his very first Roth contribution, then all distributions including earnings would be qualified, if over 59.5.
2) If the Roth is NOT yet qualified due to not having met the 5 year holding requirement for qualification, the earnings come out last. That’s why the conversions as well as any prior regular contributions could all come out tax free up to the amount of such contributions.
Proper reporting of Roth distributions on Part III of Form 8606 will arrive at these same conclusions, and only send the correct taxable amount, if any, to line 15b of Form 1040.