over 59 1/2 roth conversion withdrawals w/in 5 years
My client is a former CPA. He has done some research and believes that he can convert all of his IRA assets $725k in 2010 and then begin to withdraw a year later with no penalities because he is 62 and over age 59 1/2. Everything I read states that there will be some penalty on the withdrawal because he has not waited 5 years. We have multiple accounts and we will be withdrawing from a smaller roth conversion IRA accounts in 2011. $125k for him and $130k in his wives name. What, if any, type of penalty will he be facing. I don’t want him to make a mistake because he is interpretting things in a way that benefits his situation. I would be excited to be wrong about his facing a penalty. Thank you!
Permalink Submitted by Alan Spross on Wed, 2009-07-15 17:54
He is correct about not having to pay a penalty. The 5 year holding requirement ends at age 59.5 regardless of when the conversion was done. Conversion amounts can be withdrawn immediately after turning 59.5 even if the conversion was done at 58 without penalty.
However, there is something else to be concerned with under his plan. Using the two year tax deferral, his 2010 conversion would result in half the conversion being reported in 2011 and half in 2012. But if he takes withdrawals in 2011, the income tax bill will be accelerated. Along with the large gross amounts he is converting, this could inflate his marginal tax rate in 2011, not to mention the fact that the Bush tax cuts expire in 2010, so take rates in 2011 and 2012 might well be higher.
In working on his plan, he also has the option to Opt out of the two year deferral, and convert amounts in each year that do not inflate his marginal rate too much. He would then report the income for the conversion in each year he does one, and would have better control. If he does not opt out of the deferral, none of his tax bracket for 2010 is used for conversion reporting.
Permalink Submitted by Edward Czapor on Wed, 2009-07-15 20:58
Or he could consider taking his distribution from his TIRA in 2010 which would still be penalty free, to fill the tax bracket. This would nearly be equivalent to a conversion since withdrawals so close to conversion are planned. Taxes on a lesser conversion in 2010 could still be deferred to 2011 and 2012 with more funds getting into the Roth earlier than opting out and converting in each year.