59.5 Roth
If a client is under 59.5 AND has been in a Roth Conversion account for 6 yrs and takes a full distribution, they would obviously be hit with a 10% penalty, but would the gain also be included as income?
If a client is under 59.5 AND has been in a Roth Conversion account for 6 yrs and takes a full distribution, they would obviously be hit with a 10% penalty, but would the gain also be included as income?
Permalink Submitted by Joseph Arsenault on Tue, 2009-12-01 21:42
This is mostly incorrect.
Distributions are only subject to the 10% penalty if they are includible in gross income. The exception here is the 5-year exclusion period where the client needs to wait 5 years after the Roth conversion before distributions will escape the penalty. Since the client is 6 years into having the Roth since the conversion, distributions that are a return from the conversion (basis) are not taxed or penalized. The client is free there. Of course if there were subsequent conversions they would have seperate 5-year periods to worry about.
The gain in the Roth that is withdrawn will be taxed at ordinary income and also penalized with the 10% early withdrawal penalty because that amount is included in gross income.
-J