Roth conversion
If a client has a Roth for 8 years. They now wish to convert another IRA to Roth, does this new conversion have to wait 5 years before making any withdrawals? Or can they make withdrawal and not create a tax or a penalty shortly after the conversion?
Permalink Submitted by Alan Spross on Mon, 2010-01-18 18:18
It depends on their age.
1) If over 59.5, their Roth is fully qualified and all distributions are tax and penalty free.
2) If under 59.5, their withdrawals come under the ordering rules as follows:
a) First out is their regular contributions, tax and penalty free
b) If they take out more, they go into conversions starting with the oldest. Those done within the last 5 years incur the 10% early distribution penalty unless another exception applies other than age (disability, first home, certain medical, etc). This penalty only applies to the taxable portion of those conversions, which is usually most or all of the converted amount.
There is another wrinkle also for 2010 conversions only. If client defers the conversion taxes for two years but takes distributions of those same conversions prior to 2012, the tax bill for the amount distributed is accelerated into the distribution year.
PS – please post in the discussion forum section. This section is for website administrative issues. Thanks.