definition of basis in Roth IRA
I understand that contributions made to a Roth IRA can be withdrawn anytime without tax or penaltly. For the sake of my question, I will refer to the contributions as basis.
-When a traditional IRA owner completes a Roth conversion, is the amount converted to the Roth considered basis, and therefore can be withdrawn anytime without tax or penalty? The first full paragraph in the second column on page 5 of the March ’10 newsletter suggests that it cannot.
-When a participant of a traditional 401k rolls the account to a Roth IRA, is the amount converted to the Roth considered basis, and therefore can be withdrawn anytime without tax or penalty?
-When a participant of a Roth 401k rolls the account to a Roth IRA, is the amount deposited in the Roth considered basis, and therefore can be withdrawn anytime without tax or penalty?
Permalink Submitted by Alan Spross on Wed, 2010-02-24 23:30
Basis in a Roth IRA consists of the balance of regular contributions and conversion contributions. Note that Form 8606 in the Roth distributions section refers to basis in regular contributions and basis in conversion contributions separately, and separate balances must be tracked until the Roth is qualified.
Regular contributions come out anytime without tax or penalty and before conversions. Conversions are tax free and carry a 5 year holding period to avoid the 10% penalty, and come out after all regular contributions. After 5 years or reaching age 59.5, there is no longer a penalty on withdrawal of conversions.
Roth 401k to Roth IRA rollovers are somewhat different. If the Roth 401k was qualified, the entire amount is considered as regular contributions in the Roth IRA. If not qualified, only the actual amount of regular Roth 401k contributions are added to the Roth IRA regular contribution total.
Permalink Submitted by Thomas Ferry on Thu, 2010-02-25 13:05
Thank you for the clear and concise explanation.
As regards withdraws w/out the 10% penalty, I presume it’s the longer of 5 yrs or 59 1/2?
Also, before reading your comment about a non qualified Roth 401k, I had always thought that the word “qualified” and 401k were somewhat synonomous.
Under what conditions would a Roth 401k not be qualified, and how unlikely is it to occur? How would I or a participant know if the Roth 401k is non qualified?
In the event that the Roth 401k is non qualified, does rolling the non qualified Roth 401k to an existing Roth IRA (that is older than 5 yrs) allow for the amount of the Roth 401k that exceeds basis to be withdrawn without taxes and penalty and not be subject to the longer of 5 yrs or age 59 1/2?
Permalink Submitted by Alan Spross on Thu, 2010-02-25 17:55
“Qualification” here is in reference to the status of the individual’s account in either a Roth 401k or a Roth IRA vrs. the type of plan itself. For both Roth type accounts qualification occurs after a 5 year holding period PLUS reaching age 59.5 or a couple other exceptions such as disability or death.
Since the Roth 401k plans were only offered in 2006, none of them could be qualified for tax free earnings until 2011 at the earliest even for employees over 59.5.
If a non qualified Roth 401k is rolled into a Roth IRA, the aging of the Roth 401k is erased and the IRA aging is used. In your last paragraph assuming the Roth IRA is qualified, then the Roth 401k earnings become qualified also. But if this was the first Roth IRA, the 5 year holding period would have to start over from scratch. Again, qualification for these purposes only determines when the earnings become tax free. The contributions themselves are always tax free. Before a Roth IRA becomes qualified, the earnings always come out last, therefore taxes would not be incurred until after all the contributions were already distributed.
Permalink Submitted by John Boyd on Sun, 2017-02-05 10:18
I have 100 shares xyz purchased in my ROTH IRA @ $175 .00 a share three years ago. Current value is $50.00 a share. If I had the brokerage transfer the 100 shares from the ROTH into my regular cash account would I stand a chance of the original purchase date and $ amount transfering into the cash account. Pay tax on the $50 X 100, and then be able to sell the stock realizing a handsome loss ($125 X 100) to apply against my other Schedule D gains? Thank you.
Permalink Submitted by Alan - IRA critic on Sun, 2017-02-05 16:51
No. If you distribute an investment from an IRA in kind, the cost basis is the value of that investment on the date of distribution. xyz would therefore have a cost basis of $50. If you sold it immediately, you would have a very small loss or gain or possibly no change. Meanwhile the distribution from the Roth would likely not be taxable because it would come from your Roth basis (total of your regular or conversion contributions less what you distributed previously). If you feel that these shares have little chance of recovery you should sell them inside your Roth IRA and reinvest in another investment. That keeps value in your Roth IRA where any gains will eventually be tax free.