Related to Roth Conversions
If I convert say half my IRA assets (presently a rollover IRA), to a Roth, I know I have to wait 5 yrs to take money out. I understand that this does not apply to the principal that I transfer, rather the earnings generated within the Roth. If I already was taking say 4% per year of that which I converted to the Roth, and continue to do so after the conversion, those payouts ( from the roth ) are alledgely tax free. Is this true?
Permalink Submitted by Alan Spross on Mon, 2010-05-10 22:38
Your understanding of the distribution rules is not correct.
I will assume that you are not yet 59.5. If so, there are two different 5 year holding periods:
1) From the date of your first Roth contribution. This holding period is required for earnings to be tax free and you also must be 59.5
2) For each specific conversion, a 5 year holding period to withdraw conversion funds without a 10% penalty.
For your conversions, the taxes are paid in the year you convert (except for 2010), but if you withdraw those funds within 5 years, you owe a 10% penalty. But if you had made regular Roth contributions as well, your distributions come first from the regular contributions tax and penalty free, and when these have all been distributed, then you tap the conversions. After 5 years, your conversions can be tapped both tax and penalty free.
Once you reach 59.5 AND 5 years has passed since your first Roth contribution, then your Roth is fully qualified. That means that all distributions are tax and penalty free.
You have been taking 4% a year out of your traditional IRA? Are you retired or taking substantially equal payments to avoid the penalty?