Basic Roth Distribution Question
I should know this, but a group discussion produced several differing opinions.
If a client opens a Roth account with $20,000, can he turn around in a month and take out the $20,000 penalty free? I’ve always understood principal can be removed at any time due to the fact that taxes have already been subtracted.
However, If a client opens a Roth account with $20,000, and a year later he has $20,500 ($500 in earnings) he can take out the $20,000, but the $500 is subject to the 5-year / 591/2 rules.
Thanks in advance.
Permalink Submitted by Terri Ward on Tue, 2010-10-05 16:49
You are correct, the $20,000 can come out penalty free, but the $500 gain is subject to tax and penalty if the client does not meet the 5 year rule & is under age 59 1/2.
Permalink Submitted by Alan Spross on Tue, 2010-10-05 16:58
Depends on what they mean by “opening a Roth with 20k”. Since this is far more than a regular contribution, it would have to either be a rollover from a pre existing Roth or a conversion. If this is a conversion, there is a 5 year holding period for each conversion until the client reaches 59.5. So if they convert and then withdraw the conversion funds before 59.5 (ordering rules apply), there is a 10% penalty.
If a rollover from a prior Roth, any distribution would be taxed in the same manner as if the rollover did not occur.
Permalink Submitted by Terri Ward on Tue, 2010-10-05 17:05
Good point Alan…I was assuming that the $20k was all contributory over the last several years. I agree completely on the conversion & 5 year rule.
Permalink Submitted by Kevin DeNardo on Tue, 2010-10-05 17:29
Thanks much gentlemen,
So, in summary:
1.) Client who walks in with $20,000 check and opens a Roth, can take funds out anytime no questions.
2.) Client to converts TIRA to Roth is subject to 5-year/59 1/2 rule.
3.) Client who rolls over a Roth, whatever rules that existed for original Roth are carried over to new rollover Roth.