5 year rule for IRAs
I am 38 and have had a Roth for 10 years. I recently added a large sum of money as a direct Roll Over from a 401K to a Roth IRA. Can I access this money without a penalty prior to 59 ½?
I am 38 and have had a Roth for 10 years. I recently added a large sum of money as a direct Roll Over from a 401K to a Roth IRA. Can I access this money without a penalty prior to 59 ½?
Permalink Submitted by Peter Lingane on Mon, 2011-01-17 21:20
The early distribution penalty is normally assessed on the taxable income associated with a distribution. Since the ordering rules recover basis from a Roth IRA first, there is often zero penalty for distributing part of a Roth IRA before age 59.5 because the taxable income is often zero.
Pundits quickly pointed out that it would be possible to take a distribution from a traditional IRA without penalty by converting to a Roth IRA and taking the distribution from the Roth IRA. To stop such shenanigans, a new rule was introduced that applied the early distribution penalty to the gross distribution from a Roth IRA if the distribution was sourced to a conversion less than five years previously and if the participant had not achieved age 59.5. See Pub 590, p.64 (2009 edition).
You can probably withdraw the basis in the 10-year old Roth IRA without tax or penalty but you will pay tax plus penalty if you withdraw earnings and you will pay the penalty only if you withdraw any of the amount “recently” converted.
Permalink Submitted by Peter Lingane on Mon, 2011-01-17 21:57
Follow-up Query: Thank you for answering my question regarding withdrawing money from my Roth IRA. With current law in 5 years could I widthdraw the money that I rolled over in 2010 from my 401K to my Roth IRA without a penalty?
Follow-up Response: Probably. It depends on the amount that you want to withdraw and the ordering rules. The ordering rules are set out in Pub 590, p. 66-7.
You might be able to avoid penalty before five years if one of the exceptions to the penalty applies. The exceptions are listed on p. 66 also. This publication is available for downloading for free on the IRS website.
You should confirm everything I’ve said with the firm that prepares your income taxes or with other sources since you know nothing about my qualifications and I have been known to make mistakes.