More clarification on 5 year rule for Roth conversions
Suppose a person converts from a traditional IRA to a Roth at age 58. Three years later they want to withdraw all funds from the Roth (lets say the entire amount in the Roth is comprised of the converted amounts at the individual’s age 58). What kind of taxes and penalties will they be looking at? Income taxes on earnings? Is there a 10% penalty because the funds were not held for more than 5 years even though the individual is older than age 59 1/2? If so, does that 10% penalty apply to all amounts–converted funds and earnings, or earnings only (assuming there are earnings?).
Thanks in advance for your assistance.
Permalink Submitted by Alan Spross on Wed, 2012-01-11 22:48
There is no 10% penalty on any amounts after age 59.5. Before age 59.5 the conversion funds would be subject to penalty for failing to meet the 5 year conversion holding period.
If the age 58 conversion was the first Roth contribution of any type, then the Roth will not be qualified for earnings to be tax free until age 63. But earnings would come out only after all the conversion funds were distributed and the conversion will come out without tax or penalty (after 59.5). If earnings were distributed before age 63 and after 59.5, they would be taxable, but no penalty.
Permalink Submitted by Jack Thomas on Wed, 2012-01-11 23:16
Thanks