Distributing Basis of Non-Deductible IRA Roth Conversion
Assume no other qualified money…couple in their 30’s makes $500K. Contributes $5,500 non-deductible IRA each for 2018 and $6,000 each for 2019 then subsequently converts to Roth IRA (assume no gain). Now they have $11,500 each in a Roth IRA, which is all basis in the original non-deductible IRA. Can they access this basis penalty free just like a straight Roth IRA contribution since it truly is basis? Or is there a five-year waiting period to avoid the 10% penalty?
I understand that any growth that was converted or growth that occurred after conversion would not be accessible tax and penalty free—just looking for the original basis.
Also, does it change anything if the Roth that the funds were converted to was opened this year vs if it was opened 7 years ago?
Permalink Submitted by Alan - IRA critic on Fri, 2019-02-22 15:00
All contributions including taxable conversions are basis in a Roth IRA. What triggers the penalty on withdrawing conversion money in less than 5 years is whether the conversion was taxable or not. Here you have a non taxable conversion so effectively there is no holding period. However, this conversion still cannot come out before older conversions. Therefore, if there was an older taxable conversion under 5 years, that older conversion would have to come out first subject to 10% penalty on the amount converted. If all the couple does is make these annual non taxable conversions, they have access to the converted amount from day 1 without penalty. It does not matter when the first Roth contribution was done in this example. If a spouse has other Roth IRA accounts, for purposes of the ordering rules for taxation of Roth distributions, they are all treated as one combined Roth account, so it makes no difference whether these conversions are done to a new account or added to an older Roth account that has a number of Roth contribution types.