Backdoor Roth Contribution Distributions
I know this has been covered, but it still confuses me a bit. Client UNDER 59.5 makes a non deductible IRA contribution, converts to Roth IRA (BD Roth contribution). Do they need to wait 5 years to access the principal contribution? I’m guessing they need to wait 5 years to access the EARNINGS without a penalty, but the principal?
Permalink Submitted by Alan - IRA critic on Sun, 2021-04-04 16:23
Assuming client does not have other pre tax non Roth balances, the conversion would be non taxable and only the taxable portion of a conversion is subject to the 5 year holding period. There might have been a small amount of earnings before the conversion was processed which would have been taxable, and that small portion is subject to the 10% recapture tax if that conversion is withdrawn within 5 years. Again, I am referring to earnings generated in the TIRA prior to conversion, if any. Earnings generated in the Roth IRA after the conversion are Roth earnings, but they come out last after all regular and conversion contributions to all Roth IRAs.
Example: Make 6000 ND TIRA contribution which earns $7 before the conversion. Converted amount is 6007. If that conversion is withdrawn within 5 years, only the $7 is subject to the penalty (.70), the 6000 is not. The taxable portion of any conversion comes out before the non taxable portion, so the $7 would come out first if any part of the conversion is withdrawn within 5 years.