roth ira rollover and 10% tax
If a client with a Roth IRA (over the 5yrs) fully liquidates their Roth at age 35…
a. if the total cash value tax free due to being over 5yrs, correct?
b. they will still have a 10% penalty on the total cash value, correc?
c. Can they rollover over the Roth cash value within 60 day and not pay the 10% penalty, correct?
Thank you
Doug
Permalink Submitted by Alan - IRA critic on Thu, 2021-07-08 20:39
If they have other Roth IRA accounts, all are treated as one combined Roth IRA. The Roths are not qualified until client reaches 59.5, so the 5 years is only important if the Roth was funded by conversions. Conversions done within the last 5 years will incur a 10% penalty if the conversions were taxable. Any gains in the Roth would also be subject to tax and penalty. However, a 60 day rollover will erase all tax and penalty, and would be reported on line 4 of Form 1040 as a rollover.
If there were no conversions done, just regular contributions, there would be no tax due as long as the amount rolled back at least equalled the gains in the account. He could keep the amount of his regular contributions without tax or penalty. To report a distribution that is not fully rolled over, Form 8606 would have to be filed and client would have to know what his contribution basis is as Form 8606 asks for this on lines 22 and 24.