ROTH IRA Distribution following after-tax (+growth) rollover to ROTH

Submitted by Jessica DeBold on Wed, 2023-06-21 17:46

Client is over 59.5 and has a total of $67,000 that he is intending to roll into his ROTH. This is composed of $50,000 in after-tax contributions plus $17,000 of applicable growth. The existing ROTH is only 2 years old.

. The client ultimately wants to start taking distributions from the ROTH IRA immediately following this transaction and I wanted to make sure I understood how this transaction would be classified. There is currently around $20,000 in the ROTH and I understand the order and tax implications of that portion. Regarding the funds in this transaction, can you explain how the $67,000 from this transaction would be treated? Would all $67,000 be considered conversion principal and therefore he is able to distribute tax and penalty free at any time since he is over 59.5?

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Permalink Submitted by Alan - IRA critic on Wed, 2023-06-21 18:36

Yes, the 67,000 conversion basis can be distributed anytime tax and penalty free. After 59.5 there is no longer a 5 year conversion holding period.
But the Roth is still not qualified until 2026, therefore all distributions must be reported on Form 8606 and the ordering rules will apply. Therefore, client needs to determine how much of the current 20k is contribution basis or prior conversion basis, since those amounts come out first and contribution basis must be listed on line 22 and conversion basis (67k) on line 24. As long as his distributions prior to 2026 do not total more than 67k plus the basis amount for the 20k already there, distributions will be non taxable and penalty free. In other words, he must not tap any earnings in the Roth before 2026 or the earnings will be taxable.