Roth Conversion Case Clarification
Client is 58 year old and expects to retire in 4 years. She currently has a small Roth that she’s held for 5 years. She also has a traditional IRA held for 5 years. Here are the questions:
1. Because the client is under 59 1/2, the benefit of the Roth conversion is that she will not be hit with the 10% early withdrawal penalty. Is that correct?
2. If she initiates a new Roth into which she transfers her old Roth and converts the traditional IRA into the new Roth, will she be subject to the 10% early withdrawal penalty upon withdrawal of the funds from the Roth at retirement in 4 years (post 59 1/2)?
Permalink Submitted by Alan Spross on Fri, 2008-01-18 17:12
1) Not necesarily. While there is never a penalty for the conversion itself, if the conversion funds are withdrawn prior to completion of a 5 year period for each conversion, the penalty applies. This penalty disappears at age 59.5 just as in a distribution from a TIRA. Therefore, this does not avoid the early withdrawal penalty. Client’s regular contribution amounts that have been made to the Roth CAN be withdrawn without tax or penalty anytime, and they come out first before any conversion dollars. Of course, at 58 this client is very close to 59.5 and the end of any early withdrawal penalties if she can wait that long to take distributions.
2) Answer included above. Short answer is No. At 59.5 all her Roth assets will be considered “qualified”. That means that the entire balance can be distributed tax and penalty free. The 5 year conversion holding period is wiped out at age 59.5.