Distributions from Roth Conversions

Submitted by Daniel White on Wed, 2009-01-07 15:31

I have a client who wants to convert a $300,000 IRA to a Roth in 2009. When we convert, he will be taxed on the $300,000. If the account earns 5% in 2009, it will be worth $315,000. If the client needs to pull out $20,000 in 2010, will any portion of the $20,000 be taxed??

I have been told FIFO applies meaning none of his $20,000 would be taxable. I have also been told LIFO applies meaning $15,000 of the $20,000 will be taxed since it did not “season” for 5 years.



Submitted by mk foss on Wed, 2009-01-07 18:18

Withdrawals from Roth IRAs first come from contributions – none of those in your example. Then taxed conversions – you have that. Then non-taxed conversions (basis in IRAs converted) – none of that. Then earnings.

The FIFO label is a little confusing in this context.

In your example, nothing would be taxed.

Submitted by Alan Spross on Wed, 2009-01-07 23:58

However, if he withdraws any of the converted amounts in the first 5 years, there is a 10% penalty. The penalty does not apply if the distribution is done after age 59.5.

If he had a prior Roth, the amount of regular contributions would come out before any conversion dollars, but if this conversion is his first Roth contribution and he is not yet 59.5 or meets another exception, the penalty would apply.

300,000 is a large amount to convert in one year, and would increase his marginal rate in most cases. Also, his modified AGI without the conversion amount must not be over 100,000 in 2009 to qualify for a conversion.

Submitted by Linda Randazzo on Fri, 2009-01-09 14:18

[quote]However, if he withdraws any of the converted amounts in the first 5 years, there is a 10% penalty. The penalty does not apply if the distribution is done after age 59.5.
[/quote]

Unless there is an exception, correct?

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