Asking this question again – Roth conversion and 10% penalty

Submitted by Christopher Gregory on Thu, 2009-02-12 01:32

I’ve asked and still haven’t gotten a clear answer – not even from the IRA Masters.

If I convert a traditional IRA to a Roth – I pay the income taxes – got that. So I can pull money out of the Roth at any time after and pay no income taxes. BUT WHAT ABOUT THE PENALTY???

If I’m under 59 1/2 – (say I’m 40) I must leave the money in the Roth for 5 years. If I don’t, and I take money out, there is a 10% penalty. OK

If I am 58, do a conversion, and pull money out after I turn 59 1/2, am I subject to the penalty if I pull the money out within 5 years – before I turn 63?

Following conversion, is [u]any[/u] distribution after age 59 1/2 exempted from the penalty, no matter what?

If I do the Roth conversion after I am 59 1/2 , am I completely exempted from the 5 year waiting rule? Can I pull money out the week after the Roth conversion with no penalty if it all occurred after 59 1/2?

Hope someone can give me a crystal clear answer.



Submitted by Edward Czapor on Thu, 2009-02-12 02:31

Chris,

I thought I gave you a clear answer in your earlier post, but I will try again. The 5 year holding for penalty on conversions applies only if you are under 591/2. This rule is in place to prevent making a conversion and then withdrawing to get around the early withdrawal penalty. Once you reach age 591/2 there is no early withdrawal penalty and therefore the five year holding no longer applies. So if you are 591/2 or older you could convert and withdraw the next day without penalty on the conversion. You can also withdraw from a traditional IRA without penalty, so no 5 year holding period on Roth conversions is needed.

Ed C.

Submitted by Edward Czapor on Thu, 2009-02-12 02:45

Should have added that the 5 year holding ends when you reach age 591/2. You do not have to hold for 5 years if you reach this age before the 5 year period ends.

Submitted by Irma Flynn on Wed, 2016-10-19 01:33

Should I convert my Traditional IRA to a Roth at my age?  What are the tax consequnces?  Would I have to pay tax on a Trustee to Trustee conversion?  Does it get reported to IRS – 1099?

Submitted by Alan - IRA critic on Wed, 2016-10-19 02:15

  • If you convert you will have to complete your annual RMD before converting. You will then be taxed on both the RMD and the conversion. While you are already in retirement, conversions may still make sense if you can convert in a certain year at a lower rate than what you expect your rate to be in the future. For example, if you have high itemized deductions due to medical costs or charitable contributions that are much higher than usual, you may be able to convert at a lower rate. Another factor is the expected tax rate of your beneficiaries. If you choose to consider the interest of your beneficiary as well as your own, conversions will help the beneficiary if they are expected to be in a higher tax bracket than you are. They then inherit more Roth and less TIRA.
  • Conversions are fully taxable unless you have basis in your IRA from non deductible contributions. Whether you convert by direct transfer or 60 day rollover, the distribution is reported on a 1099R and you will have to report it on Form 8606 with your tax return. Remember, conversions get a do over – you can recharacterize (reverse) all or part of a conversion up to 10/15 of the year following the conversion. You could wait to see how much the conversion increases your tax bill and whether the conversion has gained or lost money to determine if you will recharacterize or not.
  • For most people conversions cost less if done in the period between retirement and the start of RMDs and SS because your income will be lower. Once RMDs and SS benefits start, the opportunities are less obvious and amount to tax circumstances in the particular year that may be non typical for you.

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