Pre 59 1/2 Roth Conversion & Excise Tax?
Can a person Pre 591/2 convert to a Roth from an IRA or qualified plan without paying the 10% Excise Tax? I’ve posed this question once but I would like to make sure since I have a younger client who is considering doing a conversion. Is there a reference in an IRA publication?
Permalink Submitted by Alan Spross on Wed, 2009-02-25 19:50
The 10% tax does not apply to Roth conversions. This is stated on p 29 of the 2007 edition of Pub 590 under “Allowable Conversions.” However, the client must maintain the conversion dollars in the Roth for 5 years or pay the 10% penalty if he withdraws the converion funds from the Roth. This 5 year holding period prevents someone from doing a conversion just to get at the funds without paying a penalty.
Permalink Submitted by Jamie Halverson on Wed, 2009-03-18 15:31
What if the client has an existing Roth IRA and we would be converting additional funds into the Roth? Am I correct that we would use the start date of the existing Roth to determine the 5 year holding period?
Jamie
Permalink Submitted by Alan Spross on Wed, 2009-03-18 17:43
No. You are referring to a different 5 year holding requirement. There are two different 5 year holding requirements, one that effects when a Roth becomes fully qualified and fully tax free including earnings, and the other that effects the 10% early withdrawal penalty on conversions.
You are referring to the first one above, and that period DOES begin as of Jan 1st of the year for which your first valid Roth contribution is made. But the conversion holding period applies to each separate conversion whether it is made to a new Roth account or into an existing one. This requirement ceases at age 59.5 or if there is another penalty exception that applies.
If a conversion is made into an existing Roth, any distributions come first from regular contributions and next from conversions. Therefore, withdrawals up to the amount of regular contributions would be tax and penalty free, before the conversion funds are tapped.