OLD CONVERTED ROTH
I have two sets of questions – both regarding a Roth IRA that was converted several years ago. I have a client, aged 52, who elected to convert her pre-tax IRA to a Roth back in the late 90’s when the concept of Roth conversions was originally introduced. She would like to make a withdrawal from this same Roth account now; am I correct in assuming that her basis is tax free and can be withdrawn at any time now and that the earnings cannot be withdrawn without a 10% tax penalty because she is younger than 59 1/2? And to further stretch this concept –she would like to convert a current traditional, pre-tax IRA into the same existing Roth account. If she does so, can she a) convert into this same Roth keeping the original 5 year holding rule intact or b) will she need to open a second Roth conversion account and move the new converted assets/monies into that account to satisfy a new 5-year holding rule? Thanks.
Permalink Submitted by Alan Spross on Thu, 2009-11-19 19:05
Any distributions she would take follow the “ordering rules” for non qualified distributions. If she has ANY regular contribution balance, they come out first. If none or after these are distributed, she starts with the oldest conversions first. Conversions done over 5 years ago come out tax and penalty free as well. When all but the earnings have been withdrawn, the earnings come out subject to tax and early withdrawal penalty of 10%.
If she does another conversion now, it is better to open a new Roth account to receive it. This is more for recharacterization purposes than for the 5 year holding period. She will have a 5 year holding period for new conversions regardless of whether she converts to the original or a new Roth account.
Evidently, she needs some money from her IRAs. Tapping those old conversions is a way of getting funds out tax and penalty free. Doing new conversions will replace these funds and will be taxed, but any penalty is avoided. Of course, the new conversions will be subject to penalty if withdrawn before their new 5 year holding period.
Clients should keep a tally sheet showing their Roth history, ie the years and amounts of regular contributions and conversion contributions. Distributions should also be shown and they reduce the remaining balance of contributions to which they are applied. SInce taxpayers do not report regular Roth contributions, they are often at a loss in reporting any distributions they take on Form 8606, as required. Keeping organized records is a must. Alternatively, good tax software in which all prior Roth activity has been reported, can do the job for you, but it needs to capture all Roth transactions back to the opening year of 1998.
Permalink Submitted by [email protected] on Thu, 2009-11-19 20:44
Thanks!