Premature withdrawal penalty
Just a quick question. A client, over age 59.5, has been advised by his CPA that if he converts a portion of his IRA to his Roth IRA and then withdraws it within 5 years, he will be subject to a 10% early withdrawal penalty. I have advised him that I do not believe the CPA is correct, but want to to be absolutely sure I am not missing something. Who is right?
Glenn
PS I do not believe it’s relevant given the issue, but for what it is worth, the Roth was originally funded over 5 years ago.
Permalink Submitted by Alan Spross on Tue, 2009-12-22 05:23
You are correct and the CPA is wrong. All early distributions end at 59.5 even if the client converted prior to 59.5. The 5 year holding period for conversions just stops at 59.5. REF: Middle of second column of p 67 of Pub 590.
All the usual penalty exceptions apply to the Roth conversion holding period, not JUST reaching 59.5. Therefore, higher education expenses or certain medical costs would except the penalty even prior to age 59.5.
If client is still in the middle of a SEPP plan and converts, it still only triggers the penalty if he busts the SEPP plan. But just in case, be sure you identify if client has not yet completed a SEPP plan.