Roth Conversions & 5-year holding period
I am still unclear on how the 5-year holding period affects distributions of conversion amounts.
For example, an individual is age 62 and they convert $100,000 from their traditional IRA (all pre-tax dollars) into a Roth IRA in 2010. The client makes no additional contributions to the Roth and in 2012 it has increased in value to $125,000. Then, in 2012, individual decides to distribute $50,000. How would this be treated?
The distribution is [u]not[/u] a qualified distribution because the 5-year holding period has not been met. However, the individual is over age 59 1/2 and they are only distributing a portion of what they have already paid taxes on–not earnings. Would the 10% penalty apply? And if so, what would it apply to? The entire $50,000?
Same scenario, but client is under age 59 1/2. Would this change anything? Still not a qualified distribution, but now also not normally exempt from 10% penalty.
Thank you!
Permalink Submitted by Anonymous (not verified) on Thu, 2010-03-04 16:55
This topic has been discussed so many times, I am just going to leave a comment about how to remember the rules better:
A 10% “Premature” Distribution Penalty by [u]definition[/u] can only be assessed for someone under 59 1/2.
[i]Therefore:[/i]
Roth owners over 59 1/2 can always take their conversions out anytime penalty-free.
Roth owners under 59 1/2 can only take their conversions out penalty-free if [u]that[/u] conversion was held 5 years; otherwise a 10% penalty on the amount.*
*I assume no 72t exception
pko
Permalink Submitted by Alanna Crawford on Thu, 2010-03-04 17:02
Perfect! Thank you!