Roth IRA conversion prior to 59.5…
For an individual, age 55, that does a Roth IRA conversion in 2010…
Does the 10% [u]penalty[/u] apply if Roth IRA conversion $’s are withdrawn within 5 years of conversion? If yes, when does the 5 year clock start…Jan 1 of the year of conversion or the exact date of conversion? Can the interest (tax-free), if any, be withdrawn first?
Permalink Submitted by mk foss on Mon, 2010-03-15 20:48
The 10% penalty will apply to withdrawals from a Roth IRA by someone under age 59.5 in the five year period starting on the day of the conversion. When a withdrawal is made, it first comes from contributions, then conversions, then earnings. If the earnings came out first, they would be subject to both income tax and penalty tax. Withdrawing the converted amounts only catches a penalty and not additional tax.
If the withdrawal is for something that would be an exception to the 10% penalty (higher education, for example) then the 10% penalty will not apply but the taxpayer must code Form 5329 to show which exception to the penalty they are relying on.
Permalink Submitted by Edward Czapor on Mon, 2010-03-15 21:13
The five year period for the 10% penalty on conversions starts on Jan 1 of the year of conversion, which I am certain Mary Kay intended to say. In your case with the individual age 55, the five year period may be slightly shorter, since there would no longer be a penalty at age 59.5.
Permalink Submitted by Alan Spross on Mon, 2010-03-15 21:28
Agree. The Jan 1 date is referenced on p 64 of Pub 590.
But note that if the distribution from the TIRA is taken in Dec of Year one and rolled to a Roth IRA in January of Year two, the 5 year clock starts on Jan 1 of Year two even though the conversion is reported and taxed in Year one. Most conversions are done by direct transfer which would likely eliminate the above dual year situation.
Earnings cannot be withdrawn first before the Roth is qualified except for a qualified first home distribution up to 10,000. In all other cases, the earnings must come out last. After the entire Roth is qualified, distinctions between contributions and earnings no longer matter and they do not need to be tracked.