Roth IRA Conversion
I have a client that is looking to rollover over half of his IRA into a Roth IRA that will have been established 5 years ago this July. He is already 59 1/2 and we are doing an in-service distribution. He was hoping to tap some of the converted amount but he and I both read a rule that says that if you distribute monies from the Roth before the 2 year deferment on taxes is paid, you will have to claim that portion as income in this tax year. Can someone verify that for me? I was under the impression that if you met the age test and the 5 year test, there was no issue in withdrawing some or all of your converted funds.
Permalink Submitted by Alan Spross on Tue, 2010-05-11 03:16
It is correct that if he withdraws the conversion funds from a 2010 conversion prior to January 1, 2012, he will accelerate the reporting year for the distributed amount from 2012 into the year of the distribution. But since his Roth is now fully qualified, he falls into a situation that the IRS has not fully clarified. Since the ordering rules no longer apply once the Roth is qualified, the only way to determine if he withdrew 2010 conversion money is to determine his Roth balance prior to the conversion, and if his distributions exceed that amount, the amount of the excess would be deemed to come from his 2010 conversion.
Example: Roth value prior to the 2010 conversion – 40,000
2010 conversion is 100k and he would plan to report 50k in 2011 and 50k in 2012
If he withdraws 60k in 2011, then 20k comes from his conversion. Since his Roth is now qualified he would not ordinarily owe any taxes, but since he has not paid taxes on the conversion yet, he would have to report 70k on his 2011 return, and the balance of 30k on his 2012 return.
The central point here is that there is no way to use the two year deferral as a cash flow strategy to get money from a TIRA by going through a Roth conversion in 2010 to delay the tax bill. The deferral is limited to funds that remain in the Roth until 2012, and then the entire Roth can be distributed tax free.
Permalink Submitted by Jeff Rose on Tue, 2010-05-11 19:30
Thanks so much for your prompt response. That was [i]extremely[/i] helpful.