ROTH withdrawals
How does a client withdraw from his ROTH that was a conversion last year with paying taxes on any of the gains since the conversion?
How does a client withdraw from his ROTH that was a conversion last year with paying taxes on any of the gains since the conversion?
Permalink Submitted by Alan Spross on Tue, 2011-06-07 22:31
Unless the client has had a Roth for over 5 years and is 59.5, his distributions are non qualified.
That means what is withdrawn is determined by “ordering rules”. The first dollars out are any regular contributions he has made. If none, then conversions come out next. Conversions are tax free but subject to 10% early withdrawal penalty if not held 5 years or client is 59.5. Earnings come out last, after all the other amounts have been withdrawn. Therefore, to avoid the tax on earnings any distributions should be limited to the amount of regular and conversion contributions.
That said, there is another special factor that applies only to conversions done in 2010. If the client deferred the taxes on his 2010 conversion until 2011 and 2012, taking a distribution prior to 2012 will accelerate the year in which the 2010 conversion income must be reported.
Example: Convert 50k planning to report 25 k in 2011 and 25k in 2012.
In 2011 client withdraws 20k of the 50k conversion
The result is client must report 45k as income in 2011 and 5 k in 2012. If client took out 25k or more, then the entire 50k must be reported in 2011. This is NOT an additional tax, is is just an earlier due date for tax that would have been due in a later year.