ROTH IRA Withdrawls
My Client is 45 and she has had a ROTH IRA for more than five years.
She wants to withdraw all the money to pay off a tax problem.
I am unsure of the rules here as she has had it more than five years but is not 591/2
I have always been confused about the rules, is it five years no matter what age or
five years and 591/2 to avoid the 10% penalty.
Thanks for any help.
Permalink Submitted by Alan Spross on Tue, 2012-05-22 00:50
Her withdrawal would be a non qualified distribution because she is not yet 59.5. Taxation of the distribution depends on the breakdown of her Roth, and distributions come from the following balances first:
1) Her regular Roth contributions – these come out tax and penalty free
2) Her conversions starting with the oldest conversions. Conversions over 5 years old come out tax and penalty free. Conversions less than 5 years old are tax free but subject to the 10% penalty on the taxable amount of the conversion.
3) Earnings come out last and would be taxable and subject to the 10% penalty as well.
Therefore, she needs to know the breakdown of her Roth balance in order to be able to determine the tax impact. If she has earnings, perhaps she should leave the earnings alone to cut down on the tax bill and preserve some of her Roth.
NOTE: Perhaps she should look into an IRS installment plan or consider some other source to pay off the taxes. If the amount is large enough, perhaps an offer in compromise would be an option.