Roth IRA coversion – Withdrawals prior to 5 year period
I have gone through Ed Slott’s books with a fine toothed comb and have scoured the internet for an answer to my question but to no avail.
I have a 78-year old client who converted his 2,000,000 dollar traditional IRA to a Roth IRA in September of 2010. One-hundred percent of the conversion amount was includable in his taxable income for 2010. He had sufficient funds in a taxable savings account to fully pay the taxes due on the conversion, which he did in tax year 2010. None of the money used to pay the taxes came from the Roth IRA nor any other qualified retirement account. Prior to this conversion my client did not have a Roth IRA. This is his first and only Roth IRA account. To this day, there have been no contributions and no additional conversions into the Roth IRA, nor have there been any withdrawals. The only amounts in the IRA are the 2,000,000 dollars from the conversion and the earnings that have accumulated since the conversion.
My client was presented with an opportunity to purchase a collectible for 100,000 dollars. He would like to withdrawal the funds for the purchase from the Roth IRA. From what I can tell from reading Ed Slott’s “The Retirement Savings Time Bomb…And How To Defuse It” in addition to IRS publication 590, I’m about 80 percent certain that my client is able to withdrawal 100,000 dollars from his Roth IRA without being subject to the 10% IRS penaly and without the withdrawal being subject to taxes.
My reasoning is that even though the Roth IRA conversion was done less than 5 years ago, my client is over age 59.5 and has sufficient “basis” (2,000,000 dollars) to withdrawal 100,000 dollars. However, this isn’t explicity stated either in IRS publication 590, Ed’s book, nor any other resource I can find on the internet. All of the explanations and examples that I found deal with Roth IRA withdrawals with respect to principal contributions and with earnings, or if the account owner is not age 59.5. Nothing is explicitly stated concerning withdrawals of converted amounts when done within the 5-year conversion period and if the account owner is over age 59.5. My apologies for being so wordy, but I wanted to lay out as much detail of this situation as I could so I can have a clear answer.
Permalink Submitted by Alan Spross on Mon, 2012-08-20 03:13
You are correct.
He can withdraw up to the 2mm he converted without tax or penalty. The 5 year holding period for Roth conversions ends at age 59.5 as indicated on p 63 and 64 of Pub 590. The exception that applies in his case is having reached 59.5, the first reason listed on p 64.
This has nothing to do with being a qualified distribution. His Roth will not be qualified until 1/1/2015 after which date his earnings would become tax free. If he withdraws the 100,000 now, he must report it on Form 8606 and it is technically a non qualified distribution, but Form 8606 will show that it is non taxable. The 1099R will be coded “T” because the custodian knows he is over 59.5 and this will take care of the penalty waiver.