2 questions
One client who is under 59.5 wants to withdraw his Roth IRA contributions to help pay for his son’s college. If he contributed 20k and it’s worth 50k, he can take the 20k without tax or penalty, correct?
I have another client who wants to do a back-door Roth, but he has a Simple IRA. Will a Simple be counted and subject them to the pro-rate rule or is it only Traditional IRAs?
Permalink Submitted by Alan - IRA critic on Mon, 2024-06-17 18:00
Correct, as long as none of the 20k is from conversions in the last 5 years.
For other client, any SIMPLE or SEP IRA balances must be included in total IRA value to determine the taxable portion of a conversion.
Permalink Submitted by Robert Roselli on Mon, 2024-06-17 18:20
None of it was converted. I assume the client will receive a 1099-R from the Roth. His assets were originally at American Funds and now at Fidelity. When the transfer happened, American Funds didn’t transfer over the transcript. We ordered it from AF. So I have the transactions each year. As long as we don’t take out more than 20K, do I provide their accountant with historic transactions so there is proof my client only withdrew the basis?
For the 2nd client, I am planning on having him transfer the Simple IRA into his qualified plan so he won’t be affected by the pro-rata rule, will that work?
Permalink Submitted by Alan - IRA critic on Mon, 2024-06-17 18:29
Roth owners should retain Form 5498 which reports all contributions, although the IRS rarely if ever would request such documentation, as they also receive these 5498 forms. The accountant only needs to know that the regular Roth IRA contribution basis is 20k. The accountant can enter that info into the tax program which will store this data until a distribution is taken. Of course, if client changes accountants, they will have to start over and provide the data to the new accountant.
For second client, as long as the first contribution to the SIMPLE IRA was over 2 years ago, the balance can be directly rolled into a qualified plan that accepts IRA rollovers. If the SIMPLE IRA is still active, annual direct rollovers would be needed to eliminate the SIMPLE balance at year end.
Permalink Submitted by Robert Roselli on Sun, 2024-08-11 12:49
I want to revisit this. My understanding is if it’s a non-qualified distribution, it comes out principal first and it doesn’t matter what is used for. Qualified distributions waive the 10% for certain reasons. Will the custodian issue a 1099-R for the distribution of $ 10,000? My client has contributed to their Roth since 2006 and is with their 3rd custodian. They’ve contributed $ 6,750 since being with the current custodian. I hope the current custodian won’t say $ 6,750 is principal and $ 3,250 is earnings. I am hoping they will issue a 1099-R and leave it up to my client and his accountant to track the cost basis.
Permalink Submitted by Robert Roselli on Tue, 2024-08-13 15:08
I want to revisit this. My understanding is if it’s a non-qualified distribution, it comes out principal first and it doesn’t matter what is used for. Qualified distributions waive the 10% for certain reasons. Will the custodian issue a 1099-R for the distribution of $ 10,000? My client has contributed to their Roth since 2006 and is with their 3rd custodian. They’ve contributed $ 6,750 since being with the current custodian. I hope the current custodian won’t say $ 6,750 is principal and $ 3,250 is earnings. I am hoping they will issue a 1099-R and leave it up to my client and his accountant to track the cost basis.