Roth IRA Questions

Submitted by Charles Stanley on Mon, 2014-01-06 13:58

Two questions:

Client has existing Roth IRA funded by direct contributions. Client’s current income precludes future direct contributions. If client makes future contributions via back door conversions, to the same Roth IRA will he still be able to tap original direct Roth contributions, tax/penalty free, without the conversions causing a timing issue?

Second client will be receiving a share of ex husbands Roth IRA via a QDRO. She may need to tap the Roth IRA in the near term for living expenses. Will she be able to tap a pro rata share of the husbands original contributions tax/penalty free?

Thank you in advance for your research into these questions!

Chuck



Submitted by Alan - IRA critic on Mon, 2014-01-06 16:14

  • Regular contributions are always distributed tax and penalty free before any Roth conversions are distributed. Further, once the regular contributions are totally distributed and conversions are distributed, the 5 year holding period for conversions only applies to the taxable portion of the conversion. A tax free conversion of non deductible TIRA contributions therefore effectively has no holding period.
  • A QDRO does not technically apply to IRA accounts. For an IRA transfer, the requirement is a court order incident to divorce. Pursuant to such an order the amount of regular contributions and conversions done by the ex is pro rated and then combined with client’s own Roth IRA whether client keeps the Roths separate or not.  Accordingly, there must be a complete accounting of the ex’s Roth at the time of the transfer so that each spouse will be able to update their records with respect to the new balance of regular contributions, taxable conversions and non taxable conversion portions and the year of such conversions. Finally, the client’s 5 year holding period with respect to the Roth being qualified at age 59.5 will begin on the oldest of the year of first Roth contribution done by either spouse. 

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