Roth IRA Distributions
Client (58) and Spouse (64) are retiring this year. They both have Roth IRA’s that they have been funding every year for more than 5 years.
If Client (58) takes money from his, will he be penalized for under 59 and < 5 years on some of the distribution?
If Spouse (64) takes money from hers, will she be penalized for <5 years on some of the distribution?
Thanks..
Permalink Submitted by Alan - IRA critic on Thu, 2015-02-26 23:10
Client would be penalized before 59.5 only on distributions from Roth conversions held under 5 years or on the distribution of earnings. Both conversions and earnings come out after regular contributions and conversions come first from the oldest conversions. Spouse would not have a penalty under any circumstances and spouse Roth is fully qualified now.
Permalink Submitted by Julie Brangenberg on Mon, 2015-03-09 14:33
Does the 5 year clock start from when the participant first funds the Roth IRA?
Permalink Submitted by Alan - IRA critic on Mon, 2015-03-09 15:05
The 5 year clock for Roth earnings becoming qualified starts with the first funding of a Roth, but the 5 year holding period for conversions applies separately to each year’s conversions. Conversion holding period always ends at 59.5 for conversion that have not yet met the 5 year holding period.
Permalink Submitted by Julie Brangenberg on Mon, 2015-03-09 16:38
Can the client roll their after-tax 401k money to a Roth? Is this considered a conversion?
Permalink Submitted by Alan - IRA critic on Mon, 2015-03-09 17:10
They can whenever the plan allows distributions. The rollover is called a “qualified rollover contribution” but functions like a conversion. Technically, a conversion is limited to a rollover from a non Roth IRA to a Roth IRA. An after tax sub account in a 401k holds the after tax contributions and the earnings on those contributions. The earnings would be taxed when doing a qualified rollover contribution to a Roth IRA. However per Notice 2014-54, if the earnings are considerable a client can request two rollovers as part of a single transaction with the earnings directly rolled to a TIRA and the after tax portion to a Roth IRA. This will avoid all current taxes. These clients are very close to having both Roth IRAs qualified, and when that occurs the dollars rolled in from the 401k will be qualified as well.
Permalink Submitted by Julie Brangenberg on Mon, 2015-03-09 18:01
So when the client turns 59 1/2, the dollars from the 401k will be qualified, because he’s had the Roth IRA funded for more than 5 years?
Permalink Submitted by Alan - IRA critic on Mon, 2015-03-09 18:31
Yes. Dollars rolled to the Roth IRA from the 401k, whether they were pre tax, after tax or Roth 401k dollars will be fully qualified once the Roth IRA is qualified.
Permalink Submitted by Elizabeth Howe on Tue, 2015-03-31 12:05
If you are under 59.5 and you take from a Roth that was converted from an IRA more than 5 years ago you do not pay penalties on the original converted amount. You do pay taxes and a 10% penalty on the income since the conversion and the original conversion amount is considered to be the 1st $ out of the distribution. Is that correct?
Permalink Submitted by Alan - IRA critic on Tue, 2015-03-31 16:13
Yes, that is how the Roth ordering rules are structured. Earnings come out last.