May I withdraw 100% non-deductible Roth conversion dollars? Re-characterize to withdraw?

Submitted by Wayne Smith on Mon, 2015-07-20 14:38

Hello. I’ve asked some accountants these questions and received differing responses. Hoping someone could help. My situation:

I am 40 years old. I had an existing roth ira with previous year contributions and earnings. It is less than 5 years old.

Earlier this year I opened a traditional IRA and contributed funds that were 100% non-deductible (after tax dollars). I immediately converted this to the Roth IRA account.

Unfortunately, I find that I need to access those funds that I put in as contributions. I don’t meet one of the exceptions to do this penalty/tax free.

I’ve been told that I can’t access those Roth conversion amounts without penalty because the funds have not been there 5 years. Another person told me I could access the funds because it was with 100% taxed dollars already (but not the earnings). Which is accurate?

I’ve thought about re-characterizing this conversion amount and sending it back to the Traditional IRA. I understand any associated earnings would move as well. If I do a re-characterization and these funds were all non-deductible to begin with, could I then remove the contributions tax and penalty free?

Thank you.



Submitted by Jose Morales on Mon, 2015-07-20 16:21

No matter what, this will be ugly when it comes to reporting.  You can recharaterize back to a Traditional IRA contribution and if it was a current year contribution for 2015 you can take the funds back as a deemed excess contribution.

Submitted by [email protected] on Mon, 2015-07-20 18:24

I thought the penalty was on earnings only. The “after-tax” converted amounts come out 3rd in line AFTER pre-tax converted amounts.  There shouldn’t be a penalty on taking your after-tax converted principal out, if that was all you had in as conversions.

Submitted by Jose Morales on Mon, 2015-07-20 19:25

If that was the case then all someone under 59 1/2 would have to do to avoid the 10% tax penalty would be to first convert the desired distribution amount to a Roth then withdraw the funds from the newly created Roth.  It’s the reason why there is a 5 year waiting period for conversions in addition to the standard 5 year waiting period.

Submitted by [email protected] on Mon, 2015-07-20 21:11

There is a difference between after-tax and pre-tax converted dollars.  If your TIRA contained nothing but basis, you could convert and then withdraw that amount before 5 years without penalty, as long as there was no additional conversions in the account that hadn’t aged out.  I believe alan does a better job of explaining that below.

Submitted by Alan - IRA critic on Mon, 2015-07-20 20:53

  • You indicated that you converted into an existing Roth. All your regular contributions from Day 1 come out before conversions, so if you do not need the full Roth balance, you don’t have to touch the conversion.
  • If you do need to tap the recent conversion, withdrawing it would be done tax free. It would also be penalty free if your conversion was fully non taxable because you had no other TIRA balance besides the non deductible contribution. But if you needed to withdraw amounts in excess of all your regular and conversion contributions, you would be tapping earnings and earnings would subject to both tax and penalty.
  • You may have had older conversions. If so, those old conversion must come out prior to the current conversion. While the current conversion could come out tax and penalty free, any older conversions might have been taxable. We do not know the full composition of your Roth IRA.
  • Rather than removing the recent conversion under the Roth IRA ordering rules mentioned above, you could recharacterize the conversion which would restore the non deductible contribution basis back to your TIRA along with any earnings on the conversion. If you then requested a return of your TIRA contribution, you would get back the contribution tax and penalty free, but would also have to withdraw the earnings that occurred both within the TIRA and the Roth on this contribution. Those earnings would be taxed and subject to penalty. But if you do not recharacterize you can withdraw this conversion tax and penalty free (after all earlier contributions) and leave the earnings in the Roth.

 

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