early distributions from multiple Roth IRAs

Submitted by Greg Gorham on Wed, 2015-07-29 22:42

Your article http://www.investopedia.com/articles/retirement/03/030403.asp on Roth IRA distributions is the best I have read as it applies to my question.

I have 6 years of Roth 401K contributions, a 2010 $400K of 401k rollover Roth IRA conversions into 4 annuities, several smaller Roth IRA conversions less than $30K in the last 2 years and general savings. I estimate my first Roth IRA account was opened in 2002.

I see that for each Roth IRA conversion there is a separate 5-year period when calculating non-qualified distributions. I see that any Roth IRA account including multiple Roth IRA accounts can be used to be considered a 5-year period when determining the character of a Roth IRA distribution.

I will turn 56 in October 2015 and want to begin distributions of Roth IRA funds approximately $60K per year ($5k per month roughly) thru age 59.5. At 59.5 I will reduce my Roth IRA distributions to $30K per year and draw $30K from my Traditional IRA the balance of my annual need for the period 59.5 to 60 years old. At 60 years I will turn on income distributions from 4 Roth IRA annuities (seeded with the $400K conversion), 2 Trad IRA annuities, and reduce my Roth IRA and Traditional IRA distributions to roughly $10K per year thru age 66 10 months. At 66 10 months I will turn on Social Security distributions and drop distributions from Roth IRA and Traditional IRA distributions to almost nothing— and live until forever on the annuities and Social Security distributions.

At 56 I will roll my current employer Roth 401K into one Schwab Roth IRA that will have the following: 6 years of Roth 401K contributions, approximately $22K times 6 years or $132K of Roth 401K contributions, $30K recent conversions, and $118K growth, or $280K total. If I distribute from this Schwab Roth IRA at a rate of $60K per year- age 56-59.5 – I will exceed the $132K of “contributions” in this Roth before 59.5 years old. ($60K/year times 3.5 years = $210K)

Here is my question: Can I lump all of my Roth fund sources that were contributions or conversions (including the $400K Roth IRA conversion in 2010 to Roth annuities) and use that total to characterize all Roth IRA distributions up to $532K ($400K + $132K) prior to 59.5 as non-taxable/no-penalty?

I believe I can do this without tax or penalty.

Can you help me verify my calculation that I can do this without tax or penalty?

I think I saw an article that stated “Under the aggregation and ordering rules, all of an individual’s Roth IRAs are treated as a single account.” Is this my answer?



Submitted by Alan - IRA critic on Wed, 2015-07-29 23:42

  • Yes, that is your answer. Before your Roth IRAs are qualified at 59.5, all distributions must follow the ordering rules which consider all of your Roth IRA accounts as just one combined Roth account. The 132k of Roth 401k contribution will be treated as regular Roth IRA contribution after the rollover, and these are deemed to come out first without tax or penalty. It appears you also have some other regular Roth contributions starting in 2002. Add those to the 132k to determine the actual total of regular contributions.
  • Next out are your conversions, oldest first. The 400k from 2010 is out first, then comes 30k of recent conversions but I cannot tell if you also did an in plan Roth 401k rollover which is treated as a conversion. Whatever this total comes to, they are out after the 400k and are tax free, but since they are under 5 years, they incur a 10% penalty if you take them out before 5 years or age 59.5 whichever comes first.
  • You plan to take out 210k before 59.5 and you have at least 532k available to you tax and penalty free, so there is plenty of leeway. At 59.5 all of your Roth IRA accounts are fully qualified and tax and penalty free. You do not even need to file an 8606 form for distributions taken after 59.5, but you will have to file one for 2015 through 2019 because you will be taking out non qualified Roth distributions in each of those years. You will need to keep track of your balances in each of these categories in order to do properly complete the 8606 in those years, but you appear to have a handle on those balances. Do not worry about earnings since they come out last and you will not reach earnings until after you no longer need the 8606. Remember that a non qualified Roth IRA distribution does not mean that it is taxable. It is not taxable until you reach earnings and you will not reach earnings, and you will also not reach conversions less than 5 years before you hit 59.5.

Submitted by Greg Gorham on Thu, 2015-07-30 09:42

Thank you!  I appreciate the detailed assistance.

Submitted by Greg Gorham on Fri, 2015-10-02 12:54

I am working with Schwab to set up ROTH IRA distributions prior to reaching age 59.5.  As I mentioned earlier, I am operating under the advice I can lump all of my Roth accounts to determine my total “contributions”, “conversions” and “growth”.  Prior to age 59.5 I can distribute funds totalling less than my total contributions and total conversions without tax or penalty. Schwab tells me they can code the distributions in three ways “J = early”, “Q = qualified”, and “X = exception”.    I just need to tell them, probably in writing, so my periodic distributions default to the proper characterization rather than having to contact them each and every time. My question is what characterization should I ask Schwab to use in my case so at  tax time I am not penalized, taxed, or forced to perform unnecessary steps to make inform the IRS these distributions are not penalized or taxed?

Submitted by David Mertz on Fri, 2015-10-02 21:24

  • Code J is the only acceptable code in this instance.  There is no reason for Schwab to code it any differently and probably would not do so even at your request.
  • The instructions for Form 1099-R indicate that, except for a recharacterization or a return of contribution, the only acceptable codes for a Roth IRA distribution are codes J, Q and T.  Neither code Q nor code T is appropriate because you are not age 59½, dead or disabled.
  • Code X is invalid.  It does not exist.
  • A distribution from a Roth IRA that is not a qualified distribution must be reported on Form 8606.  Until you have exhausted your basis in regular Roth IRA contributions, and Roth conversions older than 5 years, the calculation on Form 8606 will result in the distributions not being subject to tax or penalty.  Since Schwab has no knowledge of Roth IRAs that you might have at other custodians, they have no way of knowing if your distribution is a distribution of basis or not.  Tax return preparation software will generally help you keep track of your basis, but ultimately it’s your responsibility to track the basis.
  • As Alan said, at $5k per month you’ll be far from exhausting your basis before age 59½ when your distributions will become qualified distributions.

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