Roth Transfers Taxabel

Submitted by Michael D Meeks on Sat, 2016-04-09 20:15

Client, age 40, has company Roth IRA which has been in existence for over 5 years.

Client decides to take all funds out of Company Roth IRA Account. He receives the check
as opposed to doing a trustee to trustee transfer between old and new account .

Assume the total value of the Roth IRA is Roth Contributions of $50,000 and earnings of $50,000.

Client intends to keep the Roth contributions and reinvest the earnings.

I believe the IRA rollover rules would say that client rolled over $25,000 in Roth Contributions
and $25,000 in earnings.

Therefore for 2015, since he is under 59 1/2 the earnings would be taxed plus a 10% penalty.

Correct?



Submitted by Alan - IRA critic on Sun, 2016-04-10 01:50

No. The rollover rules are taxpayer friendly, and the taxable amounts are deemed to be rolled over before non taxable amounts. What client keeps is therefore non taxable, but the Roth IRA now holds 50k more in earnings. The following is copied from IRS Reg 1.402(A)-1 Q 5:

(b) In the case of an eligible rollover distribution from a designated Roth account that is not a qualified distribution and not paid as a direct rollover contribution, if less than the entire amount of the distribution is rolled over, the part that is rolled over is deemed to consist first of the portion of the distribution that is attributable to income undersection 72(e)(8).



Submitted by Michael D Meeks on Tue, 2016-05-03 18:15

Thanks Alan… MIke



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