Rolling Over a CARES Act Roth Withdrawal
From an Ed Slott article:
“under the tax rules for Roth IRA distributions, the first dollars withdrawn from a Roth IRA are deemed to come from Roth IRA contributions. Once the contributions are withdrawn, the next dollars out come from conversions, which will also be tax free since the tax was paid upon conversion.
But there’s a catch: If converted funds are not held for 5 years, withdrawals of those funds, while tax free, can be subject to a 10% penalty if withdrawn before age 59 ½. Once the converted funds are exhausted, the last funds out will be the earnings, which are more likely to be hit with tax and penalty if withdrawn before the 5 years and age 59 ½.”
With this in mind, if I were to roll back CARES Act Roth distributions (periodically over the three year roll back period) is there an hierarchy for what gets rolled back first? Would it be the contribution, the conversions, or the earnings first?
Since I am under 59.5 the earnings portion is what concern me since this portion would be taxable.
Permalink Submitted by Alan - IRA critic on Wed, 2020-12-09 17:58
Form 8915 E treats the repayment as being applied first to the taxable amount. Let’s say you withdraw 99,000, of which 1/3 is earnings. Therefore 33,333 would be taxable (no penalty for CRDs). If you also elect to report the distribution over 3 years, you would owe tax on 11,111 each year. Then, if you repay at least 11,111 by the due date for your 2020 return, Form 8915 E subtracts that 11,111 from the taxable income so you would have no taxable income for 2020. Another 8915 version would carry this through to 2021 and 2022 if necessary to apply your repayments. The end result is the same as for a non CRD Roth IRA distribution. If you rolled over part of a pre CRD Roth distribution, the amount rolled back would be attributed first to your taxable Roth IRA earnings, so rollovers would be applied in reverse of the ordering rules, and that works in your favor.