ROTH conversion distribution question
Client is 41 yrs old and has a 401k with company he is no longer employed. If we rollover into IRA and then convert to ROTH owe tax on rollover amount. Additional questions:
1) Can client take penalty and tax free distributions from the basis of Roth immediately?
2) Does the 5 year rule apply to basis and earnings or just earnings?
Permalink Submitted by Alan - IRA critic on Thu, 2021-04-15 21:08
Tax free since tax has already been paid. But there is a 5 year conversion holding requirement under which the taxable portion of the conversion is subject to penalty when distributed. The penalty ends at the earlier of 5 years or age 59.5.
There are two different 5 year holding requirements. The conversion holding period is described above and applies for penalty but not ordinary tax purposes. The other 5 year holding period applies for ordinary tax and starts for the year of the first Roth contribution and once taxpayer also reaches 59.5, the entire Roth is qualified and earnings are tax free. So this one does not apply to basis, only to earnings subject to taxation.