Withdrawal from backdoor Roth IRA

Submitted by Christopher Combs on Fri, 2024-02-02 18:25

Hello Alan et al,

I’m writing to confirm what portion of my client’s Roth IRA distribution will be exposed to a 10% penalty.

She is younger than 59 1/2.

She withdrew $27K from her Roth IRA in May 2023. This Roth IRA was funded through a series of IRA non-deductible contributions/conversions beginning in 2018. Here is the timeline on her conversions (all after-tax dollars):

$11,000 in 2018
$ 6,000 in 2019
$ 6,000 in 2020
$ 6,000 in 2021
$ 6,000 in 2022

$35,000 total

Am I correct that:

1. She’ll avoid a 10% penalty on the $11,000 converted in 2018 since it was deemed to have been converted on 1-1-2018 and was in the Roth IRA for >5 years before she withdrew it in May 2023?

2. She’ll pay a 10% penalty on the $16,000 converted in 2019-2020-2021 since it was in the Roth IRA for less than 5 years?

Thanks,

Chris



Submitted by David Mertz on Fri, 2024-02-02 18:56

  • Only the taxable part of a conversion is subject to a recapture of the early-distribution penalty if taken out before 5 years.  Assuming no investment gains that would have been taxable as part of these conversions, the entire $27k distribution would be a distribution of nontaxable conversion basis and not subject to any penalty.
  • Another way to look at it is the 5-year rule for conversions only applies to taxable conversions.  With no part of the Roth conversions being taxable at conversion there is no penalty for any distribution of any basis (which under the Roth IRA ordering rules comes out before earnings).

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