Roth conversion to avoid 10% penalty?
I have a client that needs to take a premature distribution from her traditional IRA. She’s 51 and no withdrawal exceptions apply. She’s had a Roth open for 5+ years. Can we process a conversion and then take a Roth withdrawal to circumvent the 10% early withdrawal penalty?
Permalink Submitted by Alan - IRA critic on Mon, 2024-09-23 11:16
No. Any conversion must be held 5 years or until 59.5 if sooner before withdrawal of the conversion to avoid the 10% penalty. The purpose of the 5 year conversion holding is to prevent the strategy you are asking about from working. Congress apparently thought that 5 years was long enough so that IRA owners would not be planning for an early TIRA distribution.
However, if client has a regular Roth contribution basis, she could withdraw those contributions without tax or penalty, then convert the same amount from the TIRA and the conversion would be taxable but would not be subject to the penalty. Client would end up in the same place, ie a taxable distribution (conversion) and no penalty. Only drawback is that the regular Roth contributions basis will be reduced by the amount of the distribution and replaced with a new conversion that will have to be held 5 years.