roth withdrawal of conversion funds
My client opened a Roth in March of 2020, also did a Roth Conversion in 2023. If she makes a withdrawal is the conversion gains taxable or since the Roth was opened in 2020 it is waived under the 5 year or longer timeframe. Thanks…
Permalink Submitted by Alan - IRA critic on Mon, 2025-08-25 14:33
If she is not yet 59.5, Roth distributions will follow the ordering rules. Those state that the regular contribution amount comes out first, tax and penalty free. Next out are conversions in chronologic order. If the 2023 conversion is withdrawn under these rules, the 10% recapture tax will be due for the taxable portion of that conversion because the conversion would not yet have aged 5 years. Any gains in the Roth, whether from regular contributions or conversions come out last and would be subject to tax plus the 10% penalty.
Gains in the Roth are not separated from those on regular or conversion contributions. At any point in time, the amount of gain is the amount left after all regular or conversion amounts has been distributed.
These distributions must be reported on Form 8606, and the taxpayer must have kept track of their balance of regular contributions and conversions, as well as the conversion year. 2023 conversions could not be withdrawn penalty free until 2028 if still under 59.5 when the conversion is distributed.
Even though Roth contributions are not reported on tax returns, client’s should enter them into tax programs or have their professional preparer enter them each year. If the same program is used in future years, it will capture the amount of these contributions and detect excess contributions as well. Or the client must have another method of keeping track of these contributions unless they are totally sure that they will not need to take a distribution until after their Roth is qualified at 59.5 and 5 years.
Permalink Submitted by Jon Heller on Mon, 2025-08-25 17:00
My client is over 59.5 so there is no penalty involved. But do conversion have their own 5 year clock? or if they have a Roth open longer than 5 years ago will it be considered part of that account? Thanks…
Permalink Submitted by Alan - IRA critic on Mon, 2025-08-25 17:16
Conversions have their own 5 year clock with respect to the penalty, but any open clocks end at 59.5. Since client contributed prior to 2021, they have also completed the 5 year holding period for qualified distributions.
Therefore, all client’s Roth IRAs are now fully qualified, with all distributions tax and penalty free. Client no longer needs to track any 5 year holding periods.