Withdrawal from Conversion within 5 years
I have a 75 year old client who has made Roth Contributions for the past 10 years. About three years ago he did a Roth Conversion from his IRA into his existing Roth. He has requested a withdrawal in excess of both the total Contributions and Conversion. My understanding is that the Contributions are considered to be withdrawn first, then the Conversion and then the Earnings. Is that correct? If so, how do you determine what Earnings came from old Contributions versus the more recent Conversion? Or does the IRS not distinguish where they came from? Just trying to avoid penalty as Conversion was done within 5 years. Any feedback would be great. Thanks!!
Permalink Submitted by Alan Spross on Thu, 2012-08-16 21:44
Since he has held a Roth IRA over 5 years and is over 59.5, his Roth is fully qualified and tax free. There is no need to keep track of contribution amounts and dates any longer. Distributions can be reported directly on line 15a of Form 1040. -0- on 15b since all distributions are tax and penalty free. No Form 8606 is required either.
The client’s Roth was qualified 5 years ago since he met the 5 year holding requirement then. In addition, even before his Roth was qualified, there was no holding period for any conversions because he was over 59.5 when all conversions were made. The penalty for holding conversions less than 5 years does not apply after 59.5.
Of course, a major distribution like the one he is planning will eliminate the tax free gains that could be generated on this money in the future. But perhaps he may have no choice but to request the distribution.
Permalink Submitted by gerard noronha on Fri, 2012-08-17 15:43
question for alan:
conflicting articles i have read on the 5 year rule…just want to know if i read this right
1) older than 59 1/2..now 66…made a roth conversion at 61,62 etc…I do not have to wait to take our roth monies if I need it? 5 year rule does not apply…please confirm…Alan thanks in advance
Permalink Submitted by Alan Spross on Fri, 2012-08-17 17:22
Yes, you can now take distributions tax and penalty free.
The 5 year holding period for conversions does not apply after reaching 59.5, even for conversions done prior to 59.5. If your first conversion was at 61, you never had a 5 year holding period to avoid penalty since there would be no penalty for withdrawing the conversion.
The 5 year holding period for earnings to be tax free is different because it does not stop at a certain age. But if you are now 66, you are in your 6th year as a Roth owner so your Roth is fully qualified and even the earnings are tax free. You can distribute any or all amounts tax and penalty free from here on.