5 year rule on ROTH distributions
I was asked a question about this: someone has been regularly contributing $5,500 to an IRA every year for 20 years and the account value is about $200,000. If that IRA is converted to a ROTH, what is the waiting period before taking distributions? This person said what about the contributions made more than 5 years ago? Can they be withdrawn immediately? And, if under 59 1/2, what would be the tax and/or penalties, if any if he decided to withdraw the growth on those contributions?
Permalink Submitted by tomd37 on Thu, 2018-04-26 12:47
The first thing I would think about is the over-contribution to the IRA account. I don’t think you could contribute $5,500 in most of those years. I believe he must hold the converted Roth IRA for five years for any of it to become “qualified” regardless of when the contributions were made to the traditional IRA. I believe he would pay a 10% penalty on any withdrawls under the age of 59.5 without regard to the period of time. Let’s see what the experts here have to say as I am not one of them.
Permalink Submitted by Alan - IRA critic on Thu, 2018-04-26 17:56
First, if excess contributions were made and then converted, since a Roth conversion can no longer be recharacterized, the excess amounts will have to be treated as excess regular Roth IRA contributions and withdrawn to avoid 6% excise taxes for each year. However, assuming that this is just a theoretical question and there are no excess contributions, the amounts converted can be withdrawn tax free, however withdrawals of conversions done in the last 5 years will incur the 10% penalty. Conversions done over 5 years ago can be withdrawn without tax or penalty. If earnings on the conversions are withdrawn prior to 59.5, both tax and penalty would be due on the earnings.