taxation on traditional IRA to Roth IRA conversion.
Hello,
Could you answer the following question. You have a traditional IRA. You withdraw the required RMD plus the tax owed on it from the same IRA as a conversion to a Roth IRA. If you are under 59 1/2, what portion of the withdrawal is subject to the 10% penalty? My understanding is that the penalty is applied to the tax amount. Am I correct?
Same question except you are 59 12 or older. I believe that the answer is there is no penalty? Is that correct? Thank you for answering this question!
Ron Nippes
Permalink Submitted by Alan - IRA critic on Tue, 2019-11-05 15:20
Yes, the penalty only applies to the withheld amount, not to the converted amount. No penalty if over 59.5 or if you qualify for another penalty exception. Note that if you have other money available you can roll the amount that was withheld into your Roth IRA as a second conversion up to 60 days after the first distribution was received. That will eliminate any penalty and results in the entire amount of the distribution being converted instead of being lost from your IRAs, and you will have the benefits of withholding. The withholding, even done late in the year is treated by the IRS as if made equally throughout the year.
Permalink Submitted by David Mertz on Tue, 2019-11-05 16:11
I’m confused. How is it that you are subject to RMDs if you are under age 59½? The only case I can think of where you might be required to take distributions from a traditional IRA when under age 59½ and also be able perform a Roth conversion from the same IRA (after the RMD for the year is satisfied) is if this is an IRA inherited from your spouse more than 11 years older and is maintained as an inherited IRA. In this case, since the distribution is from an inherited IRA there is no penalty on any distribution. Is the distribution not actually a required distribution? Required distributions are not eligible for rollover or conversion.