QCDs and Roth Conversions: Today’s Q&A Mailbag
Director of Retirement Education
- Contributions – Contributions come out first and are always tax and penalty free. No exceptions.
- Conversions – Conversions come out once contributions are fully distributed, first in, first out. They are income tax free. However, each conversion has its own 5-year holding period for the 10% early distribution penalty. A distribution before the 5-year holding period is up will be subject to the penalty, if no exception applies, as long as the converted amount was taxable at the time of the conversion. Once the 5 years are up for each conversion, a distribution of the converted amount has no 10% penalty.
- Earnings – Once all the basis in the Roth is gone, then earnings are distributed. Earnings will always be taxable and subject to the 10% penalty, if applicable.
It is important that Roth IRA owners track their contributions and conversions in order to properly report the distribution to IRS when an early distribution is taken. Early Roth distributions are reported on Form 8606 which must be filed with the Roth owner’s tax return for the year.
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