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This Week's Q&A: Converting a Pre-Tax IRA to a Roth and More

By Beverly DeVeny
Follow Us on Twitter: @theslottreport

This week's Slott Report Mailbag looks into converting and contributing to different IRAs, 401(k)s, and RMDs.  As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question:

Three part question:

In December 2016 I converted a portion of my pre-tax IRA to a Roth IRA.  Based on the 5-year holding period, can I begin withdrawing money anytime in 2021 without tax and penalty? I am over 59 1/2.

If I convert additional money in 2017 or future years to the Roth IRA, can I still withdraw it in 2021?

I have been contributing to a Roth 401(k) for several years at my current employer  Is the date I began contribution to the Roth 401(k) begin the 5-year holding period for the Roth IRA, or are the two Roth's to be treated separately?

Thank You. Bill

Answer:

I am going to answer your questions in reverse order so they go from easy to complex.

Each employer Roth account has its own five-year holding period which is never combined with the Roth IRA holding period.

Roth IRAs have distribution ordering rules with different tax and penalty rules. All Roth IRAs are treated as one single account when applying the distribution rules.

The first funds that come out of a Roth IRA are deemed to be annual contribution amounts. They are always tax and penalty free.

After contributions are fully distributed, the next funds out of a Roth IRA are converted amounts, first in, first out. They arealways distributed tax free. They are penalty free if the account owner is over the age of 59 ½ or the conversion has been held for five years. Each conversion has its own five-year holding period.

When conversions are fully distributed, the last funds out of the Roth IRA are the earnings. Earnings are distributed tax and penalty free if any Roth IRA was established more than five years ago and the Roth owner is over the age of 59 ½ or the distribution is due to the death of the account owner, or the disability of the Roth owner, or the distribution is for a first-time home purchase. All other distributions of earnings will be taxable. They will be subject to the early distribution penalty if the Roth owner is under the age of 59 ½ and no exception to the penalty applies. 

In your case, you can withdraw your converted amounts from the Roth IRA at any time tax free and penalty free because you are over age 59 ½.

Question:

Can a 70.5 year-old retired employee be required to take their RMD before they take a partial rollover from their 401k? In other words, can they be forced to stay in the 401k until they take the RMD? (She is still working elsewhere and does not want the RMD until next year.) 

Thanks. Paul

Answer: 

The rules can be a little tricky!  An individual can delay taking her first required minimum distribution (RMD) from their 401(k) until April 1 of the following year she attains age 70 1/2. However, this ability to delay the first RMD until the next year is lost if a distribution is taken from the plan in the year they reach age 70 ½. This is because the rules say that all funds distributed from a plan are a rollover and the first money out of a plan in a year when an RMD is required is considered to be the RMD. The bottom line is that the RMD must be taken before any rollover of the remaining funds can happen. It is not possible to do a rollover and then take the RMD later.

 

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