Q. on withdrawing from Roth

[omni550]

After doing some online reading, I'm still unclear on what the rules are with regard to withdrawals from a Roth. I'm hoping someone here can cast some light on this.

Here's a hypothetical situation:

Roth owner is over 60 years old and single. He has no interest in leaving an inheritance or large legacy. His tIRA and Roth accounts are simply for his sole use and to provide income throughout his lifetime.

Roth IRAs were started in 1998.
Various small contributions to Roths were made over the years.
Roth monies are invested at Vanguard and Fidelity in various mutual funds, etc.

Total Roth balances at end of 2012 ~$40K
Total Roth balances at end of 2013 ~$50K (due to $10K conversion from tIRA in 2013)
Total Roth balances at end of 2014 ~$135K (due to $80K conversion from tIRA in 2014)


The owner would like to withdraw $70K from his Roth accounts.

What are the rules with regard to making withdrawals from the Roth accounts? I keep reading about a 5-year rule, but it's unclear to me to what that applies? Also, what about the recent conversions (in 2013 and 2014)...do those monies need to stay in the Roth for a certain time before they can be withdrawn?

As an alternative, he could withdraw some or all of the $70K from his tIRA. (However, depending on the amount, it might put him in a rather high tax bracket).

omni

 

[karluk]

I think the biggest issue you are facing is that the five year holding period has been met for your Roth IRA contributions, but not for either of the conversions. Each time you make a conversion, it starts a new five year period that has to be met before any of the conversion amount can be withdrawn penalty free.

For the sake of illustrating the pitfalls, I will assume that all of your contributions, conversions and earnings are in the same Roth IRA. The amount that you can withdraw penalty free is:

immediately - You are limited to the sum of all of your Roth contributions since 1998. If you exceed this amount, some of the withdrawal will be considered a withdrawal of the Roth conversion made in 2013 and will be subject to penalties, since the five year rule has not been met.

If you wait until 2018, you will be able to make penalty free withdrawals of an amount equal to the sum of all of your contributions plus the amount that you converted in 2013. Any amount over this will be subject to penalties because the five year rule has not yet been met for the amount you converted in 2014.

If you wait until 2019, then the entire Roth IRA can be withdrawn penalty free. You have met the five year waiting period for all contributions and conversions, so everything, including earnings, is penalty free.

You can open up a separate Roth IRA designed specifically to hold your conversions. If you already have done this, then the entire Roth IRA that contains only contributions and earnings can immediately be withdrawn penalty free.

 

[Animorph]

From https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/ :


"Accordingly, it's also worth noting that because the 5-year rule for Roth conversions merely leaves the withdrawal of conversion principal potentially subject to the early withdrawal penalty, any other exceptions to the early withdrawal penalty can still shelter the Roth conversion amount from the penalty. Thus, withdrawals within 5 years of conversion by someone who is already over age 59 1/2 are not subject to the early withdrawal penalty, regardless of the 5-year conversion rule, simply because being over age 59 1/2 itself is an exception to the penalty!"


So if the owner is 60, that should allow them to ignore the 5 year rule. From my previous study of this, don't confuse "qualified" withdrawals as the only valid penalty-free withdrawals. Though they may not be "qualified", withdrawals inside the 5 year period for rollovers after age 59.5 are still penalty and tax free.


Publication 590 (2013), Individual Retirement Arrangements (IRAs)


"
Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions , later, to determine the recapture amount, if any.
The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions , earlier.
For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2013, and makes a regular contribution for 2012 on the same date, the 5-year period for the conversion begins January 1, 2013, while the 5-year period for the regular contribution begins on January 1, 2012.
Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.
You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions.

Other early distributions. Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Exceptions. You may not have to pay the 10% additional tax in the following situations.

• You have reached age 59½.
• You are totally and permanently disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the distribution to buy, build, or rebuild a first home.
• The distributions are part of a series of substantially equal payments.
• You have unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse was born before January 2, 1949) of your adjusted gross income (defined earlier) for the year.
• You are paying medical insurance premiums during a period of unemployment.
• The distributions are not more than your qualified higher education expenses.
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution.

Most of these exceptions are discussed earlier in chapter 1 under Early Distributions . "

 

[karluk]

Animorph, thanks for the link. I had read the same information elsewhere, but it wasn't as clearly presented, so I came to some incorrect conclusions about the effect of Roth conversions on penalty free withdrawals.

 

[kaneohe]

This is my favorite table: the very last entry applies here; over 59.5y.o.
and first Roth over 5 yrs old . You're "qualified" so you can withdraw anything and everything w/o tax or penalty. Fairmark Forum :: Retirement Savings and Benefits :: Distributions from RIRA after TIRA transfer

Generally you need to know the ordering rules: contributions come out first, then conversions in order w/ oldest first (within each conversion, taxable part comes before non-taxable part), and then finally earnings. In your case, everything is fair game.

Note that there are 2 types of 5 year clocks: 1 for each conversion, another for time from opening 1st Roth. If you open 1st Roth w/ a conversion but the first Roth is not yet 5 yrs old, you can withdraw the conversions if you are over 59.5 y.o. w/o a problem but earnings are still subject to tax.


***********************************************************************
Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.

 

[omni550]

Thanks, everyone, for the helpful responses. (The folks on this board are such a knowledgeable resource.)

Looks like there's no issue with making the $70K withdrawal from the Roth in 2015.


omni

 

[ER-Chuck]

My financial advisor told me that the max you can withdraw from an roth IRA without paying taxes on is $55,000 a year.

 

[kaneohe]

My financial advisor told me that the max you can withdraw from an roth IRA without paying taxes on is $55,000 a year.

Might ask him to cite a source. I've never heard that.

 

[jim584672]

" max you can withdraw from an roth IRA without paying taxes on is $55,000 a year."

This is false.