Roth Conversion

[PatrickA5]

I'm trying to figure out if I would have a penalty on a Roth distribution in the following circumstance.

In 2010, I did a $20,000 conversion of a Traditional IRA to a Roth. Of that conversion, approx $5,000 was taxable and $15,000 was non-taxable (non-deductible basis in my TIRA). I am 54 years old and this was the only conversion I've made and have made no "contributions" to the Roth. For simplicity purposes, we'll say there is no earnings either.

So, if I take a distribution of $12,000 this year would there be any income tax or penalty on any of it? Reading an IRA web-site (Ed Slott), it made me think there MIGHT be a 10% penalty on the $5,000 ($500), but it's anything but clear to me how these early withdrawal of "conversion" money is penalized. Thanks.

 

[pb4uski]

See Distribution Overview

Note that it indicates that special rules apply to amounts converted in 2010. My understanding is that those special rules apply if you elected for the conversion to be taxable in 2011/2012 rather than 2010.

 

[kaneohe]

That's a good article in the link above. An alternative method is to use this table from KAWill which is also from the fairmark.com website. Put a semi-colon after every yes and no to make sense of it. The ordering rules mentioned in the article linked above are built into the tables, i.e. contribution come out first, then taxable portion of conversions, etc.
In OP's case, no contributions so the taxable portion of the conversion comes out first and has a 10% early withdrawal penalty just like a TIRA would if under age 59.5 and 5 yr conversion clock not yet timed out.


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.

 

[haha]

I'm trying to figure out if I would have a penalty on a Roth distribution in the following circumstance.

Do you have no other source for the cash that you need?

Even if you get no penalty, it seems a real mistake to lose the premium staus of money in a Roth unless you have no other choice,

Ha

 

[PatrickA5]

Thanks for the replies. The table that kaneohe posted is great. I must have missed it when i was looking through the Fairmark website. I think I'll print it out and save it somewhere.

Haha, I'm not likely to do a distribution, but am just trying to understand all of the ramifications of Roth distributions. There seem to be a lot more "moving parts" to a Roth account than 401Ks and TIRAs. Very confusing. No wonder guys like Ed Slott can get people to spend $1,995 for a two day seminar on nothing but IRAs.

 

[pb4uski]

......No wonder guys like Ed Slott can get people to spend $1,995 for a two day seminar on nothing but IRAs.

Now that sounds like a real waste of money (and time). I'd rather be golfing.

 

[Animorph]

Thanks for the replies. The table that kaneohe posted is great. I must have missed it when i was looking through the Fairmark website. I think I'll print it out and save it somewhere.

Haha, I'm not likely to do a distribution, but am just trying to understand all of the ramifications of Roth distributions. There seem to be a lot more "moving parts" to a Roth account than 401Ks and TIRAs. Very confusing. No wonder guys like Ed Slott can get people to spend $1,995 for a two day seminar on nothing but IRAs.

The ramification of converting tax-free growth inside the Roth to taxable growth outside the Roth could be fairly expensive, though less visible. For $12k making 5% a year ($600) with 15% long-term CG tax you could be paying $90 extra taxes per year on average. Of course, if you need it now, that could still be better than the alternatives.