The general rule is that you may take your own contributions out of your Roth IRA at anytime with no tax or penalty. Remember, all of your Roth IRA accounts are treated as a single account, from you you first withdraw your own contributions, then you withdraw your converted assets, then finally you withdraw earnings. Since converted assets have already been taxed, you will never owe income tax on them again. However, if you withdraw them within 5 years of the conversion, you may be subject to a 10% penalty on them (unless you are over 59 1/2, disabled, or use them for certain types of expenses outlined in IRC section 72(t). Earnings withdrawn from the Roth account will be subject to income tax and possibly penalties unless you have had a Roth account for at least 5 tax years and you meet certain requirements. Best to see your tax advisor as the onus to keep this all streight is yours.
Very good question and answer. But in all the articles I have seen, not one has stated explicitly the treatment of the contributory and conversion (i.e., the amounts on which tax has been paid)AFTER the five years are up, but before age 59.5. Are those portions subject to the 10% premature withdrawal penalty (so long as not used for first time house buying, etc.)??
Take a look at the article "Lawyers are Scrambling to Meet Deadline for Roth IRA" (at "www.RothIRA.com"). It has a good discussion. From what I understand, if you take money out of a Roth IRA prior to age 59.5, but more than 5 years after the conversion, only the portion of the distribution which comes from earnings is subject to the 10% penalty.
Well, if you go to AOLs Tax Logic, it seems prety clear that the conversion and contributory amounts ARE subject to the 10% penalty if you withdraw them before you are 59.5, even if you have had them in the Roth for five years. It makes sense, but I still have yet to an explicit statement.
Correct - earnings withdrawn after 5 years but before age 59 1/2 are subject to ordinary income tax and the 10% premature distribution penalty unless a known exception applies. So, remember, no matter how many Roth accounts you have and from which Roth account you withdraw your money, the first distributions from any Roth are treated as return of your contributions. They are tax and penalty free!!! Then, once you have withdrawn your contributions, you begin to hit your converted amounts, those which were subject to income tax when converted first and First converted first. So, if I converted $5,000 in 1998 and contributed $2,000 for 1998 and then converted another $5,000 in 1999, I can withdraw up to $2,000 tax free any time. The next money I withdraw will be treated as my 1998 conversion - if I withdraw it within 5 years of its conversion and it was taxable when converted, I will now be subject to a 10% premature distribution penalty unless I am now over 59 1/2, disabled, using it for qualified medical insurance premiums while on unemployement or meet one of the other exceptions under section 72(t). Then, if I withdraw more than $7,000 the next portion withdrawn is treated as my 1999 conversion and again, the 10% penalty applies to amounts which were taxed when converted unless I meet a known exception to the penalty. Finally, if I withdraw more than the $12,000 of my own previously taxed money, I will be hitting the earnings on which I will owe income tax and a 10% penalty unless I have had a Roth IRA account for over 5 years and I am over 59 1/2, dead or disabled. If I have not had the account for 5 years but meet one of the exceptions to the penalty, I will only owe orinary income tax on the earnings, not the penalty.
I still remain confused on the non-exclusion period as it applies to conversion money for purposes of the early withdrawal penalty. Does a different five year period apply separately to conversions apart from regular contribtuions? Best described by an example:
A regular $2000 is made into a ROTH for the 1998 Tax Year. In 2002 a $50000 conversion is made into a ROTH and $10000 in earnings have accumlated by that year end. In early 2003, $52000 is withdrawn from the ROTH while the owner is under 59 1/2 and has no other exemptions from thge 10% early withdrawal penalty. Does the non-exclusion period beginning for the 1998 contribution apply to the conversion monies (to avoid the 10% penalty on them) or does a separate non-exclusion period for the converion apply which would have commenced in 2002?
I had previously read that when you open a Roth in 1998 the five year clock starts ticking. I thought that applied to conversion and contributory Roths. In the previous comment, would not the clock start with the earlier Roth date? You implied 5 years from the conversion.
I think the confusion is due to the fact that there are two different types of 5-year clocks. The first dollars you put into a Roth, whether it is a contribution or a conversion, starts the clock ticking for the 5-year period required as one part of the "Qualified Distribution Rules" for tax-free withdrawal of earnings. What I mean by that is you have had a Roth for at least 5 tax years and you are either over 59 1/2, disabled, first time home purchase (limited to $10,000) or your beneficiary is taking the money due to your death. The second 5-year clock applies to closure of the "loophole" which previously existed. If I convert my IRA, I am taxed on it but not penalized. Prior to the most recent changes, I could then take my money out of the Roth penalty free, even if I wasn't over 59 1/2, etc... The loophole was closed by requiring each conversion to remain in the Roth for at least 5 years before I withdraw it without penalty, if I would otherwise be subject to penalties for a withdrawal from my traditional IRA. This second clock applies to each conversion separately where as the first clock I mentioned starts once and runs out in 5 years - end of story.