Confusing surrounding what is a ROTH IRA qualified withdrawal

[Guest Jennif102]

Hello,

I am contemplating turning my traditional IRA into a ROTH and can't find a solid answer surrounding what is a qualified ROTH IRA withdrawal (not subject to 10% penalty)

Here's my scenario:

Under 59 1/2

had Roth IRA for LESS than 5 years

If I convert my traditional IRA into a ROTH IRA tomorrow, I want to have the option WITHIN the next 5 years to either:

1. Withdrawal money to buy a house

2. Withdrawal money to pay for higher education expenses from an accredited institution.

Can someone please tell me exactly what the tax implications are for each of these scenarios for a ROTH IRA that you've had for less than 5 years?

Thanks

[Appleby]

Definition of a qualified distribution from a Roth IRA can be found here

http://www.retirementdictionary.com/qualif...bution-roth.htm

For your specific questions:

1. No penalty, up to $10,000

2. No penalty for qualified education expenses

Qualified education expenses defined in IRS Publication 970

Hope this helps

[Guest Jennif102]

I'm actually still pretty confused. You say that both those distributions are qualified, but according to the link you put in your reply, the dist won't be qualified since it won't be passed the 5 year waiting period. It also mentions nothing about a qualified education expenses distribution:

A qualified distribution from a Roth IRA is defined as one that meets the following requirements:

1. It occurs at least five years after the Roth IRA owner contributed to his/her first Roth IRA (for instance, if an IRA owner contributed to his/her Roth IRA for 2007, this five year period begins January 1,2007, providing the 2007 contribution is made by the deadline (generally April 15,2008)…and

2. Meets one of the following requirements

1. Occurs on or after the IRA owner reaches age 59 ½

2. Occurs as a result of the Roth IRA owner is disabled (within the meaning or Internal Revenue Code Section 72(m)

3. Is distributed to the beneficiaries of the Roth IRA owner as a result of the Roth IRA owner being deceased.

4. Is used towards the purchase of a first-time home for the IRA owner or an eligible family member (limited to $10,000 for the IRA owner’s lifetime).

[Appleby]

Actually- I did not say the distributions are qualified. But I can see how it can be confusing.

The link provided a definition to a qualified distribution, in response to your question “what is a qualified withdrawal”.

However, in your scenarios, the distribution is not qualified, because you have not held a Roth IRA for at least five years. So, the question then becomes “ How is a non-qualified distribution treated?”. But before we answer that, let’s look at your question, which is “ If you convert money, and withdraw from that converted amount before five years, what are the tax implications for the examples you provided?”. The answer is:

----If you withdraw up to $10,000 to purchase a first time home, the amount is penalty free.

----If you withdraw any amount for qualified educational expenses, the amount is penalty free.

The amounts will always be tax-free, because you already paid any taxed owed on the amount when it was converted.

Now, let’s look at the broader issue of “ How is a non-qualified Roth IRA distribution treated?”. The answer depends on the source of the withdrawal. According to the ordering rules, withdrawals from Roth IRAs occur from the following sources:

Regular contributions. When those are completely withdrawn,

Conversion amounts. When those are completely withdrawn,

Earnings

----Withdrawals from earnings are always tax and penalty –free, because they are from funds that were already taxed when contributed to the Roth IRA

----Withdrawals from conversion amounts are tax-free, because any taxes owed on those amounts were paid when converted . If the converted amount has been aged for less than five years, the withdrawal is subject to a 10% early distribution penalty, unless an exception applies. If the conversion amount has aged for at least five years, the 10% penalty does not apply.

----Withdrawals from earnings are subject to income tax and the 10% penalty. However, the penalty is waived if an exception applies.

I hope that helps.

Please feel free to post any follow-up questions

[Guest Jennif102]

Got it now! Thanks so much!