Can Roth IRA conversions be withdrawn in less than 5 years if you are over 59.5?

[Guest rkal66]

I am getting really confused. If I convert traditional IRA to a Roth, can I withdraw the contributions penalty and tax free before the Roth has been opened 5 years if I am over the age of 59.5?

It's not a "qualified distribution", but since I am over 59.5 it should not matter. Is this correct?

[Appleby]

Distributions of contributions and conversion amounts will be penalty-free if the distributions occur when you are age 59 ½ or older- regardless of how long or (short) the period since you have held a Roth IRA or converted the assets. IRC 408A (d)(1)(B)).

Of course, you already know that distributions of contributions and conversion amounts will always be tax-free since the taxes were already paid on these amounts ( by not taking a deduction for the contribution and paying the taxes on the converted amount at the time of conversion.)

Earnings

Because the distribution is nonqualified, distributions of earnings will be subject only to income tax- No penalty since you are at least age 59 ½ (one of the exceptions to the early distribution penalty),

[Guest nukejohn]

Appleby,

If you were 48 y/o, and had opened a Roth IRA in 1998 (but hadn't contributed since), but you wanted to convert a much larger IRA into the Roth, could you do the conversion in Jan 2004, and withdraw enough money in April 2005 to pay the taxes on the conversion, without having to pay taxes on the April withdrawal. The way I understand it, you would only have to pay a 10% early withdrawal penalty.

Thanks

[Appleby]

Short answer is yes.

Explanation:

Any amount you withdraw will come from your IRA contributions first, and after that; your conversion assets.

Your conversion amounts are withdrawn on a first-in-first-out basis. Any amount you withdraw will not come from your 2004 conversion until you have withdrawn your total contributions and 1998 conversion amounts. Therefore, since you have not converted assets to your Roth IRA since 1998, you will not owe early distribution penalty on any amount you withdraw from your Roth IRA, unless the withdrawal exceeds your total contributions and conversions for 1998.

You will only pay taxes if the amount you withdraw includes earnings. This will not occur unless your withdrawals have exceeded your total contributions and conversion amounts.

Example:

In 1998 you contributed $2,000

In 1998 you converted $5,000

In 2004 you converted $20,000

The account has total earnings of $1,000

Total balance $28,000

If you withdraw $7,000, this amount will be tax and penalty free ( total contributions and conversions that had aged five years)

If you withdraw $8,000, then $7,000 will be tax and penalty free. $1,000 will be subject to the early distribution penalty – because it will be from conversion assets that have not aged five years

If you withdraw $28,000 then $7,000 will be tax and penalty free. $20,000 will be subject to the early distribution penalty – because it will be from conversion assets that have not aged five years. $1,000 will be subject to the early distribution penalty and income taxes, because it will be from a nonqualified distribution

Note: the 10 percent early distribution penalty will never apply if you meet an exception.

From a financial planning perspective, you may want to discuss with your financial planner whether it is better to pay the taxes from other sources, given that the assets in your Roth IRA accumulate of a tax-free basis .