Roth IRA. Withdrawal penalty

[Guest donnabf]

Hypothetical. I'm 64. Convert to a Roth from regular IRA March 2004. Start to withdraw 2007 (3 yrs. later). Any penalty? I'm confused about being older than 59&1/2. Thanks

[Lame Duck]

It's my belief that the following rules would apply to your hypothetical.

To be a qualified distribution (no tax on the distribution) there are two requirements that must be met. The first is that the assets have been in the Roth IRA for at least a 5-year period, which begins with the first day of the year in which any type of contribution is first made. In your case, the period would commence on January 1, 2004, the year in which you make the conversion. The second requirement is that it is as a result of a specific event. In your case, attainment of age 59 1/2 qualifies.

Since you propose beginning the distribution in 2007 (three years), the distribution would be a nonqualified distribution. However, only a portion of the distribution may be taxable. Because of the ordering rules, you are deemed to first remove any annual contributions, followed by taxable conversion dollars. Next would be non-taxable conversion dollars. The last would be a distribution of earnings.

The distribution of your conversion assets would not be taxable. There would be no tax until you had withdrawn all of the conversion assets. The withdrawal of the earnings may or may not be taxable. I beleve that if the earnings are not distributed until after the 5-year period has elapsed (distribution occurs on or after 1/1/09), they would not be subject to taxation, since they now meet the requirements of a qualified distribution (5-year holding period and after attainment of age 59 1/2). Perhaps some of the others may have a different slant on it.

There should be no penalty tax on the distributions, even though it is a nonqualified distribution, since you meet one of the statutory exceptions to the penalty (attainment of age 59 1/2).