Early Distribution Rule

[Guest walgie]

I funded my Roth IRA in 1998 with normal contributions when I was 57 and rolled over (Converted) a traditional IRA to this same Roth IRA in 2003 when I was 62.

After reading Publication 409, tax topics 428 and 558 from the IRS web site, and documents from several other web sites (including this one), I am of the belief that once I have passed age 59 1/2 and have satisfied the five year rule, the conversion in 2003 and all subsequent conversions are not bound by the early distribution 10% penalty (see TTCA-98 Brings Order To Roth IRA Distributions).

Please let me know if I am understanding this correctly.

Thanks

William

[jevd]

You may not be subject to the 10% early distribution penalty on the amounts you rolled over in 2003 at age 62, however each conversion has its own 5 year holding period and if you withdraw earnings on the conversion, you may be subject to taxation on them. The original deposits in 1998 and 2003 and the earnings on the original 1998 deposit may be withdrawn tax and penalty free. See IRS Pub 590

[Guest walgie]

Hi JEVD;

If I understand you correctly, after meeting the 5 year rule for the initial funding of my Roth IRA AND have attained an age greater than 59 1/2, the original deposit of a conversion can be distributed tax and penalty free, but the earnings of the conversion have their own 5 year holding period.

In other words, the 401k plan that I rolled over to a traditional IRA in March, 2004, can be converted to my Roth IRA today and the original amount deposited can be distributed tax and penalty free, but the earnings can not be distributed until 2009.

William

[jevd]

That is my understanding. Each conversion has its own 5 year holding period. The conversion amount has already been taxed. The earnings are subject to tax if withdrawn before the 5 year holding period. See instructions to form 8606 and the form itself to determine tax free basis and earnings subject to tax. As you are over 59 1/2 the 10% penalty for early distributtion doesn'y come into the picture.

[Appleby]

You’re on the right track jevd, but I would word the response a little differently ... for walgie, all distributions from his Roth IRAs will be tax and penalty-free because they will be qualified distributions, i.e.

a ) It has been at least five years since walgie funded his/her first Roth IRA and

b) walgie has met one of the four requirements (attaining age 59 ½).

If walgie had not met the 5-year rule, then all distributions would still be penalty free, because he/she is at least age 59 ½, but distribution of earnings would be subject to income tax, because the distribution would not be qualified

Also, the earnings on any Roth IRA assets are subject to one 5-year period, which begins the year the first Roth IRA for the individual is funded …only the conversion assets are subject to separate 5-year holding periods.

[jevd]

Thanks again for clarification Appleby. I had thought the earnings were tracked separately for the conversion. Apparently not. It does make tracking easier.

[Guest walgie]

Thank you jevd and Appleby for your replies.

I am taking away from this the following fact:

I have attained an age greater than 59 1/2.

It has been 5 years since the funding of my FIRST Roth IRA.

I am now able to receive without tax or penalty, distributions from ALL assets

in my Roth IRA and subsequent Traditional IRA conversions.

Thanks again.

William

[BPickerCPA]

William,

You have it correct. Glad it's all straightened out.