Direct Rollover to ROTH IRA

[Guest Golden Girl]

Is this treated like a taxable distribution (i.e. regular income tax plus 10% penalty applies) but no upfront withholding is required?

Thank YOU

[Guest Golden Girl]

It appears the rollover to the ROTH IRA may be exempt from the 10% penalty.

I am trying to get my hands around that one.

So, essentially if a taxpayer is under age 59.5, they can roll 10,000 to a ROTH IRA, pay regular tax, but no 10% penalty.

However, if the taxpayer then turns around and distributes the $10,000 from the ROTH IRA before age 59.5, the 10% penalty would apply.

So, the taxpayer is not really avoiding the 10% penalty by the direct rollover to the ROTH- just delaying it unless they keep in ROTH IRA until age 59.5.

Sound right?

Lori

[Guest Jessica Stern]

This may help:

http://www.rothirarules.net/roth-ira-tax.htm

and

http://www.rothirarules.net/

Take care

Is this treated like a taxable distribution (i.e. regular income tax plus 10% penalty applies) but no upfront withholding is required?

Thank YOU

[John Feldt ERPA CPC QPA]

Would the 10% penalty only apply to the earnings?

1. Roll from plan to Roth IRA at age 50.

2. Pay income tax, no the 10% penalty.

3. Distribute from Roth IRA to self at age 51.

4. Pay 10% penalty on the earnings only?

[jevd]

Would the 10% penalty only apply to the earnings?

1. Roll from plan to Roth IRA at age 50.

2. Pay income tax, no the 10% penalty.

3. Distribute from Roth IRA to self at age 51.

4. Pay 10% penalty on the earnings only?

From Answer Book Series:

TREATISE, 401(k)-ANSWER-BOOK, Q 22:11 What is a qualifying distribution from a Roth IRA?

What is a qualifying distribution from a Roth IRA?

Qualifying distributions from Roth IRAs are withdrawals of earnings made after a five-year period, beginning with the first year for which a Roth IRA contribution was made, and must satisfy at least one of the following conditions:

1. The IRA owner is age 591/2 or older;

2. The IRA owner has died or become disabled; or

3. To pay for certain first-time home buyer expenses up to a lifetime limit of $10,000.

The IRS Restructuring and Reform Act of 1998 [Pub. L. No. 105-206, 112 Stat. 685] (IRRA) clarified that there is only one five-year holding period for all Roth IRAs owned by any one taxpayer.

IRRA also provides that if a distribution is made from a Roth IRA during this five-year holding period and the Roth IRA contained both contributions and conversion amounts, the distribution is to be treated as coming first from original Roth IRA contribution amounts, then from conversion amounts (in the order converted and beginning with amounts already included in income), and last from earnings. [i.R.C. § 408A(d)(4)] For purposes of these ordering rules, all Roth IRAs, whether or not maintained in separate accounts, will be considered a single Roth IRA.

Any conversion amounts thus withdrawn will be subject to the 10 percent early withdrawal penalty unless one of the exceptions under Internal Revenue Code (Code) Section 72(t) applies (e.g., over age 591/2 ). Under the rules, recordkeeping for Roth IRAs will be much simpler if conversion amounts and original Roth IRA contribution amounts are not placed in the same Roth IRA account. This closes retroactively the loophole whereby the 10 percent early withdrawal tax on eligible rollover distributions could be avoided by rolling into a traditional IRA, converting to a Roth IRA, and then immediately withdrawing the converted amount. Emphasis added by poster.

[John Feldt ERPA CPC QPA]

Thanks you. I knew the Treasury would not have let that happen.

[John G]

Direct often means a rollover from one custodian to another at your request, but you never touch the assets or the check. This is the preferred method of rolling funds from one custodian to another.

I think here you mean directly moving from an IRA to a Roth. This is not technically a rollover, but rather a conversion. Conversion rules apply. There are income and tax filing limitations. Taxes may be due...but keep an eye on what rules apply in what time periods as the laws change.

You can also do a rollover from a Roth to another Roth. Direct here means custodian to custodian and you don't touch the funds. No tax issues here, no penalty. Some custodians may charge fees, but often the new custodian will reimburse you for these if you ask.

Also worth noting, you can rollover into an IRA say from a plan. Then do some partial conversions when the tax impact works for you. Its not an all or nothing decision, you can do conversions in steps. However, you must qualify in each year you undertake a conversion.

[K2retire]

Also worth noting, you can rollover into an IRA say from a plan. Then do some partial conversions when the tax impact works for you. Its not an all or nothing decision, you can do conversions in steps. However, you must qualify in each year you undertake a conversion.

And now you can also roll pre-tax money from a qualified plan directly to a Roth IRA. I believe that is was the OP asked about.

[Guest cocojambo2]

Would the 10% penalty only apply to the earnings?

1. Roll from plan to Roth IRA at age 50.

2. Pay income tax, no the 10% penalty.

3. Distribute from Roth IRA to self at age 51.

4. Pay 10% penalty on the earnings only?

From Answer Book Series:

TREATISE, 401(k)-ANSWER-BOOK, Q 22:11 What is a qualifying distribution from a Roth IRA?

What is a qualifying distribution from a Roth IRA?

Qualifying distributions from Roth IRAs are withdrawals of earnings made after a five-year period, beginning with the first year for which a Roth IRA contribution was made, and must satisfy at least one of the following conditions:

1. The IRA owner is age 591/2 or older;

2. The IRA owner has died or become disabled; or

3. To pay for certain first-time home buyer expenses up to a lifetime limit of $10,000.

The IRS Restructuring and Reform Act of 1998 [Pub. L. No. 105-206, 112 Stat. 685] (IRRA) clarified that there is only one five-year holding period for all Roth IRAs owned by any one taxpayer.

IRRA also provides that if a distribution is made from a Roth IRA during this five-year holding period and the Roth IRA contained both contributions and conversion amounts, the distribution is to be treated as coming first from original Roth IRA contribution amounts, then from conversion amounts (in the order converted and beginning with amounts already included in income), and last from earnings. [i.R.C. § 408A(d)(4)] For purposes of these ordering rules, all Roth IRAs, whether or not maintained in separate accounts, will be considered a single Roth IRA.

Any conversion amounts thus withdrawn will be subject to the 10 percent early withdrawal penalty unless one of the exceptions under Internal Revenue Code (Code) Section 72(t) applies (e.g., over age 591/2 ). Under the rules, recordkeeping for Roth IRAs will be much simpler if conversion amounts and original Roth IRA contribution amounts are not placed in the same Roth IRA account. This closes retroactively the loophole whereby the 10 percent early withdrawal tax on eligible rollover distributions could be avoided by rolling into a traditional IRA, converting to a Roth IRA, and then immediately withdrawing the converted amount. Emphasis added by poster.

Further to those specifications, you must rollover all amounts within a 12 month period and you're only allowed to do it once.

Rollover within 12 months

Normally you aren't allowed to do more than one rollover from or to the same IRA within a 12-month period. This rule applies to Roth IRAs, too, but with a special exception. For purposes of this rule you're permitted to disregard a conversion from a traditional IRA to a Roth IRA, even if the conversion takes the form of a rollover.

Source: http://www.definerothira.com

Example: In November, 2007, you took a distribution from your traditional IRA and rolled it to a different traditional IRA within 60 days. In March, 2008 you want to roll this traditional IRA to a Roth IRA. This rollover is permitted if you meet the other requirements for a rollover.

Rolling part of your IRA

There's no rule that says you have to convert your entire IRA at once. You can convert part of an IRA if you choose. Unfortunately though, you can't choose to roll only the nontaxable part of a traditional IRA that contains taxable and nontaxable money.

Example: You have a traditional IRA with a balance of $10,000, which includes $6,000 of nondeductible contributions. If you roll $6,000 of this IRA to a Roth IRA, you're required to treat that rollover as coming 60% from nondeductible contributions and 40% from other money — the part that's taxable.