Are Roth distributions subject to 10% penalty if you are not 59 1/2?

[JAMES PATRICK]

I have read Roth rules and regs and would like confirmation on a few points:

1.) If you withdraw conversion money after it is in a Roth for 5 years and you are not 59 1/2 it seems to me that the 10% penalty still applies, is that so? (only deductible money was converted).

2.) Earnings on contributions or conversions would be subject to 10% until an exception was to apply, 59 1/2 etc.

[BPickerCPA]

1) If you withdraw conversion money after five years, no 10% penalty tax no matter how young you are.

2) Earnings will always be subject to income tax until they become "qualified withdrawals" and will always be subject to the 10% penalty tax until an exception applies.

[JAMES PATRICK]

The reason I am somewhat confused was the examples given in Pub 590 on page 44. The examples say amounts were converted in 1998 and withdrawn in 2003 and 2004. The 2004 withdrawal had no 10% penalty but the 2003 did.

[BPickerCPA]

The IRS views 2004 as the first year that you can take the conversion out penalty free. At least that's what pub 590 says. I'm looking into it since I don't necessarily agree.

[BPickerCPA]

I checked the pub and the regs, and the example in pub 590 is WRONG. In the 1998 pub 590, they had a similar example where the example 2 withdrawal was in 2002 and the example 3 withdrawal was in 2003. Apparently in the 1999 version they updated the years but did not change the original conversion from 1998 to 1999. So whereas in the 1998 pub 590 the withdrawals were in years 5 and 6, in the 1999 version they are in years 6 and 7.

The pub is clearly in error. Great catch!

Barry

[JAMES PATRICK]

Thanks Barry,

I thought it I was losing it, actually the good catch was yours, in comparing last year's Pub to this year and realizing how they made the error.