Taxes on Roth Withdrawal.

[Guest jgs123]

My 70-year old friend converted a Traditional IRA to a Roth in 1998. He elected to pay the conversion taxes over 4 years. He wants to make a withdrawal from the Roth this year but was told he would have to pay taxes on the entire withdrawal amount (not just the earnings). It would be treated as accelerated income. Is this correct or can he apply the withdrawal to the amount he already paid conversion taxes on in 1998 & 1999? Please advise.

[JAMES PATRICK]

The information you were given is correct. Let's say he converted $4000 in 1998. He must report $1,000 on his return for 1998 , 1999, 2000 and 2001.

If he withdraws $500 this year he must report the $1,000 that he would have reported plus he must report the $500 for a total of $1,500 for year 2000. Of course that means he only reports $500 in 2001.

[Guest rjelmore]

I am not an expert on this subject, to say the least. But another point of view on your question can be found in the article "Top Ten Roth IRA Myths" on the main web page under "Articles for Planning Professionals". An excerpt:

Myth number 1…

"You cannot use the money converted to a Roth IRA for five years without additional taxes and penalties."

Wrong.

You may use up to 100% of the amount transferred or contributed to a Roth even the day after you convert without any additional taxes (and no penalties if you are over 59½). The reason for this is that Roth IRAs use a very favorable accounting method called FIFO. That stands for first in first out. What this means is that any withdrawals from a Roth will first be considered from the principal or basis, which is tax-free. After 100% of the amount of your transfers or contributions have been withdrawn then taxes or penalties may apply, but then only if the five-year rule has not been met.