Author Topic: How to withdraw funds from your IRA and 401k without penalty before age 59.5  (Read 132876 times)

dandarc

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #200 on: December 12, 2018, 10:06:23 AM »
Generally, converted assets in the Roth IRA must remain there for at least 5 years....
Another exception to "Generally" is the amount of non-deductible traditional contributions converted to Roth.  See Backdoor Roth IRA.  Those amounts (subject to withdrawal ordering rules - these are #3 in http://retirementlc.com/wp-content/uploads/2017/07/2017-07-06-Roth-IRA-Distribution-Ordering-Rules.pdf) may be withdrawn at any time without tax or penalty.
Huh. I thought those were subject to the 5 year wait as well. TIL.
The ordering rules when making a non-qualified withdrawal from your Roth IRA are thus:

1. Regular contributions
2. Conversions on a first-in, first-out basis
    a. Taxable portion (the amount required to be included in gross income because of the conversion or rollover)
    b. Non-taxable portion
3. Earnings

In a Roth IRA, the penalty only would apply to taxable items - it is a 10% additional tax on the taxable portion. If you've done your backdoor Roth IRA well, item 2.a will be minimal - typically you're aiming to convert more or less immediately after the deposit is made so that there are no earnings when you convert, so if you've done it perfectly, 100% of the backdoor Roth conversion is the "non-taxable" portion.

That being said, if it has been 5 years or more since the conversion, the "taxable portion" essentially shifts into the "non-taxable portion".

frugalnacho

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #201 on: December 19, 2018, 08:35:34 PM »
Is it really 5 years? It was my understanding that it's the 5th year after the conversion is made and only the tax year counts.  So if you convert on December 31, 2018 you would satisfy the 5 year "seasoning" on January 1, 2023 which is really only 4 years and 1 day later.

Is that correct?

Nords

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Re: How to withdraw funds from your IRA and 401k without penalty before age 59.5
« Reply #202 on: December 19, 2018, 10:35:56 PM »
Is it really 5 years? It was my understanding that it's the 5th year after the conversion is made and only the tax year counts.  So if you convert on December 31, 2018 you would satisfy the 5 year "seasoning" on January 1, 2023 which is really only 4 years and 1 day later.

Is that correct?
That's correct-- five tax years, not five calendar years.

https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/