Author Topic: How to withdraw funds from your IRA and 401k without penalty before age 59.5  (Read 120225 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#3 in http://retirementlc.com/wp-content/uploads/2017/07/2017-07-06-Roth-IRA-Distribution-Ordering-Rules.pdf) may be withdrawn at any time without tax or penalty.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".