The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: coast2coast on February 16, 2015, 04:34:33 PM
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Hello MMM forum -
I have a few questions about Roth IRA contributions, conversions, and withdrawals, and haven't been able to track down answers through my own research. Given the wisdom on this forum, I thought I'd see if anyone here could helpfully lend some insight. Here it goes....
I have 2 Roth IRA accounts:
- Bank of America (opened January 2008) / total contributions $100 / current balance $103
- Vanguard (opened January 2014) / total contributions ZERO / total conversions $11,000 (5,500 converted Jan 2014; 5,500 converted Jan 2015)
I am 36 y.o. My income since 2010 and for the foreseeable future has made me ineligible for direct Roth IRA contributions; hence the Roth IRA conversions beginning in Jan 2014 by way of non-deductible Traditional IRA contribution then "backdoor" conversion to a Roth IRA. The $100 contribution to the BOFA Roth IRA in 2008 was made in a fleeting moment of foresight back when I was a student and had minimal income; sadly, I never made any further contributions in those pre-Mustachian days. Now for the questions:
I can only withdraw, without penalty or tax, $100 from either/both of these Roth IRA accounts because that is the only contribution that I have made -- correct?
Along similar lines, any future conversion amounts to the Vanguard Roth IRA via backdoor, e.g., $6,000 for tax year 2015, would not withdraw-able without penalty or taxes, correct?
If, however, I make a withdrawal from the Vanguard Roth IRA account for a first-time home purchase, does the 5-year rule entitle me to withdraw up to $10,000? This would be because 5 years have elapsed since the initial BOFA Roth IRA account was opened, notwithstanding the Vanguard account being under 5 years old.
Any thoughts would be most welcome - I truly appreciate it!
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I think the 5 year rule applies to conversions too. So you would only be able to withdraw $100 of contributions until 2019. At which point you could withdraw $5,500 of the conversion done in 2014. If you took a distribution before 2019 for a first time home purchase, since that is a qualified distribution you would not pay the 10% penalty but you would have to pay taxes on whatever wasn't in there for at least 5 years. But since you already paid taxes on the conversion amount, you wouldn't owe any additional money. So yes you could take up to $10k for a first time home purchase without owing anything.
See link below for more info:
http://www.fool.com/money/allaboutiras/allaboutiras12.htm
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Thanks for the explanation. If I'm following correctly, the 5-year "waiting period" doesn't have effect in this home purchase scenario because the 10,000 home purchase limit is necessarily less than the 11,000 that have already been converted and taxed.
Seems like using the Roth IRA as a holding ground for 10,000 of down payment savings will work fine in this scenario. But using it for emergency fund purposes, as I've seen some on this forum do, would not work because that would not be a qualified distribution. Thanks!