Author Topic: Roth conversion withdrawals before/after 5 years  (Read 3936 times)

Weedy Acres

  • Bristles
  • ***
  • Posts: 280
Roth conversion withdrawals before/after 5 years
« on: April 17, 2016, 03:32:05 PM »
If I convert $100K from tIRA to Roth IRA in year 1, then take $40K out in year 3 (paying the 10% penalty), then it grows to $200K and in year 6 I take $100K out, isn't my year 6 $100K distribution penalty free because that's what I converted in year 1, and it's now ok to take out contributions penalty free?

TurboTax is telling me only $60K is tax free (it has my 10+ year tax return history, so I'm assuming it's going back and counting my year 3 withdrawal as part of the contribution).  Is this correct?

I haven't found the right form to complete to demonstrate that I'm withdrawing contributions, not returns.

jim555

  • Handlebar Stache
  • *****
  • Posts: 2194
Re: Roth conversion withdrawals before/after 5 years
« Reply #1 on: April 17, 2016, 04:25:35 PM »
The $100k conversion amount should be with-drawable in 5 years.  Only the conversion amount, not any earnings.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5162
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Roth conversion withdrawals before/after 5 years
« Reply #2 on: April 17, 2016, 04:37:57 PM »
TurboTax is correct here. Roth IRAs have a strict set of ordering rules that say which dollars come out when: direct contributions first, then conversions (oldest first), then earnings.

You already withdrew $40k of the first conversion, paid the 10% early withdrawal tax because of the timing, leaving $60k of that conversion remaining.

Then you later withdrew $100k, of which the first $60k was from a conversion (not taxable since it's more than five years old), and the last $40k would be earnings (taxed at your regular income bracket plus 10%).

Weedy Acres

  • Bristles
  • ***
  • Posts: 280
Re: Roth conversion withdrawals before/after 5 years
« Reply #3 on: April 17, 2016, 08:11:04 PM »
TurboTax is correct here. Roth IRAs have a strict set of ordering rules that say which dollars come out when: direct contributions first, then conversions (oldest first), then earnings.

Crap, even if I paid the penalty?  I can't specify which part I'm taking out?  That sucks.

Then you later withdrew $100k, of which the first $60k was from a conversion (not taxable since it's more than five years old), and the last $40k would be earnings (taxed at your regular income bracket plus 10%).

Except that the $40K just has the 10% hit, not my income bracket hit as well, because it's a Roth, right?

Weedy Acres

  • Bristles
  • ***
  • Posts: 280
Re: Roth conversion withdrawals before/after 5 years
« Reply #4 on: April 17, 2016, 08:58:34 PM »
Another follow up:
Could I contribute $5500 to my Roth IRA tomorrow, and would my earlier 2015 distribution pull that out instead of earnings?

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5162
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Roth conversion withdrawals before/after 5 years
« Reply #5 on: April 17, 2016, 09:51:50 PM »
TurboTax is correct here. Roth IRAs have a strict set of ordering rules that say which dollars come out when: direct contributions first, then conversions (oldest first), then earnings.

Crap, even if I paid the penalty?  I can't specify which part I'm taking out?  That sucks.

That's right. The money comes out in the order specified, no matter what. You pay whatever tax (if any) that applies to the withdrawal.


Quote
Then you later withdrew $100k, of which the first $60k was from a conversion (not taxable since it's more than five years old), and the last $40k would be earnings (taxed at your regular income bracket plus 10%).

Except that the $40K just has the 10% hit, not my income bracket hit as well, because it's a Roth, right?

Nope. Read the rules again. Non-qualified distributions of Roth earnings count as taxable income and have an early withdrawal penalty. Does that match up with what TurboTax is telling you?

Another follow up:
Could I contribute $5500 to my Roth IRA tomorrow, and would my earlier 2015 distribution pull that out instead of earnings?

That's an interesting question. I don't know. Work through the tax forms and see for yourself.

Weedy Acres

  • Bristles
  • ***
  • Posts: 280
Re: Roth conversion withdrawals before/after 5 years
« Reply #6 on: April 18, 2016, 06:24:06 AM »
Ouch, ouch, ouch. Yes, that's what TurboTax is doing.  I was hoping their formulas were wrong. :-(

Diving more into the details on Roths, we made too much last year to contribute.  And too much to deduct a tIRA contribution.

Geez, looks like I need to start doing some better tax planning....

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: Roth conversion withdrawals before/after 5 years
« Reply #7 on: April 18, 2016, 09:45:46 AM »
Geez, looks like I need to start doing some better tax planning....
Yes. Taxes are our biggest expense. We spend more on tax than everything else combined (we also live very frugally). The easiest way to accumulate more money is by optimizing your taxes.