Newbie Roth Rollover Question [Early withdrawal penalty?]

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Newbie Roth Rollover Question [Early withdrawal penalty?]

Postby Parasky » Sun Mar 24, 2013 10:17 pm

Hi, I'm so glad I've found this forum. I'm just starting my retirement planning. My salary is too hight to make a direct Roth contribution so I am planning on making a non-deferred contribution to an IRA and then rolling it over to a Roth to get around the salary limit. I don't currently have any IRAs so I don't need to worry about the potential tax issues. My question is does the 10% penalty for making an early withdrawal still apply to the Roth rollover? i.e. can I take money out of the roth at any time without paying a penalty? I know the penalty would apply to earnings but does it still apply to contributions? I didn't think it did but something I read implies that it does. It said that if the penalty didn't apply then everybody who wanted to take their money out of an IRA would first roll it over to a Roth to avoid the penalty, which I guess make sense, but I'm over my head here.

Thanks so much for any help.
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Re: Newbie Roth Rollover Question [Early withdrawal penalty?

Postby House Blend » Mon Mar 25, 2013 9:58 am

Your conversion to Roth starts a 5 year clock back-dated to Jan 1. If you withdraw any conversion amounts before the clock expires, those are typically subject to the 10% penalty.

But there are many exceptions (e.g., over age 59.5).

See Publication 590.
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Re: Newbie Roth Rollover Question [Early withdrawal penalty?

Postby Parasky » Mon Mar 25, 2013 10:20 am

Thanks for responding! That's what I initially thought also, but after reading pub 590 it seems to imply that if the Roth rollover was funded from a non-deferred contribution to an IRA, then the 10% penalty wouldn't apply.

This seems to be the relevant sentence from pub 590, "You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount)"

Since the amount rolled over was non-deferred in the first place, then I wouldn't have to include it in income when I took it out of the Roth, therefore I wouldn't have to pay the penalty. Does that make sense?
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Re: Newbie Roth Rollover Question [Early withdrawal penalty?

Postby TheIndexer » Mon Mar 25, 2013 10:34 am

The 10% penalty does not apply to rollovers from non-deductible contributions to a tIRA.

http://www.paychex.com/a/d/white-papers ... h-iras.pdf
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Re: Newbie Roth Rollover Question [Early withdrawal penalty?

Postby Default User BR » Mon Mar 25, 2013 1:39 pm

It's usually best to go the IRS publications:

Additional Tax on Early Distributions

If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.
Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions , later, to determine the recapture amount, if any.

IRS Publication 590

Note the part in bold (emphasis mine). If your conversion had no earnings, then there would be no additional tax.


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Re: Newbie Roth Rollover Question [Early withdrawal penalty?

Postby Parasky » Mon Mar 25, 2013 4:02 pm

Thanks. That's the section of the Irs pub that I was looking at. I'm not worried about any extra taxes on the conversion because it's all non-deferred contributions. My specific question is whether the 10% penalty would still apply if I wanted to take an early withdrawal of contributions only from the Roth.

I think you guys answered my question.

Thanks!
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