Roth withdraw, less than 5 years, less than 59 years old

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bradpevans
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Joined: Sun Apr 08, 2018 1:09 pm

Roth withdraw, less than 5 years, less than 59 years old

Post by bradpevans » Mon Feb 11, 2019 2:39 pm

I'm 53 and have a had a Roth for a couple years via: After Tax 401K --> Roth IRA ("mega back door" route)

Suppose I bought $5000 in each of two funds, but today the values are $4800 and $5500.

So 10K in, 10.3K today

Can i withdraw the $4800 without penalty since that *holding* has no earnings? (down $200)

Or does the fact that account is up $300 come into play?

thanks

Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: Roth withdraw, less than 5 years, less than 59 years old

Post by Silk McCue » Mon Feb 11, 2019 2:52 pm

Because we are talking about the treatment of distributions from Conversions and you are under 59.5 you can withdraw the $10k total of the contributions without penalty or tax. Just don't take the net gain which has tax and penalty. Whether in one Roth account or multiple they are your "Roth IRA".

Here is the table version of the Roth Conversion chart that many here reference:

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET


Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes


UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

ExitStageLeft
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Re: Roth withdraw, less than 5 years, less than 59 years old

Post by ExitStageLeft » Mon Feb 11, 2019 2:56 pm

I'm no IRA guru and was looking on the IRS web site for confirmation of my thinking. The IRS being what it is, I can't put my fingers on a specific document that says it in black and white. But here's my understanding: your contributions can be withdrawn from a Roth IRA without penalty at any time.

Assuming that is correct, your contributions were $10k, so that is how much you could withdraw. The fact that the earnings are a sum of gains and losses isn't material.

That's my understanding. Use at your own risk.

retiredjg
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Re: Roth withdraw, less than 5 years, less than 59 years old

Post by retiredjg » Mon Feb 11, 2019 3:02 pm

bradpevans wrote:
Mon Feb 11, 2019 2:39 pm
I'm 53 and have a had a Roth for a couple years via: After Tax 401K --> Roth IRA ("mega back door" route)

Suppose I bought $5000 in each of two funds, but today the values are $4800 and $5500.

So 10K in, 10.3K today

Can i withdraw the $4800 without penalty since that *holding* has no earnings? (down $200)

Or does the fact that account is up $300 come into play?

thanks
It does not work that way.

When you rolled your after tax account to Roth IRA, chances are some of that money was after-tax contributions and some was earnings that accrued in the after-tax account. The earnings were pre-tax when they went into the Roth IRA and the earnings carry a 5 tax year clock on them.

If the clock has already run, all that rollover money (and no more) is available tax and penalty free.

If the clock has not finished running, you must take the part that was taxed at the time of the rollover (what had been earnings in the after-tax account) out first and there will be a 10% penalty on that portion of your withdrawal. Then you can take the rest of the rollover out tax and penalty free.

The $300 earnings that have occurred inside the Roth IRA must stay in the Roth IRA until the Roth IRA is 5 years old and you are 59.5 or disabled (or you could take it out with tax and/or penalty).

All that I have said assumes you never made any direct contribution to Roth IRA. If you had made direct contributions, that money would come out first.

Here's an example. You contribute $9k to your after tax account and it grows by $1k. You roll it all to Roth IRA and it makes $300.

That money sits in a stack like this and comes out of the Roth IRA from the top down.

$1k subject to a 5 tax year clock <--10% penalty on this money if it's clock has not finished running

$9k which was the after-tax contributions <---available tax and penalty free once the money above it in the stack is removed

$300 earnings that have resulted from the $10k put inside the Roth IRA <---will have tax and/or penalty until you are 59.5 and the Roth IRA is 5 years old

In all cases, the "5 tax year clock" starts on January 1 of the year you do something even if you do it late in the year. So the clock could theoretically be 4 years and 1 day long.

Topic Author
bradpevans
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Re: Roth withdraw, less than 5 years, less than 59 years old

Post by bradpevans » Mon Feb 11, 2019 3:08 pm

retiredjg wrote:
Mon Feb 11, 2019 3:02 pm
bradpevans wrote:
Mon Feb 11, 2019 2:39 pm
I'm 53 and have a had a Roth for a couple years via: After Tax 401K --> Roth IRA ("mega back door" route)

Suppose I bought $5000 in each of two funds, but today the values are $4800 and $5500.

So 10K in, 10.3K today

Can i withdraw the $4800 without penalty since that *holding* has no earnings? (down $200)

Or does the fact that account is up $300 come into play?

thanks
It does not work that way.

When you rolled your after tax account to Roth IRA, chances are some of that money was after-tax contributions and some was earnings that accrued in the after-tax account. The earnings were pre-tax when they went into the Roth IRA and the earnings carry a 5 tax year clock on them.

If the clock has already run, all that rollover money (and no more) is available tax and penalty free.

If the clock has not finished running, you must take the part that was taxed at the time of the rollover (what had been earnings in the after-tax account) out first and there will be a 10% penalty on that portion of your withdrawal. Then you can take the rest of the rollover out tax and penalty free.

The $300 earnings that have occurred inside the Roth IRA must stay in the Roth IRA until the Roth IRA is 5 years old and you are 59.5 or disabled (or you could take it out with tax and/or penalty).

All that I have said assumes you never made any direct contribution to Roth IRA. If you had made direct contributions, that money would come out first.

Here's an example. You contribute $9k to your after tax account and it grows by $1k. You roll it all to Roth IRA and it makes $300.

That money sits in a stack like this and comes out of the Roth IRA from the top down.

$1k subject to a 5 tax year clock <--10% penalty on this money if it's clock has not finished running

$9k which was the after-tax contributions <---available tax and penalty free once the money above it in the stack is removed

$300 earnings that have resulted from the $10k put inside the Roth IRA <---will have tax and/or penalty until you are 59.5 and the Roth IRA is 5 years old

In all cases, the "5 tax year clock" starts on January 1 of the year you do something even if you do it late in the year. So the clock could theoretically be 4 years and 1 day long.
the earnings were "split off" and went into my Traditional 401K.
All earnings happened inside the Roth, not before (because of the splitting off).

In this case, it *seems* i could take out 10K tax free, because 10K of After tax money went in

retiredjg
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Re: Roth withdraw, less than 5 years, less than 59 years old

Post by retiredjg » Mon Feb 11, 2019 3:19 pm

bradpevans wrote:
Mon Feb 11, 2019 3:08 pm
the earnings were "split off" and went into my Traditional 401K.
All earnings happened inside the Roth, not before (because of the splitting off).

In this case, it *seems* i could take out 10K tax free, because 10K of After tax money went in
I would agree. You can even take the extra $300 if you are willing to pay tax and a 10% penalty on it.

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Epsilon Delta
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Re: Roth withdraw, less than 5 years, less than 59 years old

Post by Epsilon Delta » Mon Feb 11, 2019 3:20 pm

retiredjg wrote:
Mon Feb 11, 2019 3:02 pm

If the clock has not finished running, you must take the part that was taxed at the time of the rollover (what had been earnings in the after-tax account) out first and there will be a 10% penalty on that portion of your withdrawal. Then you can take the rest of the rollover out tax and penalty free.
With the caveat that this is done by year.

If you converted $5000 in 2016 including of $100 in earnings you paid tax on in 2016 ad $6000 in 2017 and including $200 of earnings then
The first $100 to come out is the $100 taxed in 2016 and has a 10% penalty. $10.
The next $4900 is the rest of the 2016 conversion and is tax and penalty free.
The next $200 is the taxable part of the 2017 conversion and has a 10% penalty. $20.
the next $5800 is tax and penalty free.
Any thing more is earnings in the Roth and is taxed and a has a 10% penalty. (until the account is qualified, more or less).

retiredjg
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Re: Roth withdraw, less than 5 years, less than 59 years old

Post by retiredjg » Mon Feb 11, 2019 3:27 pm

Epsilon Delta wrote:
Mon Feb 11, 2019 3:20 pm
With the caveat that this is done by year.
Thanks ED, I agree. What I said applies to one or more rollovers that occur(ed) within 1 calendar year.

Alan S.
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Location: Prescott, AZ

Re: Roth withdraw, less than 5 years, less than 59 years old

Post by Alan S. » Mon Feb 11, 2019 4:23 pm

bradpevans wrote:
Mon Feb 11, 2019 2:39 pm
I'm 53 and have a had a Roth for a couple years via: After Tax 401K --> Roth IRA ("mega back door" route)

Suppose I bought $5000 in each of two funds, but today the values are $4800 and $5500.

So 10K in, 10.3K today

Can i withdraw the $4800 without penalty since that *holding* has no earnings? (down $200)

Without penalty OR tax, without regard to that "holding". See below.

Or does the fact that account is up $300 come into play?

No, not until you withdraw the entire 10,000 of basis first, irrespective of any "holding".

thanks
OK, so you did a Notice 2014-54 split direct rollover to TIRA and Roth IRA.
The first 10k of your Roth balance can be withdrawn anytime without tax or penalty, but the remaining 300 would be subject to both tax and penalty until you reach 59.5. The 300 comes out last under the Roth ordering rules.

Note that whatever investments you made that have gains or losses is immaterial. The Roth ordering rules do not apply per investment, they apply to all of your Roth IRAs in the aggregate. Therefore, what matters here is that you have a net gain of 300 at this point in time. The amount of gain or loss is subject to daily change based on investment results. Your amount of basis (10,000) is not affected by investment results, it only changes when you add a new contribution or take a distribution.

For example, if your total account value were to drop to 9,000 solely due to investment losses, you would still have 10,000 in basis, and no gain.
If you took a distribution of 6,000, that would come from your 10,000 of basis, reducing it to 4,000. You would report this on Form 8606 (until your Roth is qualified). A future gain in the Roth would only occur after this distribution if your account value exceeded 4,000.

Topic Author
bradpevans
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Re: Roth withdraw, less than 5 years, less than 59 years old

Post by bradpevans » Mon Feb 11, 2019 4:27 pm

Thank you Alan S.

this is perfect.

kaneohe
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Re: Roth withdraw, less than 5 years, less than 59 years old

Post by kaneohe » Mon Feb 11, 2019 5:23 pm

Alan S. wrote:
Mon Feb 11, 2019 4:23 pm
..............................................

OK, so you did a Notice 2014-54 split direct rollover to TIRA and Roth IRA.
......................................................
Trying to understand how the qualified plans to Roth IRA works. In this case only the after-tax funds went to Roth so
this is like a conversion of non-deductible IRA contributions?

And if the above split direct rollover had not happened, OP would have paid tax on the earnings in the qualified plan at conversion
and this part would be like the taxable part of a TIRA conversion to Roth? The other part (after tax contributions to 401K) would not be taxed at conversion and would l be like the non-taxable part of a TIRA conversion to Roth?

Topic Author
bradpevans
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Joined: Sun Apr 08, 2018 1:09 pm

Re: Roth withdraw, less than 5 years, less than 59 years old

Post by bradpevans » Mon Feb 11, 2019 6:29 pm

kaneohe wrote:
Mon Feb 11, 2019 5:23 pm
Alan S. wrote:
Mon Feb 11, 2019 4:23 pm
..............................................

OK, so you did a Notice 2014-54 split direct rollover to TIRA and Roth IRA.
......................................................
Trying to understand how the qualified plans to Roth IRA works. In this case only the after-tax funds went to Roth so
this is like a conversion of non-deductible IRA contributions?

And if the above split direct rollover had not happened, OP would have paid tax on the earnings in the qualified plan at conversion
and this part would be like the taxable part of a TIRA conversion to Roth? The other part (after tax contributions to 401K) would not be taxed at conversion and would l be like the non-taxable part of a TIRA conversion to Roth?
I believe this is how it happened:
After tax ("basis") went direct to Roth IRA.
"Gains" had two options.
a) pay the tax impact in April, money goes into Roth
b) place the money into traditional 401K

The gains were small, so not a big deal. As i see it, option b is sub-optimal
because income tax is paid going in, then again on profits later (rather than LTCG)

Alan S.
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Location: Prescott, AZ

Re: Roth withdraw, less than 5 years, less than 59 years old

Post by Alan S. » Mon Feb 11, 2019 6:57 pm

bradpevans wrote:
Mon Feb 11, 2019 6:29 pm
kaneohe wrote:
Mon Feb 11, 2019 5:23 pm
Alan S. wrote:
Mon Feb 11, 2019 4:23 pm
..............................................

OK, so you did a Notice 2014-54 split direct rollover to TIRA and Roth IRA.
......................................................
Trying to understand how the qualified plans to Roth IRA works. In this case only the after-tax funds went to Roth so
this is like a conversion of non-deductible IRA contributions?

And if the above split direct rollover had not happened, OP would have paid tax on the earnings in the qualified plan at conversion
and this part would be like the taxable part of a TIRA conversion to Roth? The other part (after tax contributions to 401K) would not be taxed at conversion and would l be like the non-taxable part of a TIRA conversion to Roth?
I believe this is how it happened:
After tax ("basis") went direct to Roth IRA.
"Gains" had two options.
a) pay the tax impact in April, money goes into Roth
b) place the money into traditional 401K

The gains were small, so not a big deal. As i see it, option b is sub-optimal
because income tax is paid going in, then again on profits later (rather than LTCG)
Not exactly.
You did have two options.
1) Since the gains were very small, rolling the entire amount to your Roth IRA would have produced a very small taxable amount, and this transaction is less complicated and easier to report (see below).
2)Do the split direct rollover, which eliminates any current taxes. The potential downsides here are:
a) Risk of wrong amounts being deposited into your two IRA types due to either the way the direct rollover checks are made out or due to carelessness of the receiving custodian. While such errors are not frequent, IF they happen it is a real hassle to get the custodian to correct it.
b) Having a TIRA balance will impact any back door Roth conversions you plan to do in the future
c) The distributing plan often will report a split rollover on a single 1099R form. Consumer tax programs mishandle the entry as a single 1099R because there actually should be a 1099R for each destination account. The reason for this is that Boxes 2a and 5 have different instructions depending on which type of IRA will receive the contributions. So if you direct it to 2 IRA types, it is apples and oranges for Boxes 2a and 5. The antidote for these filing issues is to tear down the single 1099R and enter it as two separate forms, one for each IRA destination. Did you get one of those single 1099R forms?

So your choice here boils down to HOW MUCH pre tax money is being distributed, and how much it will impact your taxes v. the benefit of having more money in your Roth. Generally, small amounts (eg 200 or less) of pre tax dollars are better off going to the Roth along with the after tax dollars.

Topic Author
bradpevans
Posts: 415
Joined: Sun Apr 08, 2018 1:09 pm

Re: Roth withdraw, less than 5 years, less than 59 years old

Post by bradpevans » Mon Feb 11, 2019 7:31 pm

Alan S. wrote:
Mon Feb 11, 2019 6:57 pm
bradpevans wrote:
Mon Feb 11, 2019 6:29 pm
kaneohe wrote:
Mon Feb 11, 2019 5:23 pm
Alan S. wrote:
Mon Feb 11, 2019 4:23 pm
..............................................

OK, so you did a Notice 2014-54 split direct rollover to TIRA and Roth IRA.
......................................................
Trying to understand how the qualified plans to Roth IRA works. In this case only the after-tax funds went to Roth so
this is like a conversion of non-deductible IRA contributions?

And if the above split direct rollover had not happened, OP would have paid tax on the earnings in the qualified plan at conversion
and this part would be like the taxable part of a TIRA conversion to Roth? The other part (after tax contributions to 401K) would not be taxed at conversion and would l be like the non-taxable part of a TIRA conversion to Roth?
I believe this is how it happened:
After tax ("basis") went direct to Roth IRA.
"Gains" had two options.
a) pay the tax impact in April, money goes into Roth
b) place the money into traditional 401K

The gains were small, so not a big deal. As i see it, option b is sub-optimal
because income tax is paid going in, then again on profits later (rather than LTCG)
Not exactly.
You did have two options.
1) Since the gains were very small, rolling the entire amount to your Roth IRA would have produced a very small taxable amount, and this transaction is less complicated and easier to report (see below).
2)Do the split direct rollover, which eliminates any current taxes. The potential downsides here are:
a) Risk of wrong amounts being deposited into your two IRA types due to either the way the direct rollover checks are made out or due to carelessness of the receiving custodian. While such errors are not frequent, IF they happen it is a real hassle to get the custodian to correct it.
b) Having a TIRA balance will impact any back door Roth conversions you plan to do in the future
c) The distributing plan often will report a split rollover on a single 1099R form. Consumer tax programs mishandle the entry as a single 1099R because there actually should be a 1099R for each destination account. The reason for this is that Boxes 2a and 5 have different instructions depending on which type of IRA will receive the contributions. So if you direct it to 2 IRA types, it is apples and oranges for Boxes 2a and 5. The antidote for these filing issues is to tear down the single 1099R and enter it as two separate forms, one for each IRA destination. Did you get one of those single 1099R forms?

So your choice here boils down to HOW MUCH pre tax money is being distributed, and how much it will impact your taxes v. the benefit of having more money in your Roth. Generally, small amounts (eg 200 or less) of pre tax dollars are better off going to the Roth along with the after tax dollars.
Form 5498 is all i got (if memory serves). FWIW, all accounts in question are held at Fidelity and these transactions had no tax implications (After tax 401K contributions --> Roth IRA / earnings --> 401K). For 2019 the rollover is immediate and free, so no earnings to worry about no fees to pay.

I do in fact i have two rollovers IRAs, one at Fidelity and one at Etrade from a previous job. Both of those funded solely with pre-tax dollars.

Alan S.
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Location: Prescott, AZ

Re: Roth withdraw, less than 5 years, less than 59 years old

Post by Alan S. » Mon Feb 11, 2019 9:26 pm

Your 1099R would have been for the year you did the mega back door, which was apparently a couple years ago. So your tax filing was done then. From there you just need some method of keeping track of the composition of your Roth IRA (amount of regular or conversion basis, applicable years for conversions or rollovers from qualified plans, etc. You would need that to either determine the tax impact of any Roth IRA distribution you might take before you take it and also to enable you to report such a distribution on Form 8606.

You would have received a 5498 from both the TIRA and the Roth IRA, which does not affect your tax reporting unless there is a conflict between the 5498 and the matching 1099R for that year. You should keep the 5498 forms with your tax files or IRA files according to your preference.

retire2022
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Location: NYC

Re: Roth withdraw, less than 5 years, less than 59 years old

Post by retire2022 » Mon Feb 11, 2019 10:09 pm

all IRS Publication 590b

https://www.irs.gov/pub/irs-pdf/p590b.pdf distributions

https://www.irs.gov/pub/irs-pdf/p590a.pdf about retirement funds

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