May 10

if someone under age 59 1/2 wants to take money out of a Traditional IRA, they would have to pay a 10 % penalty and taxes. But what if they converted the Traditional IRA to a Roth IRA first? (and they can maybe convert only the amount they need). Then – as I understand Roth IRAs – there is no 10% penalty to withdraw from a Roth. Is this true?
Also, Can you w/d from a Roth anytime without incurring or do you have to wait 5 years after conversion?

4 comments so far...

  • Rick B Said on May 10th, 2010 at 8:07 pm:

    You can’t withdraw money from a ROTH without penalty.

  • Talisman Said on May 10th, 2010 at 8:35 pm:

    There are several ways to avoid the 10% early withdrawl penalty from the IRS (and many states have a 2% penalty along the same lines).

    Publication 590 has excellent details on the special exceptions allowed to avoid penalties. There are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations.

    -You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
    -The distributions are not more than the cost of your medical insurance.
    -You are disabled.
    -You are the beneficiary of a deceased IRA owner.
    -You are receiving distributions in the form of an annuity.
    -The distributions are not more than your qualified higher education expenses.
    -You use the distributions to buy, build, or rebuild a first home.
    -The distribution is due to an IRS levy of the qualified plan.
    -The distribution is a qualified reservist distribution.
    -You rollover the distribution within the time limits.

    Anytime you take a distribution from a traditional IRA – including converting it to a Roth IRA, you will have to pay regular taxes on the distribution. As you sort of hinted in your original post, you noticed the 5-year rule. If you convert an IRA to a Roth and take a distrubution without satisying the Roth requirements – you still pay the 10% penalty – see the link below:

  • travelguruette Said on May 10th, 2010 at 9:22 pm:

    When you convert the money from a traditional to a roth you must pay the taxes on the money. You are going from a pretax situation to a post tax situation.

  • ninasgramma Said on May 10th, 2010 at 9:35 pm:

    What you propose looks like a loophole to avoid the 10% penalty, but in fact there is no loophole. Your converted money has to sit in the account for five years before you can take the money out without penalty (and then only if you are age 59.5 or older, or meet another exception).

    There are circumstances when there is a 10% penalty on distributions from a Roth IRA. For example, if you take out earnings before age 59.5 (and you do not meet another exception such as disability), you will pay a 10% penalty. And as mentioned above, if you take out converted amounts there may be a 10% penalty if the money hasn’t been in the account for five years, or you are under age 59.5 or do not meet one of the other exceptions.

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