Roth Conversion question

Technical topics regarding tax preparation.
#21
HowardS  
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Go to Q-5 in the following link:
https://www.law.cornell.edu/cfr/text/26/1.408A-6

For purposes of qualified distributions, the first contribution/conversion starts the 5 year clock. There isn't a separate clock for each conversion.

The 5-taxable-year period described in A-1 of this section begins on the first day of the individual's taxable year for which the first regular contribution is made to any Roth IRA of the individual or, if earlier, the first day of the individual's taxable year in which the first conversion contribution is made to any Roth IRA of the individual.

Thus, each Roth IRA owner has only one 5-taxable-year period described in A-1 of this section for all the Roth IRAs of which he or she is the owner.


For purposes of 72(t), 10% early withdrawal penalty, there is a separate 5 year clock for each conversion.

The 5-taxable-year period described in this A-5 for purposes of determining whether section 72(t) applies to a distribution allocable to a conversion contribution is separately determined for each conversion contribution, and need not be the same as the 5-taxable-year period used for purposes of determining whether a distribution is a qualified distribution under A-1(b) of this section.


Q-5 steers you to section 72(t). 72(t)(2)(A)(1) is relevant regarding the 10% penalty. No penalty after 59.5.

It is very confusing and I think I've got it right. :?
Maybe read this first:
https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
Retired, no salvage value.
 

#22
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san diego ca
I just read the last link posted in #21. I almost went cross-eyed. So each conversion DOES require a separate 5-year holding period. From the link:

Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once. When withdrawals occur from conversion amounts, they are deemed to be withdrawal on a first-in, first-out basis under IRC Section 408A(d)(4)(B)(ii)(II), which effectively means the oldest conversions (most likely to have finished their 5-year requirement) are withdrawn first, and the most recent conversions are withdrawn last. (Overall, the ordering rules from Roth IRAs stipulate that withdrawals are after-tax contributions first, conversions second, and earnings third.)

So say a TP in his 70's converts $10,000 from his Trad IRA to a Roth. His first conversion. Then the next week he withdraws all of it. What gets penalized? And what gets taxed?
 

#23
HowardS  
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Earnings taxed, no penalty.
(Full circle, back to posts #1 and #2)
Retired, no salvage value.
 

#24
dsocpa  
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S Corp has a 401(k). The 401(k) has a ROTH option. Shareholder has just started contributing to the ROTH account. Now he is thinking it would be a good idea to convert $200k of the deferred contributions to the ROTH. Tax payer is 54 and in the 24% tax bracket. I understand I need to read the plan document to determine if the conversion within the 401(k) plan is even possible. Assuming that it is wouldn't it make more sense to wait until he's retired to convert when his income is lower. Although, that would create taxable social security income for sure. Anyone else ever run into a ROTH conversion in a 401(k)?
 

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