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Roth IRA Distributions- Penalty Rules and age 59 1/2

Last Updated September 16, 2011

Question: 

I have read a number of conflicting views on the Roth conversion issue that relates to people over 59½. So I turn to you.

I am 62 years of age. I have had a regular Roth IRA for over five years. I have just rolled over my 403(b) into a Rollover IRA (I was told I could even though I am still employed). I am planning to convert a portion of this Rollover IRA into the Roth IRA.

My question: If I convert the Rollover IRA to the Roth, do I still have to wait for five years before taking distributions from the converted Roth to avoid a 10% tax penalty? I am over 59½ at the time of this partial conversion.

Question answered by Denise Appleby

Answer: 

No. Since you will be at least age 59 ½ when the distribution occurs, the 10 % penalty will not apply. Here is a good way to look at it:

Would the 10% penalty apply if the amount was withdrawn from the traditional IRA? If the answer is no, then the 10% penalty does not apply to the Roth IRA. If the answer is yes, then we would need to look at how much the converted amount has aged. If it has aged for less than five years, then the 10% penalty will apply unless you qualify for an exception.

In your case, the answer is no- the 10 percent penalty would not have applied had you left the amount in your traditional IRA and taken a distribution from your traditional IRA, because you are at least age 59 ½. Therefore, the 10% penalty would not apply to any distribution taken from any of your Roth IRAs.

Additional Information:

Since you are at least age 59 ½ and your first Roth IRA was established more than five-years ago, all your Roth IRA distributions will be qualified and therefore tax and penalty-free. A qualified distribution is one that meets the following two requirements:

  1. It occurs at least five years after the Roth IRA owner contributed to his/her first Roth IRA (for instance, if an IRA owner contributed to his/her Roth IRA for 2007, this five year period begins January 1,2007, providing the 2007 contribution is made by the deadline (generally April 15,2008)…and
  2. Meets one of the following requirements

A. Occurs on or after the IRA owner reaches age 59 ½

B. Occurs as a result of the Roth IRA owner is disabled (within the meaning or Internal Revenue Code Section 72(m)

C. Is distributed to the beneficiaries of the Roth IRA owner as a result of the Roth IRA owner being deceased.

D. Is used towards the purchase of a first-time home for the IRA owner or an eligible family member (limited to $10,000 for the IRA owner’s lifetime).

Therefore, since you are eligible for a qualified distribution from your Roth IRA, you need not be concerned with whether your conversion has aged for five years. The ordering rules no longer apply to you, and all your Roth IRA distributions will be tax-free and penalty-free.

Your only concern now is whether it makes good financial sense to withdraw funds from your Roth IRA, especially since any earnings will accrue on a tax-free basis. It may be a good idea to talk to a competent financial advisor. Your financial advisor should be able to help you decide if you should use funds from your other accounts/assets before withdrawing from your Roth IRA, or if it makes good financial sense to start tapping into your Roth IRA now. The answer will likely depend on your financial profile and your retirement horizon.

Good luck

Question answered by Denise Appleby