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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: Cheating the 59 1/2 rule? Date: 2/1/2012 1:00 PM
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I/ve been wondering about this for some time now so I thought I would go ahead and ask other fools.

Assuming an individual has an IRA account or a 401k that is eligible for rollover into a Roth, it seems that the earily withdrawal penalty no longer really applies.

For example;

Individual has $20,000 in an IRA and they need $10,000 of that to meet some emergency need. They convert $10,000 to a Roth. That $10,000 becomes "principle" and is taxable for 2012 as income. Once in the Roth account, principle can be withdrawn at any time without penalty. The withdrawal is tax free and IRS penalty free.

Net result is a $10,000 withdrawal from the traditional IRA with no penalty.
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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70073 of 75340
Subject: Re: Cheating the 59 1/2 rule? Date: 2/1/2012 1:16 PM
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Individual has $20,000 in an IRA and they need $10,000 of that to meet some emergency need. They convert $10,000 to a Roth. That $10,000 becomes "principle" and is taxable for 2012 as income. Once in the Roth account, principle can be withdrawn at any time without penalty. The withdrawal is tax free and IRS penalty free.

Net result is a $10,000 withdrawal from the traditional IRA with no penalty.


There is a five year waiting period for removing money from conversions without additional tax on early distributions.

PSU

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70074 of 75340
Subject: Re: Cheating the 59 1/2 rule? Date: 2/1/2012 1:57 PM
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Net result is a $10,000 withdrawal from the traditional IRA with no penalty.

Sorry, no. Thanks for playing.

Each conversion to a Roth has to be held in the Roth for 5 years or the 10% early withdrawal will apply.

--Peter

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70075 of 75340
Subject: Re: Cheating the 59 1/2 rule? Date: 2/1/2012 2:21 PM
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Ahh, I see what I was missing from pub 590. I had read this:

Withdrawals of contributions by due date. If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

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But missed this:

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the ...

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So basically, that conversion has a 5-yr waiting period but previous contributions do not. Interesting.

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Author: Incomeonly Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70077 of 75340
Subject: Re: Cheating the 59 1/2 rule? Date: 2/1/2012 7:31 PM
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Yes. Otherwise, to get access to one's traditional IRA while still under 59.5 and avoid the 10% penalty, they'd only need to convert to a Roth and then withdraw....with no AGI limit now on Roth conversions, the 10% early withdrawal penalty on traditional IRAs would be moot.

Note also that unlike a qualified withdrawal, where there is no penalty and no tax on withdrawals if a person attains age 59.5 and has held a Roth at least 5 years, whichever comes LATER. The rule on avoiding the 10% penalty on Roth coversion withdrawals is having held the conversion 5 years or attaining age 59.5, whichever comes SOONER.

BruceM

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70078 of 75340
Subject: Re: Cheating the 59 1/2 rule? Date: 2/1/2012 7:43 PM
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So basically, that conversion has a 5-yr waiting period but previous contributions do not. Interesting.

Right. There are three kinds of money that can be in a Roth IRA: contributions, conversions, and earnings. Each of these different kinds of money has different withdrawal rules and different potential penalties.

However, you are correct in that a very patient person can get around the penalty for early withdrawal of their IRA money - they just have to convert to a Roth, then wait 5 years. For very early retirees, that can be a tax planning move.

--Peter

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70082 of 75340
Subject: Re: Cheating the 59 1/2 rule? Date: 2/1/2012 8:58 PM
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In case you are not familiar with it be sure to look up the IRA SEPP 72t rules and withdrawals from a 401K at the age of 55.

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