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From post #17423:
[[ My understanding is all of the monies that I converted in 98
(not the earnings from those funds) will be considered tax free in 2003 even if I
haven't reached 59 1/2. Is this correct?]]

To which TMFTaxes responded:
Nope...not at all. This was one of the biggest misconceptions of the Roth IRA. With only a few exceptions, you must be OVER age 59 1/2 AND retained the funds for five tax years in order to take distributions on a tax free basis.

Roy, can you please clarify your response. The original poster asks if, five years after conversion, those conversion dollars (not earnings, just conversion dollars) can be withdrawn tax-free to which you say no. The following contradictory example is from your Roth Series, Part IV.

Example #2: Paul makes a $20,000 conversion from his regular IRA to a Roth IRA in 1998. The entire amount converted is includable in Paul's income for 1998 (let's assume that Paul didn't take the four year spread option but the penalty would be the same even if he did). Paul makes no additional contributions or conversions in later years. In 2001, before he is age 59 ½, Paul withdraws $10,000 from the Roth IRA. While Paul will have no tax to pay on this withdrawal, (emphasis added) he WILL have to pay a 10% penalty (or $1,000) unless one of the exceptions apply. Why? Because Paul didn't keep the conversion amount in his Roth IRA for the required five tax year period, and this amount was required to be reported as income when Paul made his original conversion....

On the other hand, if you are reasonably young (somebody under age 50) and expect to need to withdraw funds from an IRA in five years (and can't use any exceptions to avoid the 10% penalty), you might be better off converting funds from your regular IRA to a Roth IRA now. Why? If the rollover amount isn't withdrawn until AFTER the five tax year period, the 10% penalty won't be imposed, even if the withdrawal from the Roth IRA occurs before you turn age 59 ½ and no other exception to the penalty applies. (emphasis added)Why? Because for a Roth IRA you have met the five tax year exception, and therefore dodge the 10% penalty. But there is NO five tax year exception for a regular IRA. So while you would still pay tax on the earnings in either case, you would dodge the 10% penalty by converting to a Roth IRA.

Can you revisit the original post and help clarify your response? Thanks, Mark
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