“America’s IRA Expert” Answers Roth IRA Questions

The Wall Street Journal recently named Ed Slott “The Best” source for IRA advice, and Mutual Funds Magazine recently called Slott “America’s IRA Expert.” In last week’s Financial Planning Magazine, Slott addresses several questions regarding tax implications relating to Roth IRAs. One of the questions Slott addresses and the answer he provides are below:

Question 1:

I may need to access around $11,000 from my Roth IRA, and I want to understand what the cost, fees and tax implications (if any) are. I spoke to a rep over the weekend and he said possibly re-characterizing the conversion could be helpful. Further, he suggested going to irs.gov and researching pub 590 (page 60 chapter 2) as it kind of spells out what the implications would be pertaining to my proposed scenario. So, besides a sales charge, 10% withdrawal penalty and taxes on earnings, what roughly total costs would I be saddled with if I access this money?

If memory serves me correctly, I converted the IRA to Roth in 2010 and my accountant is spreading the taxes over two years. This may or may not effect what I am trying to do.

Any feedback on this would be greatly appreciated.

Thanks, Jason De Ruggiero

Answer:

You should look at IRS Pub. 590 as it outlines the rules about recharacterizations and when you can and cannot recharacterize.

If you converted to a Roth in 2010 you had up to October 15, 2011 to recharacterize.

If you have had any Roth IRA established for 5 years and you are over age 59 1/2 there is no problem accessing any funds in your Roth IRA. You can always withdraw a converted amount without incurring a penalty or income taxes if the requirements mentioned above are met. It is generally the earnings in the Roth account that cannot be accessed without income taxes unless certain requirements are met. The ordering rules state that when taking withdrawals all Roth IRAs are considered one account. All contributions are considered to come out first, then converted amounts (first in, first out) and lastly earnings. We can’t be more specific on your situation without knowing what amounts have gone into your Roth accounts, if those amounts were contributions or conversions, your age, and when your first Roth IRA was established.

See Ed Slott, Tax Implications From Tapping Roth IRAs; RMD Queries, Financial Planning Magazine, Jan. 19, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.