Client Tip for June 2018: ROTH IRA

 In Client Tips

Roth IRA:              

1) Conversion
2) Recharacterization
3) Withdrawal Rules  

There may be a good reason to convert a Traditional IRA into a Roth IRA. The main reason to convert a Traditional IRA to a Roth is the elimination of required minimum distributions (RMD). Traditional IRAs require RMDs begin no later than age 70½ and are 100% taxable, unless there are nondeductible contributions in the account when qualified distributions are made from the Roth, they will be totally tax-free. However, the conversion will be 100% taxable in the year the conversion is done.

There may also be a reason to reverse the conversion, which is known as recharacterization. Some of the reasons to recharacterize would include the value of the Roth account may have declined considerably since the conversion was made or the taxpayer’s taxable income in the year of conversion may have been higher than expected.

Any IRA conversions done in 2017 can be recharacterized any time prior to October 15, 2018. The tax bill which was passed in December 2017 has eliminated the ability to recharacterize Roth conversions after 2017.

No doubt, Roth IRAs are a good deal for U.S. retirement savers, but don’t go in blind to a Roth IRA withdrawal situation. There are several key rules and distinctions you should know before taking out any funds, otherwise, you may be tagged with a 10% early withdrawal penalty.

Here are five Roth IRA withdrawal rules you should know before taking a withdrawal:

1.   Contributions — Tax-free in/tax-free out. An investor can take out the exact amount of his or her Roth IRA contributions at any time, for any reason, without having to pay any tax or penalty — with one big caveat. The earnings from your principal cannot normally be withdrawn prior to age 59½ without paying the 10% early withdrawal penalty. Earnings can generally be withdrawn without penalties after age 59½, provided you meet the five-year rule (see below).

2.   Roth IRA Five-Year Rule — Withdrawals from your Roth IRA will only be classified as qualified distributions if it has been at least five years since you first opened and contributed to your Roth IRA, regardless of your age when you opened it. A Roth IRA owner can make penalty-free withdrawals at age 59½, for instance, but if he or she made the first contribution at age 58, the plan participant would need to wait until age 63 to withdraw any earnings made on that portion of the original contributions.

3.   Qualified Versus Nonqualified Distributions — Before making any Roth IRA plan withdrawals, know the difference between “qualified” and “nonqualified” distributions.

Qualified Distributions — As long as a Roth IRA plan participant meets the five-year rule requirement (meaning it’s both tax- and penalty-free), any withdrawal is considered qualified by the IRS.  A qualified distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met:

  • Over age 59½
  • Death or disability
  • Qualified first-time home purchase

Let’s say, for example, that you opened a Roth IRA in 2012 and have contributed $5,000 annually for six years or a total of $30,000. In 2018, your Roth IRA balance is $39,000. If you reach 59½ in 2018, you will not be subject to taxes or penalties on a distribution because you satisfy both the five-year holding period and the age qualifications.

Nonqualified Distributions — These are subject to taxation of earnings and a 10% additional tax unless an exception applies. For Roth IRAs, you can always remove post-tax penalty contributions (also known as “basis”) from your Roth IRA without penalty. Several exceptions exist that enable Roth IRA plan participants to withdraw cash from Roth IRAs that otherwise would be subjected to ordinary income taxes and the 10% early withdrawal penalty as follows:

  • The distributions are part of a series of substantially equal payments (minimum five years or until the Roth IRA owner reaches age 59½, whichever is longer).
  • You have unreimbursed medical expenses exceeding 10% of your Adjusted Gross Income (AGI). [Note that under the new tax law, the medical deductions threshold is scheduled to be 7.5% for 2018, and revert to 10% after that.]
  • You are paying medical insurance premiums after losing your job.
  • The distributions are not more than your qualified higher education expenses (for yourself or eligible family members).
  • The distribution is due to an IRS levy of the qualified plan.
  • The distribution is a qualified reservist distribution.
  • The distribution is a qualified disaster recovery assistance distribution.
  • The distribution is a qualified recovery assistance distribution.

4.   First Home Purchase Exception — There are other loopholes that enable you to take money out of a Roth IRA without fear of incurring a tax penalty. One is for a first home purchase, up to a $10,000 lifetime maximum amount, per individual IRA account. According to IRS rules, first home purchase assets can be withdrawn for the account holder, or for the account holder’s children or grandchildren.

5.   College Expenses Exception — Uncle Sam also “allows penalty-free withdrawals from a Roth IRA for assets earmarked toward higher education expenses for the individual and/or for the individual’s spouse, children, grandkids, and great-grandkids”.

Once again, check with HBC before making any big decisions on a Roth IRA withdrawal. But if you play close attention to the rules listed above, you will be well on your way to a solid withdrawal plan that protects your assets, while allowing your retirement cash to take care of your family.



As we have for the last several years, our offices will be closing at 4:00 p.m. on Fridays from Memorial Day through Labor Day. This allows our valued employees to spend more time with their families after the long hours during our busy season. We wish our clients and friends a safe and enjoyable summer.

“Your Partner In Success”

Recommended Posts

Leave a Comment

Start typing and press Enter to search