IRA Rules

Archive for September, 2006

Question: Roth IRA Question regarding early withdrawal penalty.?

I had a retirement account through an employer that I converted to a Roth IRA when I left the company years ago. I now need to make an early withdrawal. I know my contributions can be withdrawn without penalty, but how about the employer contributions make when I still worked there? Can they be withdrawn without penalty as well? Any help would be greatly appreciated…

Answer: Your employer retirement account included contributions (yours and your employer match) plus earnings. When you converted that into a Roth IRA, on the date of conversion that account had the same amount of contributions and earnings. You paid income taxes on the entire amount converted at the time of the conversion.

Hopefully the Roth IRA that received the conversion does not contain other assets. I assume this is the case. Then you must keep that Roth IRA open for five years starting January 1 of the year you created the account. After that point, you can withdraw your original contributions (that came from your own contributions to the employer plan, and the employer contributions) without tax or penalty.

For converted Roth IRAs, all converted money must be in the account for five years before you can take anything out without penalty. This is quite different from Roth IRAs that were not created from a conversion.

If you have not kept the converted money in the Roth IRA for five years as defined above, then even if that Roth IRA has been open for five years (because it had older contributions in it before the conversion), you are going to pay a 10% penalty on any distributions of the converted contributions.

Question: Roth IRA? I had to make an early withdrawal?

I have recently lost my job and unemployment is not covering all the bills! I have had to take some money from my IRA and I am wondering about the penalty and amount I am going to have to pay when I file my taxes.

Answer: I assume this Roth IRA was not converted from another retirement investment.

Your original contribution can be taken out tax-free. If you are under age 59.5, your earnings are going to be taxed and there will be a 10% penalty added as well. Use Form 8606 with your tax return to figure the tax and penalty.

Retirement Plans & Investments : How to Roll Over a Traditional IRA to a Roth IRA