IRA Rules

Archive for October, 2009

Question: I’m Over 72 yrs old. Can I Convert IRA Funds to a Roth IRA and Have It Count As Minimum Distribution?

I am required to take a certain amount of money from my traditional IRA since I am over 70 1/2 years old.

Can I “convert” money from my traditional IRA to a Roth IRA and have it count as part of the required minimum distribution?

Answer: Yes, but it is dumb, unless you can return a huge profit from it in a very short time. You pay taxes on in when you take it out of your IRA, and have to leave the contributions in, I think for a minumum of 5 years.

It might be better to put it into a Coverdell ESA for the grandkids or great grandkids.

Thrift Savings Plan Webcast

Many times an investor’s number one objection to making an IRA contribution is that the funds are not accessible without a penalty or tax consequence under IRA rules. Under Roth IRA rules, however, contributions to a Roth IRA individual retirement account are never tied up. Roth IRA account owners may withdraw their contributions at any time, for any reason, without tax or penalty. Is this too good to be true? Actually it is. There are some little Roth IRA rules you still have to follow before you take advantage of the Roth IRA distribution rules. 

Distributions of earnings may be taken at any time, but the tax treatment is different depending upon the age and circumstances of the recipient. 

Tax and Penalty Treatment of Roth IRA Distributions

There are three different tax treatments for distribution of earnings from Roth IRA, under Roth IRA distribution rules: 

Roth IRA distribution rules #1: Tax-Free, Penalty-Free (“Qualified Roth IRA Distributions”)

Distribution taken after “Five-Year Holding Period” of a Roth IRA individual retirement account, under the Roth Ira Distribution Rules, and either: 

• After age 59½

First time home purchase (up to $10,000 lifetime maximum)

Disability

Death

Roth Ira Distribution Rules #2: Tax, No Penalty (“Non-Qualified Distribution”)

Distribution taken from a Roth IRA individual retirement account before the “Five-Year Holding Period” and either: 

• After age 59½

Life Event Distribution

Roth Ira Distribution Rules #3: Tax, With Penalty (“Non-Qualified Distribution”)

Distribution taken from a Roth IRA individual retirement account, under the Roth Ira Distribution Rules which is either: 

• Before age 59½

Not a Life Event Distribution

Regardless of how long the Roth IRA has been held

401k Advice in a Down Economy