Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My 40 year old customer intends to convert his $100,000 pre-tax traditional IRA to a Roth IRA.  Will he be able to take penalty-free distributions of the converted amount from the Roth later this year?

Answer: No.

When a taxpayer converts a pre-tax traditional IRA to a Roth IRA, he pays income tax on the entire converted amount.  No penalty tax is due at the time of conversion.

If the taxpayer takes a nonqualified distribution from the Roth IRA after conversion, he dips into the converted amount first for tax purposes.  That means he doesn’t have to pay income tax again on the amount withdrawn.

However, if the client is younger than 59 ½ and if the conversion was less than five years prior, the client must pay the 10% penalty tax on the amount withdrawn—even though no regular income tax is due.

The reason for this is because the government decided that they didn’t want taxpayers using Roth conversions as a loophole to avoid the penalty tax on premature distributions from an IRA.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.