early withdrawal of Roth IRA
L1: early withdrawal of Roth IRAI am 55 and laid off for over 15 months. I moved two 401K prgrams to my Roth (2009/paid taxes & 2010/due). I might be needing to support my expenses. I understand that I can use for kids college costs & private health insurance premiums without the penalty?2010-08-30 17:42, By: Chipinsd, IP: [18.104.22.168]
L2: early withdrawal of Roth IRAYes, you probably can. It sounds like you already had a Roth IRA before doing these conversions.
To backtrack somewhat, you can recharacterize all or part of these conversions if you want to avoid the tax bill. Also, your 2010 conversion taxes can be deferred to 2011 and 2012 unless you opt out of that deferral.
That said, your Roth is not yet qualified, so your distributions fall under “ordering rules”. The first distributions you take come from your balance of regular contributions, tax and penalty free. Once you run through the regular contributions, then you are taking out conversions which carry a 10% penalty if you have not held them 5 years. If you have older conversions, they come out first and may have met the 5 year holding period. But when you finally get to the recent conversions, this is where your higher education costs, medical costs over 7.5% of AGI and insurance premiums if you collected UC for at least 12weeks are applied. These penalty exceptions have requirements for timing your distribution with the year of the expenses, so better check into the details before taking the distributions. Also be sure you are able to pay your conversion taxes for 2009 from outside funds. If you cannot, and/or if your conversion has lost money, you might want to recharacterize it. If you already filed 2009, you would have to amend your return to get the taxes refunded.
In your situation you should consider meeting with a tax pro because you are working with several optionsthat interact with each other in many ways, starting with the conversions. Eventually, you may want to consider a 72t plan that will eliminate your early withdrawal penalties.
If you recharacterize any of the conversions, the funds will have to go to a TIRA account. They cannot go back into the 401k plan. The deadline to recharacterize the 2009 conversion is 10/15/10, so this becomes a decision with some urgency.You have plenty of time to consider the 2010 conversion.Feel free to post any additional questions.
2010-08-30 19:20, By: Alan S., IP: [22.214.171.124]
L3: early withdrawal of Roth IRAI want to highlight Alan’s suggestion that you get some help from a tax pro to figure out the best plan for your situation. Like Alan, I see several options for you and a tax pro can run these through a spreadsheet to help you with the best decision. For example, you may want to recharacterize all or only some of the Roth conversion funds back into the TIRA to fund the SEPP Plan.
Jim2010-08-30 19:30, By: Jim, IP: [126.96.36.199]
L2: early withdrawal of Roth IRAThere are several different tax provisions that you have to be careful not to confuse.
1. You could just “recharacterize” the 2009 ROTH CONVERSION, or part of it, back into an IRA. You would then file an amended 2009 tax return, and get a refund of the taxes paid. You must do this by 10/15/2010 for 2009.
2. You could do the same thing for your 2010 ROTH CONVERSION, but remember that 2010 ROTH CONVERSIONS are not taxable until 2011 and 2012, and those taxes aren’t due until the folowing 4/15 respectively, so that’s a valuable plan to retain, if possible. ( Unless you ELECT to have it taxed as 2010 income.)
3. If you decide not to recharacterize/reconvert either the 2009 or 2010 ROTH CONVERSIONS, then any distributions before you are 59 1/2 or within 5 years after the ROTH CONVERSION are deemed to be “no-qualified” distributions. All that this means is that you can withdraw your CONVERSION tax-free, but any amoiunt above the converted amount is subject to the 10% early distribution penalty.
4. The provisions that you were mentioning concerning health insurance premiums while unemployed, and college costs, are provisions for exceptions to the early distribution penalties from IRAs, not ROTH IRAs.2010-08-30 19:25, By: dlzallestaxes, IP: [188.8.131.52]