Question: In 2010, when Congress changed the rules for converting a traditional IRA to a Roth, I became eligible and immediately converted. Can I withdraw money from my Roth IRA without paying taxes or penalties?
Answer: Since you converted in 2010, you have now reached the five-year mark, which is one of the requirements for a qualified tax-free distribution. Qualified distributions from a Roth IRA are free of any income or penalty tax. Your distribution is qualified if it is made after a five-year holding period that begins on the first day of the first year in which you made a Roth IRA conversion and one of the following applies:
You are at least 59 ½ years old, or
The distribution is due to death or disability, or
You use the distribution – up to $10,000 – to make a qualified first-time home purchase.
For regular Roth IRA contributions, the first contribution starts the five-year holding period and that holding period is good for the rest of your life. Subsequent contributions do not start new holding periods.
Roth conversion rules are different. Each conversion amount starts a new five-year holding period. If you had made a withdrawal before the end of your five-year holding period, you would have to pay a 10% penalty.
The IRS considers all withdrawals from Roth IRAs to come first from contributions, then from converted amounts, and then from earnings. Once you have satisfied the five-year holding period, no tax or penalty will apply until you have withdrawn all of your contributions even if you are under age 59 ½ .
Question: Can I still make a Roth IRA contribution after the age of 70 ½ if I am still working? I am still contributing to my SEP and I take my required annual distribution.
Answer: Even though you cannot contribute to a traditional IRA after you reach the age of 70 ½ (seventy and one-half), you can continue to contribute to a Roth IRA if you have taxable compensation and your modified adjusted gross income (MAGI) falls below phase-out limits. Taxable compensation includes wages, salaries, tips, professional fees, bonuses, commissions, self-employment income, nontaxable combat pay, and taxable alimony. MAGI includes your adjusted gross income plus some added-back deductions you may have taken on your tax return.
In 2015, if you are married filing jointly, your Roth IRA contributions will phase-out when your MAGI is between $183,000 and $193,000. If your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time during the year your MAGI phase-out range is $116,000 to $131,000. If you are married filing separately and you lived with your spouse any time during the year then you cannot contribute to a Roth if your MAGI is higher than $10,000.
The 2015 contribution limits are the same as they were for 2014. The most you can contribute to a Roth is the lessor of $6,500 ($5,500 if under age 50) or the amount of your taxable compensation.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.