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A person who is over 59.5 years of age has an traditional IRA worth 1 million dollars and no Roth IRAs. On Monday, he converts the traditional IRA to a Roth IRA. On Tuesday, due to an unexpected expense, he takes 1 million dollars out of his Roth IRA. I claim that there is no tax consequence for taking out the 1 million dollars because he is taking back is own money. That is, earnings are taken last. Do I have this right?

I live in the United States.

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    What happened to the tax due when the Traditional IRA was converted to a Roth IRA?
    – Dilip Sarwate
    Apr 25, 2021 at 13:52
  • @DilipSarwate It was paid when the conversion was done.
    – Bob
    Apr 25, 2021 at 14:01

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There would be a 10% early withdrawal penalty on the amount withdrawn from the Roth IRA. You are correct that earnings are taken out last, and in this case there are no earnings, but no contributions either. There is only conversions, and taxable conversions withdrawn in the first 5 years are subject to the 10% early withdrawal penalty (but no tax).

This would not meet the requirements for a qualified distribution because although the owner is over 59.5 years old, they have not had a Roth IRA for 5 years. So it's a non-qualified distribution and the tax and penalty is determined by the ordering rules. If they wait 5 years after converting before withdrawing, then it would be completely tax- and penalty-free.

Also worth pointing out that converting 1 million dollars in one year is probably a terrible idea unless they are extremely wealthy. It's better to convert a smaller amount each year to keep the marginal tax rate down.

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    @Bob I think this answer is still correct. The question seems to be ”Is there a tax consequence for immediately withdrawing from a new Roth IRA converted from a traditional IRA when the person previously had no IRAs?" This addresses that question exactly. Even if there's no income tax, the IRS handles the 10% penalty and even calls it an "additional 10% tax": irs.gov/taxtopics/tc557
    – TylerW
    Apr 26, 2021 at 1:30
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    Correction to a more relevant link - can't edit my comment any more: irs.gov/publications/p590b#en_US_2020_publink1000231065
    – TylerW
    Apr 26, 2021 at 1:40
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    @Bob Ugh yeah this is hard (surprise)! So the question is still about what's considered taxable, and the answer seems to be "earnings" according to this: kiplinger.com/article/taxes/…, but I don't know enough to write up an answer on anything further. Regardless, I'm going to stop cluttering this answer with my comments. It sounds like you have a proposed answer of your own, so I'd encourage you to write up a separate answer as you see it if you'd like more discussion.
    – TylerW
    Apr 26, 2021 at 2:25
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    @Bob 10% penalty on the taxable part of the conversion. The 1 million dollar conversion is definitely taxable, so if a non-qualified distribution withdraws part of that taxable conversion within 5 years, it will incur the penalty.
    – Craig W
    Apr 26, 2021 at 2:27
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    taxable conversions withdrawn in the first 5 years are subject to ... penalty is this the first 5 years the Roth IRA is open, or the first 5 years after the conversion? Doesn't each conversion have its own 5-year waiting period?
    – yoozer8
    Apr 26, 2021 at 16:21

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