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I have a Roth IRA that was opened and initially funded more than five years ago. Now that I'm earning too much money to make regular contributions, I'd like to further fund this account through a backdoor conversion. If I open a new traditional IRA, fund it with a non-deductible contribution, and convert it into my existing Roth IRA (and file Form 8606), will I be able to safely withdraw that contribution at a later date without being subject to the 10% penalty?

Backdoor Roth IRA conversions make sense but the five-year rule is confusing me. Thank you in advance.

  • Backdoor conversion is not a contribution. – littleadv Dec 3 '13 at 4:49
  • I guess that's what I'm asking, and what I'm worried about. Is it a contribution, or is it something else? Can I withdraw it like a contribution if I start with non-deductible traditional IRA contributions? – mwp Dec 3 '13 at 16:53
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Assuming that the conversion was completely non-taxable (i.e. your Traditional IRA was 100% basis), then the converted money can be taken out at any time whatsoever (no 5 year or age stuff), without tax or penalty, similar to directly contributed money. For withdrawing conversions and rollovers within 5 years of the conversion or rollover, the penalty only applies to the part of the conversion or rollover that was taxable. Since in this case the conversion was completely non-taxable, there is no penalty on the withdrawal.

However, note that the ordering of the conversion money is not the same as for contribution money, and this may be significant in some cases. When you take money out of Roth IRA, it goes 1) contributions, 2) rollovers and conversions, and 3) earnings. However, money within (2) is then further divided by year, with rollovers and contributions for earlier years ordered before rollovers and contributions for later years, and then within each year, the taxable rollover and conversion money are ordered first, before the non-taxable money.

So what does that mean? Well, suppose you made a Roth IRA conversion that was taxable one year, and then the next year you make a contribution. If you withdraw a little bit, it comes from the contribution which is ordered first, which means no penalty. Now suppose in that second year you had a backdoor Roth IRA contribution instead of a regular contribution. If you withdraw, the first year's conversion is ordered first, and since it's within 5 years, there's a penalty. It's still true that withdrawing the backdoor Roth IRA has no penalty; but, you don't get to that money until you finish the other one. If you've never made a taxable conversion before, then this issue doesn't exist.

2

For conversions you do not to be 59-1/2 to avoid penalty. The 5-yr rule thus creates an early withdrawal option if planned well in advance.

See the flow chart in http://www.irs.gov/publications/p590/ch02.html#en_US_2012_publink1000231030 For where I sourced the answer.

Note : I edited to correct my answer. User102008 called me out on my mistake, and rightly so. The dialog is in the comments, where he points out the mistake. Good job, new User.

  • I believe you're referring to the age requirement on distributions of earnings. I'm asking about contributions, not earnings. – mwp Dec 3 '13 at 2:50
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    Your normal deposits can be withdrawn any time. I answered how the five year rule applies to a conversion. Back door Roth is a converted traditional IRA. – JoeTaxpayer Dec 3 '13 at 3:27
  • This is not correct. The penalty would only apply to the part of the conversion that was taxable. An ideal backdoor Roth IRA contribution, where you convert immediately after the Traditional IRA contribution, will be 100% non-deductible, and thus have no taxable part in the conversion. Thus, there will be no penalty when you withdraw the conversion. – user102008 Dec 4 '13 at 9:35
  • @user102008 - IRS regs regarding IRAs are not 100% clear to me. Can you cite a source for your position? Your comment implies that a 40 yr old converts, and at 45 can now withdraw Roth money with no (10%) penalty. Thus completely avoiding the 59-1/2 rule. I'm open to this being the case, would just like a citation. – JoeTaxpayer Dec 4 '13 at 12:56
  • @JoeTaxpayer: Well, do you have a source that there's a penalty? Here is the source on penalty (additional tax) for Roth IRA early distributions: irs.gov/publications/p590/… For distribution of conversions within a 5-year period, "You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount)." A backdoor Roth IRA conversion has no amount that had to be included in income. – user102008 Dec 4 '13 at 19:10

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