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From here, under "Treatment of Distributions".

In particular, let's assume I have some funds in Traditional and Roth 401(k) and IRAs.

Now, let's take a year when I make no income and I decide to convert some of the traditional 401(k)/IRA to Roth IRA that year such that the "income" generated from this conversion requires me to pay no (or negligible) taxes for that year.

Can I still withdraw the principal amount from the 401(k) tax-free (before 59.5 years) and any sum of money tax-free after 59.5 years?

Scenario 1: If I were to convert $1000 from traditional to a roth account, and as a result not have to pay any taxes that year. Then is the $1000 still considered "taxable portion of conversion"?

Answer (in comments below): Yes. While you may not pay taxes because of the income threshold (check that, you may need to combine your worldwide income just to calculate the tax on the US-sourced portion), it is still classified as taxable portion. The word is taxable, not taxed.

Follow-up question: Is the income from another part of the world is considered taxable in the US - particularly from India? eg. If I was earned $10,000 residing in India and I convert $1000 from traditional to a roth account would I be paying any taxes to the US on the $1000? Would I be paying any taxes to India on this $1000? Is this $1000 considered "taxable portion of the conversion"?

Scenario 2: If I transfer $9,000, and due to standard deductions I only pay taxes on $4000 (at say 10%). So, in this case, is $5000 considered "Taxable portion of a conversion"? (Assumption: No other worldwide income in this case).

  • Since you brought up income earned outside the US, you need to edit your question some more to include information such as your citizenship and U.S. residency status. US citizens and permanent immigrants to the US are taxed by the US on their world-wide income (regardless of where they are living at the time) with credits for taxes paid to foreign countries on non-US income. – Dilip Sarwate Feb 17 '14 at 14:09
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You can withdraw the principal of your Roth IRA account (i.e.: the amounts after tax deposited there) without a tax. However, in case of conversion - you have to wait for five years before you can do that. Otherwise, 10% penalty will apply. It is actually mentioned in the article you linked to.

Taxable portion in that context is the portion you paid tax on when converting. In the case you described (converting your 401k) that would be the whole amount of the conversion.

  • So, if I were to convert $1000 from traditional to a roth account, and as a result not have to pay any taxes that year. Then is the $1000 still considered "taxable portion of conversion"? – Aayush Kumar Feb 10 '14 at 9:36
  • Yes. While you may not pay taxes because of the income threshold (check that, you may need to combine your worldwide income just to calculate the tax on the US-sourced portion), it is still classified as taxable portion. The word is taxable, not taxed. – littleadv Feb 10 '14 at 9:39
  • Ahh, good point! Do you know if the income from another part of the world is considered taxable in the US? Also, another example just so that I know I understand this well. Let's say I transfer $9,000, and due to standard deductions I only pay taxes on $4000 (at say 10%). So, in this case, is $5000 considered "Taxable portion of a conversion"? – Aayush Kumar Feb 10 '14 at 9:54
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    @AayushKumar - instead of the back-and-forth in comments, consider an edit of your question to add a scenario for clarification. As long as it's not a full new question, the extra details will be helpful. – JTP - Apologise to Monica Feb 10 '14 at 11:02
  • @JoeTaxpayer Added the extra details in the question. – Aayush Kumar Feb 17 '14 at 12:05

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