By Andy Ives, CFP®, AIF®
IRA Analyst
QUESTION:
Thank you for all you do to educate the public. I’m hoping you guys can settle a debate that’s been going on with a few financial advisors and CPAs regarding the 5-year rule for Roth IRA conversions. I was under the impression that a non-taxable conversion can be withdrawn at any time, even within 5 years of the “backdoor” contribution/conversion, without a 10% penalty.
My personal CPA is adamant that the 10% penalty would apply to a withdrawal of the backdoor conversion amount, but I don’t see why, or where that opinion is supported. Can you please help settle this debate? Thanks again for all you do.
Tyler
ANSWER:
With a backdoor Roth IRA conversion, a non-deductible contribution is made to a traditional IRA, and those dollars are subsequently converted. Yes, there is a 5-year clock before converted pre-tax dollars are available for withdrawal penalty-free for anyone under age 59½. However, after-tax dollars that are converted are never subject to the 10% penalty, regardless of when they are withdrawn. Be aware that there are distribution ordering rules within the converted dollars “tranche.” Pre-tax converted dollars come out first (the ones potentially subject to penalty), with converted after-tax dollars (no penalty) coming out next.
QUESTION:
Dear Slott Report,
I have a self-directed Roth IRA. I invested in a partnership that, during the Covid pandemic, went bankrupt. I lost all the money. Is there a way to distribute these losses to myself to add to my taxes? My CPA says no, but I wanted another opinion.
Thank you,
Joey
ANSWER:
Joey,
Sorry to hear about the investment loss. Your CPA is correct. Losses within a traditional or Roth IRA cannot be distributed or used to offset any gains or other tax liability.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/slottreport/backdoor-roth-conversions-and-ira-losses-todays-slott-report-mailbag/