Roth Conversions and the 10% Penalty

by Craig Moser on October 13, 2017

Roth IRA rules are complicated.  One especially complex area is understanding Roth conversions and the 10% penalty.  Here are five things you need to know.

1.  10% Penalty and Roth IRA Conversions

The 10% early distribution penalty doesn’t apply to a Roth IRA conversion. This is good news for those under age 59 ½.  While  funds you convert to a Roth IRA are taxable no matter your age, the 10% penalty doesn’t apply to conversions.  Be careful here.  Withholding funds to pay taxes on the conversion results in a 10% penalty to the amount withheld.  (Any amount not converted is a regular distribution.  This includes the portion you used to pay taxes.)

2. Withdrawing Converted Amounts When Younger Than 59½

For those younger than 59½, the 10% penalty applies when you withdraw converted amounts that were taxable within five years of the conversion.  A distribution made more than five years after the conversion isn’t subject to the penalty.  The five-year holding period doesn’t apply to people over age 59 ½.  (So, for those 65 or older who convert, your funds are immediately available without tax or penalty.)

3. The 10% Penalty Doesn’t Apply to Basis

After-tax amounts  converted from a traditional IRA or company plan to a Roth IRA aren’t subject to the 10% early distribution penalty.  Called “basis”, the 10% penalty doesn’t ever apply to those funds.   In our example, “after-tax” is just that; money deposited into a traditional IRA or 401K with after tax money.

4. Different Five-Year Periods


5.  Exceptions Are The Same

Exceptions early distributions from traditional IRAs are the same as distributions of converted funds within five years (if you’re less than 59 ½.)  For example, if you’re 46 and converted two years ago, then take a distribution from your converted Roth IRA to pay your daughter’s college tuition bill, the 10% penalty doesn’t apply.

Consult a professional prior to acting on any recommendations and verify what any tax implications will be and

Ready to get MORE out of your retirement?

Kickstart your retirement plan by requesting our complimentary MORE toolkit today.
Here's what you'll get:

Customized Social Security Benefit Summary
to help maximize the payments you are entitled to

Financial Organizer
to summarize all aspects of your financial affairs

Portfolio Evaluation

Show Buttons
Hide Buttons