Non-Qualified Distribution from Backdoor Roth

non-qualified $5k distribution. I'm pretty certain the distribution is not subject to taxes, nor do I believe it's subject to the 10% penalty. Please correct me if I'm wrong.

Maybe Yes and Maybe No. It all depends upon the balance in all your IRA accounts at the end of the year plus the amount withdrawn compared to your cost basis. Example: At the end of the year (after taking your $5K distribution) the balance in all accounts is $10K. The total with the distribution would be $15K. Assume your only cost basis is the $5K non-deductible contribution. The remainder was deductible contributions and earnings. Your cost basis as a % of the whole is 33.333%. Therefore,

33.333% of your $5K distribution is not taxable. The other 66.667% is taxable and subject to the early withdrawal penalty. You can't pick and choose which part of your IRA balance to withdraw. See the instructions for Part I of Form 8606 for more info.

immediately convert it to Roth (aka backdoor Roth). Now I take the same non-qualified $5k distribution from the Roth. Again, I'm fairly certain the distribution is not subject to taxes, but what about the 10% penalty? Does the

5-year rule apply to the conversion, even though it came from a non-deductible IRA?

This is different because Roth IRAs have ordering rules. The first dollars out come from contributions and are not taxed. The next set of dollars come from conversions and rollover contributions. And, finally the next set of distributions come from earnings. In your example, the ordering rules would make the distribution not taxable.

See the instructions for Form 5329 Part I.

just ignoring that for now. The ordering rules are relatively straightforward.

This same question was posted over in misc.financial-plan.moderated a while ago, I was wondering when it would show up here! ;-)

I think the OP wants to disregard the effect of previously existing balances. Let's just assume there were zero balances in all IRA's of any kind before this transaction.

I am pretty sure the five-year rule for Roth conversions applies, but I haven't exhausted every resource to determine this. I don't think there is anything about the five-year rule that is different for deductible vs. non-deductible Traditional IRA contributions that are converted.

As to your first question, I guess that a withdrawal of a non-deductible contribution to a Trad IRA still would be subject to early withdrawal penalty if under age 59.5. If the penalty is based on the taxable amount rather than the distribution, I'm going to be embarrassed.

Now suppose I make the same $5k non-deductible IRA contribution and immediately convert it to Roth (aka backdoor Roth). Now I take the same non-qualified $5k distribution from the Roth. Again, I'm fairly certain the distribution is not subject to taxes, but what about the 10% penalty? Does the 5-year rule apply to the conversion, even though it came from a non-deductible IRA?

I know the situation is greatly complicated by existing balances. But I'm just ignoring that for now. The ordering rules are relatively straightforward. ============== You are wrong. A distribution which is not a reversal of a contribution is part contribution and part earnings/profits. The earnings are subject to both the income and excise taxes. To get your $5k out completely tax free, you have to declare it as a reversal of the contribution.

Using a Roth IRA in this manner won't help. The 5-year rule applies if you did not have any prior Roth IRA open for all of the past 5 years. This will avoid income tax on the distribution as what comes out is deemed to be a return of contributions then conversions in that order.

non-qualified $5k distribution. I'm pretty certain the distribution is not subject to taxes, nor do I believe it's subject to the 10% penalty. Please correct me if I'm wrong.

I'm going to assume that "non-qualified distribution" means that you're not 59

1/2, nor do you meet any of the special circumstances that avoid the premature distribution penalty. If this is the only traditional IRA account you have, including SEPs, SIMPLEs or rollovers from prior employer plans, there is no taxable income from this distribution. Otherwise there is taxable income. See Part I of Form 8606. The penalty is 10% of the taxable amount.

immediately convert it to Roth (aka backdoor Roth). Now I take the same non-qualified $5k distribution from the Roth. Again, I'm fairly certain the distribution is not subject to taxes, but what about the 10% penalty? Does the

5-year rule apply to the conversion, even though it came from a non-deductible IRA?

See above for the taxable amount of the conversion to Roth. If you are under 59

1/2 at the time of the distribution and the conversion is less than 5 years old the penalty applies to the amount that was taxable when you did the conversion. See the instructions for Part I of Form 5329.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Just to be clear, there is one overall 5-yr rule for Roth, and there is also a 5-yr rule that applies separately to each conversion.

Contributions to a Roth can always be withdrawn at any time with no tax or penalty.

The penalty if any is indeed based on the taxable amount (thanx to Phil Marti, who actually read the instructions).

I left out a part after "the distribution not taxable." It is subject to the early withdrawal penalty for violating the 5 year rule, as Phil mentioned in his reply.

Just to be clear, there is one overall 5-yr rule for Roth, and there is also a 5-yr rule that applies separately to each conversion.

Contributions to a Roth can always be withdrawn at any time with no tax or penalty.

The penalty if any is indeed based on the taxable amount (thanx to Phil Marti, who actually read the instructions). ============== As far as the Roth IRA is concerned, this is a conversion, not a contribution, since it went to a traditional IRA first.