Updated Tuesday, July 29, 2014 as of 4:54 PM ET
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Ask Ed Slott: IRA Recharacterizations
Friday, November 8, 2013
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My daughter is 47 years old. She wants to convert funds from her traditional IRA to fund her Roth IRA each year. Even though she is not 59 ˝, can she move these funds without the 10% penalty since the funds are moving from one IRA to another?

A conversion from an IRA to a Roth IRA is taxable, but not subject to the 10% early distribution penalty.

One year my income unexpectedly jumped up above the level allowed for a tax-deductible IRA, but I didn’t realize I wasn't eligible until months after I made my contribution. Come April when I did my taxes I had this contribution re-characterized as a Roth IRA and paid taxes on it. My question is this: Can the money I re-characterized be included as the portion of my Roth IRA, which can be taken out before 59 1/2 without penalty? 

Yes. Your recharacterized IRA contribution is treated as a Roth IRA contribution that can be withdrawn tax-and-penalty free at any time.

I made three conversions in 2010. I know that I will be able to make qualified withdrawals on January 2, 2015. I also made a conversion on 1/3/2012. Must this conversion be governed by its own 5-year rule, meaning, qualified withdrawals will begin on 1/3/2017?

Assuming you are now age 59 ˝ or older, there is no separate 5-year clock for purposes of the 10% penalty on the 2012 conversion because that penalty doesn’t apply any longer. But, if you’re under age 59 ˝, the 2012 has its own separate 5-year clock with respect to the 10% penalty. With respect to a qualified withdrawal of interest, there is only one 5-year clock that expires on 1-1-15. All of your future Roth IRA withdrawals will be qualified (tax-free) from then on. 

Have a question for Ed Slott? Please send your mailbag questions to mailbag@irahelp.com.

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(1) Comment
Investors can convert all of the funds in their traditional IRAs to Roth IRAs. In the year of conversion, the investor will be required to pay income taxes on the amount converted. However, the benefit is that the funds will never be taxed again, regardless of the gain earned.
Posted by KIMMY B | Monday, January 06 2014 at 10:33AM ET
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