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- quote -

I didn't mention "gains" or "losses" and I really didn't
intend to make a point of the terminology; however, I
believe that you characterization of a Roth IRA as a
"deferred-tax account" is non-standard. If you play by the
rules, withdrawals should not be taxed at all. Even if you
break the rules in the cases we are considering (early
withdrawal of converted funds) my understanding was that you
pay only the 10% penalty. Are you saying that these
withdrawals would also be subject to ordinary income tax?
Only if you start withdrawing earnings (or whatever you want
to call them) prior to age 59 1/2 and without some other
qualifying exception would I expect ordinary income tax to
enter the picture. I don't see how you can say that "all
withdrawals are taxed as ordinary income" since that would
make a Roth IRA similar to an ordinary IRA, and even an
ordinary IRA can have untaxed withdrawals resulting from
pro-rated after-tax contributions.

In any case, I need some way to refer to the delta of the
value in the account. I thought that from the context it
was pretty clear what I was asking, but if you can tell me
what terms are actually correct I'll be happy to adopt them.

- quote -

Yes, but the question is whether those things that can
happen can have an impact on my ability to withdraw funds
penalty-free. (And the meta question is how much
information about intervening events does one need to
determine the status of a withdrawal.) IMHO the
accessibility of funds in a Roth IRA is a useful feature and
it's important to know if there are unintuitive ways to
reduce that accessibility

- quote -

The cash value of the entire account or the cash value of
that portion of the account attributable to the particular
conversion(s) in question?

- quote -

So are you saying that the amount that can be withdrawn in
year n+7 cannot be determined without tracking the value due
to each conversion separately? If that is the case, what
are the mechanics of doing this in a single brokerage
account? If that is not the case, what is the actual amount
that can be withdrawn without penalty in year n+7?

- quote -

Again, what is the actual numerical answer here? And if
there is insufficient information to compute that answer,
exactly what additional information is required?

- quote -

As I said, I'm trying to understand whether the ability to
withdraw funds penalty-free can be permanently or
temporarily lost through the interaction with subsequent
conversions and whether it is necessary to track the
earnings from separate conversions separately. My
understanding was that the ordering rules for withdrawals
were intended to allow all Roth funds to be commingled in a
single account without creating ambiguity about what could
be withdrawn without penalty. You had also suggested that
it was not necessary to track the earnings from separate
conversions separately, but now it is starting to look like
that may not be the case.

Maybe some more examples would help:

-----
In year n I convert $100k.

In year n+6 the account is worth $120k.

In year n+7 I convert $100k

In year n+8 the account is worth $180k.

There have been no
conversions/contributions/withdrawals/etc. other than those
I listed. In year n+8 how much may I withdraw penalty-free
if I am under 59 1/2? If there is insufficient information
to answer the question, what additional information is
required?

-----

-----
In year n I contribute (not convert) $2k

In year n+6 the account is worth $1k.

In year n+7 I convert $100k.

In year n+8 the account is worth $100k

There have been no
conversions/contributions/withdrawals/etc. other than those
I listed. In year n+8 how much may I withdraw penalty-free
if I am under 59 1/2? If there is insufficient information
to answer the question, what additional information is
required?

-----

Dan Lanciani
ddl[at]danlan.*com

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- quote -

Whatever. A deferred-tax account (by definition) does not
have "gains" or "losses", as all withdrawals are taxed as
ordinary income.

- quote -

It's on paper, hence a "paper loss". A lot can happen between that
point and when you make a withdrawal.

- quote -

Correct, as long as the cash value of the account is LESS
than your contribution/conversion basis.

- quote -

Because each conversion creates a new 5-year holding period,
you have to track the account value due to the earlier
conversion versus the later conversions to determine the
amount that can be withdrawn without penalty. Withdrawals of
conversion funds are made on a FIFO basis.

- quote -

Same answer as above.

- quote -

I'm not sure if I follow you here. Your "contribution basis"
does not change, only the actual value of the account. If
that is less than your basis, you obviously have no earnings
to be taxed on. It's all paper losses or gains until you
actually make a withdrawal - then reality sets in.

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- quote -

Thanks for the correction. I was thinking of the 2 year
rule on SIMPLEs.

Phil Marti
Clarksburg, MD

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David Woods, EA, ChFC, CLU wrote:
- quote -

Agree.

Happy New ChEAr$,
Harlan Lunsford

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- quote -

That was what I thought before the comment about the need to track
earnings separately.

- quote -

Well, by your definition of (account value - sum of
contributions) they sure look negative when the sum of
contributions exceeds the account value. But let's just
call it the "change in value" to avoid confusion.

- quote -

I'm not looking for a deduction. The question is whether
I've lost (permanently or temporarily) $20k of my
"contribution basis," i.e., the amount I can withdraw
without penalty after 5 years.

- quote -

Here you seem to be saying that my "contribution basis" is
reduced to the actual cash value of the account. (N.B. I
didn't say anything about a fund. The example Roth IRA is a
brokerage account which holds and trades various different
investment instruments.)

- quote -

Let's say that in year n+7 the account is worth $200k. How
much may I now withdraw penalty free if I am under 59 1/2?
(For purposes of subsequent examples, I don't withdraw
anything in year n+7.)

In year n+8 the account value is back down to $180k. Now
how much may I withdraw penalty free if I am under 59 1/2?

- quote -

Here you seem to be saying that the reduction in
"contribution basis" to actual cash value was temporary,
since it grew back to $80k even though it was once as low as
$50k. Eventually it might grow back to the original $100k.
So we don't have to track the low point, right?

Dan Lanciani
ddl[at]danlan.*com

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"Phil Marti" <philmarti[at]aol.com> wrote:

- quote -

You certainly can. You can convert from ANY IRA,
traditional, SEP or SIMPLE.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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- quote -

No need to track.

- quote -

No such thing. Earnings may be zero, but are never
NEGATIVE in a tax-deferred retirement account.

- quote -

That just means that you have lost $20K of your investment.
There is no deduction for this.

- quote -

year n+6, since that is less than your original conversion
amount. You will have to wait another 5 years to withdraw
any of the second 100k conversion amount, without penalty.

- quote -

NO

Just read Pub 590 to answer similar questions on this
subject - it's all in there.

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robnyberg[at]sbcglobal.net writes:

[...]
- quote -

I thought I had convinced myself that I did not need to track the earnings
from Roth conversion amounts separately, only the amounts themselves. Under
what circumstances are the characters of the earnings from differently dated
conversions (or from ordinary contributions for that matter) different? Does
this come up only if you are over 59 1/2?

What happens when the earnings are negative? For example:

In year n I convert $100k.

With no subsequent conversions or contributions in year n+6
the account is worth $80k.

In year n+6 I convert $100k.

How much may I now withdraw penalty free if I am under 59
1/2?

Would it change anything if in year n+3 the value had been
as low as $50k?

Dan Lanciani
ddl[at]danlan.*com

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robnyberg[at]sbcglobal.net writes:

- quote -

OP stated that (s)he's 61 years old, so the 10% penalty
would not apply even if the converted amount is withdrawn
"early."

- quote -

Rollovers, including conversions to Roth, do not qualify for
the credit.

- quote -

This is wrong. The withdrawal has to do with the retirement
savings credit, not conversions to Roth.

- quote -

You cannot convert from SIMPLE to Roth.

Details on all this are in Chapter 2 of Publication 590.

Phil Marti
Clarksburg, MD

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Guy Scharf wrote:

- quote -

For this year and 2003, I did what your're going to do. Be
sure to pay the income tax out of other funds than the
converted funds.

Here's what I understand to be the case:

1. Each conversion amount has its own holding period and
must stay in the Roth for five years to avoid a 10% early
withdrawal penalty.

2. You're going to need to track the converted amount and
its subsequent earnings separately. Once the 5-year holding
period has passed (if you convert on Dec. 31, 2004, then
2004 counts as the first year of the five), you can withdraw
conversion amounts, but not earnings, without penalty,
regardless of your age.

3. Tax-free & penalty-free withdrawal of earnings after the
5 year holding period is subject to the same rules as
qualified Roth distributions, i.e. one of the following
applies: a. You're at least 59-1/2, or b. The distirubtion
is due to death or disability, or c. you're a qualified
first-time homebuyer.

4. If you're filing married filing separate, you're eligible
to convert only if you did not live together for the entire
year.

5. There is an interesting interaction between Traditional
IRA contributions and the Retirement Saver's tax credit that
could lower your tax liability from the Roth conversion.
You might want to look at that.

6. Conversions must be completed by Dec. 31 of the year to
count for that year. You don't have until 4/15 to do it, as
you can with an IRA contribution.

7. Lastly, taking an IRA distribution in either of the two
preceeding years disqualifies you from converting. I need
to look up the details on this one, but I'm pretty sure
that's the basic facts.

Hope this helps.
Rob Nyberg, DPM

PS, by "retirement fund" I hope you meant tradition IRA, SIMPLE, or SEP
IRA. These are the only plans you can convert from.

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guy[at]spamcop.net (Guy=A0Scharf) posted:

- quote -

No problem.

- quote -

Technically, since you are over 59 1/2, you could withdraw
the actual Roth contribution at any time (since you will
have actually declared them as income and paid any tax due).
Actually, since the major benefit is that the gains from
your investments in the Roth IRA are tax-free, as well as
the principal invested, you clearly would prefer to keep the
money there for long-term growth and the magic of
compounding.

If this is a newly-established Roth IRA, the rules call for
a 5-year period beginning with the taxable year you set up
the Roth as the first of the five. Once that five years is
past, and you have met the age requirement noted above, you
can make withdrawals without any tax consequence --
including w/d of gains and any subsequent contributions.

Bill

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You can withdraw the conversion funds immediately, with no
tax or penalty (you are over 59-1/2). To with draw the
earnings without tax, you have to wait five years from when
you opened the Roth IRA. For withdrawal ordering rules, see
IRS Pub 590 at http://www.irs.gov

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Guy Scharf <guy[at]spamcop.net> writes:

- quote -

It is. I'm not sure what you mean by "retirement fund." If
that's not a traditional IRA, you must first roll it into a
traditional IRA. From there you can convert to Roth.

- quote -

Because you're over 59 1/2, there would be no penalty. If
you withdraw before 5 years have elapsed, any earnings
withdrawn would be subject to tax, but no penalty. See the
discussion of nonqualified distributions in IRS Publication
590.

Phil Marti
Clarksburg, MD

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"Guy Scharf" <guy[at]spamcop.net> wrote:

- quote -

No restriction.

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I am considering rolling over about $30K from a retirement
fund to a Roth IRA. I assume that is still permissable. I
have very little income for the year, so recognizing $30K as
income will have minimal tax effect.

I am 61.

If I do this, are there restrictions on how soon I can draw
the funds out of the Roth IRA without penalty? (Not that I
am planning to withdraw them soon, but I would like to be
sure what the rules are.)

Thanks.

Guy

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