Dear Tax Talk,
I rolled over $66,000 of my individual retirement account to a Roth IRA conversion in 2010. I delayed paying the taxes to 2011 and 2012. Can I borrow/withdraw from this account without paying a tax penalty?
When it comes to withdrawals from Roth IRAs, even I get confused. They're much more confusing than traditional IRAs, which are just flat-out taxable and subject to penalty if withdrawn early. With Roth IRAs you have to worry about ordering rules, conversions, original contributions, five-year holdings and more.
Under special rules that applied only to 2010, the rollover is included in your taxable income in 2011 and 2012, one-half each year. In your case this would be $33,000 each year. For example, let's assume your additional tax on the Roth IRA conversion is $10,000 in each of 2011 and 2012.
The famous 10% penalty very much applies to a withdrawal of the conversion IRA if you're younger than age 59½. If it didn't apply, then there would be a loophole allowing you to convert to a Roth and then take a withdrawal. So if you withdraw $10,000 in 2012 to pay your 2011 tax, you'll have a 10% penalty on your 2012 tax return. You are already including the distribution in income by virtue of the rollover, so you're basically in the same position as if you had taken the $10,000 out from the pre-conversion IRA when underage.
However, if you had an existing Roth IRA or an IRA that had been converted to a Roth more than five years ago, you can withdraw from it your original contributions without penalty because of age. In the case of a nonconverted Roth, you can take a withdrawal at any time prior to five years of your original contributions.
You can borrow from some employer-sponsored retirement plans, but for the most part you can never borrow from your IRA. The one notable exception is the rule that allows you to withdraw IRA funds tax-free for 60 days.
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