QUESTION:
My wife and I created a Roth IRA when our two children were young to pay for their college education. Our daughter is finishing her second year of school, and our son will be entering college this fall. We have withdrawn $30,000 so far from our contributions to pay her expenses. The current value of the Roth IRA is over $150,000. Our remaining contributions are around $70,000. I’ve been told that I can only withdraw our contributions without tax or penalty and cannot touch the earnings generated unless I pay the income tax. Is this true, or can we use the entire value for the qualified expense? My wife and I are 55 and 54 years old.
Thank you,
Chip
ANSWER:
Chip,
Roth IRAs follow strict distribution ordering rules. Contributions come out first, then converted dollars (none in your case), followed by earnings. Contributions are always available tax- and penalty-free, regardless of how old you are or how long the Roth IRA has been open. As such, you currently have access to $70,000 free-and-clear. The earnings are a different story. For Roth IRA earnings to be tax free, the Roth IRA must have been open for 5 years AND the Roth IRA owner must be at least age 59½, disabled, purchasing their first home or deceased. Unfortunately, paying for higher education is not a reason for taking tax-free distributions of Roth IRA earnings. Therefore, if you exhaust your contributions and start withdrawing the earnings, you can avoid the 10% under-age 59½ early withdrawal penalty by leveraging the higher education penalty exception. However, the earnings will be taxable.
QUESTION:
A recent Slott Report post states that if you are age 73 or older you will need to take your 2025 required minimum distribution (RMD) from your IRA prior to doing a Roth IRA conversion. However, if you turn age 73 in 2025, don’t you have the option to defer your first RMD to April 1, 2026? If so, then, can’t you do a conversion in 2025 without taking the RMD?
Thank you,
Les
ANSWER:
Les,
It is true that the RMD must be withdrawn before a Roth conversion can be completed. It is also true that the first RMD can be delayed until April 1 of the year after the year a person turns age 73. However, if the first RMD is delayed, it is still the first RMD that is applicable to the year the person turned age 73 (2025 in your case). Since it is the RMD for 2025, delaying it to 2026 does not change the fact that it must be withdrawn before doing a conversion in 2025.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
Roth IRAs and Required Minimum Distributions: Today’s Slott Report Mailbag
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