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The Roth IRA rules can be complicated. One area that is especially complex is understanding how the 10% penalty applies to converted Roth IRA funds. Here are five things you need to know if you already have converted funds in your Roth IRA or if you are just trying to decide whether Roth conversion is the right strategy for you.

1. The 10% early distribution penalty is not assessed at the time of a Roth IRA conversion. This is good news for those under age 59 ½. While the funds you convert to a Roth IRA will be taxable no matter what age you are, the 10% penalty will not apply when you do the conversion. Be careful here. If you have funds withheld from your traditional IRA to pay the taxes on the conversion, the 10% penalty will apply to the withholding. That is because it is not being converted to a Roth IRA and will be treated as a regular distribution. The exception to the penalty does not apply.

2. The 10% penalty is generally assessed when converted amounts that were taxable are distributed to you within five years of the conversion if you are under the age of 59 ½. A distribution made more than five years after the conversion will not be subject to the penalty. The five-year holding period does not apply if you are over age 59 ½. So, if you are age 65 and convert you can immediately access your converted funds without tax or penalty.

3. After-tax amounts that are converted from a traditional IRA or company plan to a Roth IRA are never subject to the 10% early distribution penalty. These funds are called basis. If you have basis that you convert, you do not need to worry about the 10% penalty ever applying to those funds.

4. The five-year period applies separately to each Roth conversion made in a separate year. This can be confusing! This is because there are different five-year holding periods when it comes to Roth IRA distributions. The five-year period for qualified earnings begins with the first contribution to any Roth IRA. When it comes to the 10% penalty on distributions of converted funds, the rules work differently. Each Roth conversion you do will have its own five-year period.

5. All the exceptions that apply when early distributions are taken from traditional IRAs also apply if you take a distribution of converted funds within five years when you are under age 59 ½. For example, let’s say you are age 46 and you converted two years ago. If you take a distribution of converted funds from your Roth IRA to pay your daughter’s college tuition bill, the 10% penalty will not apply.