Last week you wrote that people can only do one IRA rollover every 12 months. A disqualified rollover of a traditional IRA becomes a taxable distribution. A disqualified Roth IRA rollover becomes a distribution, too. But wouldn't it be tax-free if I've owned the Roth for five years and I'm over 59½?
Under those circumstances, a disqualified Roth IRA rollover would be tax-free. But it wouldn't be cost-free, said Ed Slott, a Rockville Centre tax accountant.
A rollover is IRA or Roth IRA money you withdraw in a check payable to yourself and redeposit within 60 days in a new IRA or Roth IRA. You're only allowed one IRA-to-IRA or Roth IRA-to-Roth IRA rollover per year. (There's no limit on trustee-to-trustee IRA transfers, conversions from IRAs to Roth IRAs, or transfers between IRAs and 401(k) plans, none of which are subject to the limit.)
If you move a $100,000 Roth in a rollover that's disqualified, for example, the entire $100,000 would become a distribution. True, it wouldn't be taxable if the Roth is over five years old and you're over 59½, Slott said. "But you'd lose its future tax-free growth. It would no longer be a Roth IRA."
The disqualified rollover would also be an excess Roth IRA contribution, subject to a 6 percent penalty for each year it remained in the disqualified account, he adds. To avoid the 6 percent penalty, you must remove the excess contribution (and any income it earned) by Oct. 15 of the year following the year for which the contribution was made. "Any income earned by the excess contribution would be taxable, but not subject to a 10 percent early withdrawal penalty if you're over 59½," he said.
The bottom line
When a Roth IRA rollover is disqualified, it stops being a Roth IRA.