Posted on 25 August 2010
By Mark Miller
Q: Your recent column on converting a traditional IRA to a Roth states that if you pay the conversion taxes out of the Roth IRA you just created, you’ll protect more of the assets remaining in your traditional IRA and the assets in our taxable account, but you’ll end up with less in your Roth.
From what I understand, you’re not allowed to pull out Roth funds until five years after those funds are converted. Taxes would have to come from a Roth account created at least five years before. This sounded too easy (convert and then immediately pull from Roth), so I checked with a tax person. He says this is not allowed. Who’s right? – M.R., via the Internet
A: The column described strategies for funding the income tax liability that’s generated when you convert a traditional IRA to a Roth. There are a variety of ways to pay the tax bill; you can pay the taxes from a separate taxable account, from your traditional IRA, or make a withdrawal from your new Roth IRA. Choosing the best path depends on your individual situation.
The five-year rule does not preclude anyone from making withdrawals–but it could incur a penalty.
The rule generally refers to the withdrawal of earnings, and not principal. All principal comes out before the earnings and there are no new taxes on it. If you’re under age 59-¬Ω, make a conversion and then withdraw money from principal, you would have to pay a 10 percent penalty on the withdrawal amount. If you’re over age 59-1/2, there would be no penalty.
The penalty can be less expensive in certain situations than withdrawing additional funds from the traditional IRA to pay the tax; it’s also useful if you prefer to maintain a higher balance in your taxable account for emergency purposes or other reasons.
Q: My wife will be 62 in September. I’ll be 66 in the following April and will then start collecting my benefits. My wife and I have both been earning maximum wages for Social Security purposes. Can my wife collect at 62 based on my account, which is roughly half of my benefits, and then switch to her account when she reaches 66 in four years? If so, does she have to wait until April when I start collecting, or can she begin collecting in September when she turns 62? –D.M., via the Internet
A: Your wife can start collecting a spousal benefit at age 62 if her benefit at full retirement would be less than 50 percent of yours, but the amount would be permanently reduced by a percentage based on the number of months up to her own full retirement age. A spouse cannot elect to receive spousal benefits below her retirement age and later switch to her own benefits, according to a spokesman for the Social Security Administration (SSA). More information on spousal benefits is available in this SSA publication.
Q: My wife has not worked fulltime most of her life. Will she qualify for Medicare at age 65, and does she get half of my Social Security? Her annual Social Security statement says that she needs five more credits in order not to have to buy Medicare. – A.O., via the Internet
A: At age 65, your wife becomes eligible for Medicare based on your employment record. She would be eligible to receive 50 percent of your Social Security benefit at her own full retirement age. You can apply for Medicare online here.
Q: I reach full retirement age this month. My wife will be 63 in August and continues to work. Can my wife receive spousal benefits once I reach full retirement age, even though she will continue to work, or are spousal benefits unavailable or reduced if the spouse continues to work?–J.V., via the Internet
A: If your wife’s full Social Security benefit is less than 50 percent of your full benefit, she may be eligible for spousal benefits on your record. Since she is still working, there is a limit on how much she can earn and collect all benefits payable. In 2010, that limit is $14,160. For every $2 over the limit, $1 will be withheld from benefits.