Roth IRA Distribution

[Koss]

On a premature distribution from a Roth IRA, in general, only the earnings are subject to regular income tax and the 10% penalty. The original contributions are not subjected to tax or to the penalty.

Question:

Taxpayer converts a Traditional IRA to a Roth IRA, thereby subjecting the amount of the conversion to regular income tax. Then, the taxpayer takes the money out of the Roth IRA, in the form of a premature distribution. The conversion and the premature distribution occur within the same tax year. There are no other conversions, distributions, or contributions.

Does this two-step process effectively avoid the 10% early distribution penalty?

Or am I missing something?

Do the ordering rules kick in somehow, so that the distribution is treated as coming from the Traditional IRA?

BMK

[Gary2]

No, it doesn't avoid the penalty. Yes, the ordering rules come into play, but so does a special rule for the penalties, described under "Distributions of conversion and certain rollover..." on page 66 of Pub. 590 (2010 edition).

The ordering rules determine which funds are being taken on. The special rule for the penalty says that if you take out a rollover or conversion amount within 5 years since they went in, then the penalty applies. This 5 year period is not the same as the 5 year rule for determining whether the distributions are qualified in the first place.