By Andy Ives, CFP®, AIF®
IRA Analyst

Bob is 40 years old. He is a single tax filer, participates in a 401(k) at work, and makes a healthy annual salary of $160,000.

Bob has consistently contributed $5,000 each year to his Traditional IRA for 5 years ($25,000 total). However, Bob could not deduct any of the contributions because he has always been over the phase-out range for tax filers covered by a company retirement plan.

Bob cannot contribute to a Roth IRA directly because he is also over the income phase-out range for Roth eligibility.

Bob is a lousy investor. He buys high and sells low and chases penny stocks. The value of his IRA portfolio has gone up and down for 5 years and, remarkably, is still valued at $25,000 – the same total amount he has contributed over the years.

This is Bob’s only IRA. He never had a Roth IRA, a SEP or a SIMPLE IRA.

Bob decides to do a Roth conversion of his entire Traditional IRA – all $25,000.

Bob is thrilled to learn that his conversion is totally tax-free. Since his Traditional IRA is made up of 100% basis (after-tax, non-deductible dollars), the pro-rata rule does not cause any of Bob’s conversion to be taxable.

Three years after the conversion, after more wheel-spinning investment choices, Bob’s converted Roth IRA is still only worth $25,000.

Bob is frustrated. His friend has a get-rich-quick scheme, and the friend needs $25,000 cash. Bob throws caution to the wind and withdraws the full $25,000 from his Roth IRA.


  • Bob: under age 59 ½ (now age 43)
  • 5-Year Roth conversion clock: Not satisfied
  • Withdrawal amount: $25,000

Question: Does 43-year-old Bob owe any taxes or the 10% early distribution penalty on the $25,000 withdrawal?

He does not! Even though Bob is under age 59 ½, and even though Bob has not met the required 5-year Roth conversion requirement, he gets his money free and clear. How so? The $25,000 is all after-tax (non-deductible) dollars. Even though he is violating the 5-year holding period, there is never a penalty on converted after-tax dollars if withdrawn early. Had Bob been a more successful investor, and if he had any earnings in his Roth IRA, those earnings would have been subject to both taxes and the 10% early withdrawal penalty.

(PS – Poor Bob lost the entire $25,000 in the get-rich-quick scheme.)