Established date for multiple Roth IRAs
My client has a Roth IRA they started in 2000. We are now doing a traditional IRA to Roth conversion (2007) into a new Roth account. Do we have to wait the 5 years before taking funds from this account (the client is under 59 1/2) or once you open your first Roth, is that considered your established date for all Roths?
Thanks –
Permalink Submitted by Edward Czapor on Sat, 2007-09-29 14:00
A separate 5 year rule applies to the converted amount, and each conversion has it’s own 5 year holding period. The contributed amounts and the converted amounts can be withdrawn incime tax free at any time. However, the converted amount is subject to 10% penalty if withdrawn before the 5 year holding period. Once you reach age 591/2 the penalty on the converted amount no longer applies even if the 5 year holding period is not met. The ordering rules for withdrawals dictate that original contribution amounts are considered withdrawn first, followed by conversions on a FIFO basis (taxable amounts first, then nontaxable amounts due to nondeductible contributions), and finally earnings on contributions or conversions. All earnings in your case would also be subject to taxation and penalty if withdrawn before 591/2 and none of the exceptions apply. Once reaching age 591/2 all withdrawals would be tax and penalty free since a Roth has been established for 5 years.
Permalink Submitted by Edward Czapor on Sun, 2007-09-30 13:21
Just want to clarify that you are correct in that the first Roth is considered the established date for all Roths including conversions. The 5 year rule for conversions is only for the 10% penalty. Since your client has an established IRA from contributions, a withdrawal from the converted account would be tax and penalty free up to the contributions in the other account due to the ordering rules.