Roth IRA 5 year clock

Submitted by Steve Waller on Fri, 2008-02-01 16:40

One Roth is open. If person converts traditional IRA to Roth in 2010 and rolls it into the original Roth, does the 5 year clock revert to the original Roth start date or does a new start date begin?
Thanks



Submitted by Edward Czapor on Fri, 2008-02-01 17:51

There are two 5 year rules (clocks). The first determines if a Roth distribution is a qualified distribution, and therefore free of tax. This starts with the first contribution or conversion. The second determines if a penalty applies to converted amounts, with each conversion having it’s own 5 year holding period. So in your example, the first 5 year holding is established with the existing Roth, and a different 5 year holding applies to the 2010 conversion.

Ed C.

Submitted by Edward Czapor on Fri, 2008-02-01 18:06

To clarify my first response:
The conversion does not change the original first holding period, and is included with the original Roth for that 5 year holding period. The second holding period for the conversion is for penalty purposes only.

Submitted by Steve Waller on Fri, 2008-02-01 19:49

I still am not sure that I understand. If client is over 59 1/2, has a Roth started this year, and converts another in 2010, will they be income tax and penalty free in 2012 for all amounts?
Thanks

Submitted by Edward Czapor on Fri, 2008-02-01 20:05

If a Roth is started this year for 2007, then all Roth withdrawals in 2012 will be qualified, and therefore tax and penalty free as long as client is at least 591/2. This also includes any converted amounts because the penalty on conversions no longer applies if at least age 591/2, even if the 5 year holding period is not met on the conversion.

Submitted by Steve Waller on Fri, 2008-02-01 20:59

Thanks for the quick replies. That clears it up for me.

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