roth conversion from tira-5yr holding period
I understand there is a 5yr holding period after you convert a tira to
a roth ira(and pay tax) to avoid any tax on the withdrawal from the roth.
I have questions on the 5yr start date.
Example 1: I start a roth mutual fund with $10,000 from a conversion
from a tira in 2000. I convert $10,000 each year into the
same fund for the next 4 years. Have I met the 5 year
holding period for all $50,000?
Example 2: The same senario, except each year the $10,000 conversion
was placed into a different fund. Does the holding period for
$50,000 start with the first conversion of $10,000 in 2000
or is there a separate holding period of 5yrs for each
$10,000 since each went into a different fund(5 funds)?
Permalink Submitted by Clyde Wolf on Wed, 2008-11-05 18:50
Wviola,
Let’s explore this a bit.
You write, “[i]I understand there is a 5yr holding period after you convert a tira to a roth ira(and pay tax) to avoid any tax on the withdrawal from the roth.”[/i]
You pay the tax on the coversion. That money will not be taxed again.
You can take your conversion amount out of your Roth IRA at any time for any reason and not pay tax. During the 5 year holding period, you may be subject to the 10% peanalty on any distribution from this converson amount. The 5 year holding period is there so someone with a TIRA would not do a conversion to avoid the 10% peanalty. They must wait through that 5 year period to avoid the 10% penalty.
Gains from this conversion will be subject to tax and the 10% penalty as long as the IRA owner is less than 59.5 years old. After that age, the 10% penalty is waived.
Now to your questions:
1) No. Each Conversion has it’s own 5 year holding clock.
2) Same answer.
Every 5 year holding period begins on January 1 of the year the conversion is completed. A Conversion completed today would completed it’s 5 year holding period on January 1, 2013, about 4 years and 2 months from now.