ROTH Conversion
IRA owner converted a portion of his IRA to a ROTH in 2002. He is considering an additional conversion in 2009. Is each conversion treated separately for the 5-year rule or is the initial conversion the starting point for all subsequent conversions that may be made?
Permalink Submitted by mk foss on Tue, 2009-02-10 18:15
There is only one five-year rule. The 2009 conversion does not start a new one.
Permalink Submitted by Alan Spross on Tue, 2009-02-10 18:16
Each conversion has it’s own 5 year holding period to avoid the penalty on distributions of that conversion. When taking withdrawals, after regular contributions come out, conversions come out starting with the oldest conversion. The 2002 conversion early withdrawal period has now passed. The 5 year holding period always begins on January 1st of the year of the contribution to the Roth.
A 2009 conversion will not be penalty free until 2014 unless owner qualifies for a penalty exception such as reaching 59.5.
Permalink Submitted by charles lore on Wed, 2009-02-11 01:39
There are TWO 5 yr rules. One for qualified distributions and one for 10% Penalty. If I opened my very first ROTH at midnight April 14,2009 … then Jan 1,2008 is my start date. Note I have to satisfy THIS 5 yr rule even if I was 99 yrs old! When I die my bene inherits my time line
Permalink Submitted by Alan Spross on Wed, 2009-02-11 02:01
Chuck,
Here’s some useful trivia that is quite interesting regarding the 5 year holding periods.
With respect to the qualified distribution requirement, you are quite right in stating that the first year is the year FOR which the distribution is made. Therefore, your example is correct.
BUT – the Section 72t treatment regarding the 10% penalty on conversions has some interesting twists. If you take a distribution from your TIRA in December, 2008 and roll it over to a Roth in January, 2009, the conversion is reported and taxable based on the distribution date, ie this is a 2008 conversion for taxation purposes.
But for the 5 year holding period, Sec 72t counts the year IN which (not for which) the conversion contribution is made. So THIS particular 5 year conversion holding period starts in 2009 even though the conversion is taxed in 2008. If this is the owner’s first Roth contribution of any type, the 5 year qualifying period still starts in 2008.
Here is a copy of the code section for Roth IRAs with respect to 72t – key words are “IN WHICH”……
>>>>>>>>>>>>>>>
(F) Special rule for applying section 72
(i) In general
If –
(I) any portion of a distribution from a Roth IRA is properly allocable to a qualified rollover contribution described in this paragraph; and
(II) such distribution is made within the 5-taxable year period beginning with the taxable year in which such contribution was made, then section 72(t) shall be applied as if such portion were includible in gross income.
>>>>>>>>>>>>>>>>
Permalink Submitted by charles lore on Wed, 2009-02-11 02:43
Alan thanks.. Also I am anxious for your answer on the Roth Conversion(s) posting before this one.