New Roth IRA – 5 year holding period
Age 59 Opening new Roth for 2008. Will not be 59.5 until 7/8/2009. Will he have to wait 5 years before being able to take withdrawals tax and/or penalty free, or can he make withdrawals after 59.5 with no tax and/or penalties. This is not a conversion. This is a New Roth with contributions from earnings in 2008. Thanks.
Permalink Submitted by Alan Spross on Mon, 2009-03-02 23:30
If this is his FIRST Roth IRA of any kind, his distributions will not be qualified until 2013. However, his regular contributions can still be withdrawn tax and penalty free at anytime he wishes. It is only the earnings that would be taxable before 2013, and the earnings come out LAST, only after the regular contributions have first been withdrawn tax and penalty free. The earnings will be taxable until 2013, but the penalty on the earnings stops as of 7/8/2009.
Permalink Submitted by Anonymous (not verified) on Tue, 2009-03-03 00:01
Thanks Alan. Would it be the same if he waits until after 59.5 to open first Roth IRA in July 2009. Will there still be the 5-year waiting period until 2014 for tax-free withdrawals on earnings and Yes this would be a FIRST Roth. Does it work any differently if it would be a conversion from TIRA to RIRA after 59.5 instead of a New Contribution? Thanks again!
Permalink Submitted by Alan Spross on Tue, 2009-03-03 00:24
No, the opening date does not change the 5 year waiting period for the Roth to be qualified. So the sooner the first Roth is opened, either by regular or conversion contribution, the sooner the Roth becomes qualified for earnings to come out tax free.
Permalink Submitted by charles lore on Tue, 2009-03-03 01:41
I’m going disagree with Alan on second one. Here he is specific on the date the Roth is opened , July 2009. ( unlike 1st one where it is not clear) As such he by definition is making a contribution for 2009 tax yr. ( after April 15 he lost the opportunity for a tax 2008 contribution) THe clock starts running on Jan 1 2009 so the 5 yr period is up Jan 1 2014.
Permalink Submitted by Alan Spross on Tue, 2009-03-03 02:20
I don’t think there is any difference of opinion. Obviously, the year is advanced 1 year to 2014, but the main question I was addressing is that by waiting until after age 59.5 to contribute, there is no effect on the 5 year holding period that is required for the account to be qualified. Agreed, this 5 year period would be accomplished one year later.
Permalink Submitted by charles lore on Tue, 2009-03-03 03:46
Just one point I am not 100% on Alan….Can you re-characterize a Roth contribution as per same rules as a conversion?
Permalink Submitted by Alan Spross on Tue, 2009-03-03 04:15
Chuck – Yes, a regular Roth contribution can be recharacterized to a TIRA contribution or vice versa. The earnings calculation would be done and the adjusted amount transferred to the other type of IRA. The extended due date is also the deadline for doing this, as it is for recharacterizing a conversion.
If you recharacterized a TIRA contribution to a Roth by the above deadline, it would be deemed made to the Roth originally, and therefore the 5 year holding period would begin in the year that the contribution is FOR, often the year prior to the recharacterization. However, if you made a Roth contribution and then recharacterized it to a TIRA contribution, the 5 year clock would NOT start for the Roth contribution. It also would not start for a failed conversion. Of course, if you had Roth contributions for years prior to these occurrences, the 5 year clock status on the current contributions would not apply anyway.