5 year Holding period after Roth conversion
I’m getting conflicting information from several sources (mutual fund wholesalers). If client converts IRA to ROTH over several years, is each conversion subject to a separate 5 year holding period? Let’s assume client is over 59 1/2 when he takes distributions. I was under the impression that once a Roth is established, the 5 year holding period starts at the date when Roth was opened. Please advise.
Permalink Submitted by Alan Spross on Thu, 2009-10-01 20:00
Each year’s conversions have their own 5 year holding period to avoid an early withdrawal penalty. But if taxpayer reaches 59.5, all conversion dollars are then exempt from the penalty.
The “other” Roth 5 year holding period applies to qualification of earnings for tax free distributions. This is the one that starts with the year of your first Roth contribution of any kind, regular or conversion.
Therefore, a client over 59.5 is able to distribute all his conversion amounts tax and penalty free, even if the conversion was just done. But earnings do not become tax free until the end of the 5 th year from his first Roth contribution.