Roth conversion and the 5 year clock

Submitted by Robert Wright on Fri, 2009-11-06 22:15

If I [b]convert[/b] a traditional IRA to a Roth IRA in December 2009, my 5 year clock for this conversion starts Jan 1, 2009.

If I [b]contribute[/b] $5,000 to the Roth IRA in 2010, does the 5 year clock for this [b]contribution[/b] start with Jan 1, 2009 also – does the 2010 contribution have the same clock as the 2009 IRA conversion clock?

Thanks.

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Permalink Submitted by Alan Spross on Fri, 2009-11-06 23:13

For regular Roth contributions, the only 5 year clock that counts is for the first contribution of any type. In this example, if the 2009 conversion is the first contribution of any type for this taxpayer, the 5 year clocks both run from 1/1/2009. There is no need for any clock to start in 2010.

The first clock is for early withdrawal penalties, while the clock that starts with the first contribution of any type (regular or conversion) is for qualification of earnings to be tax free. Taxpayer also has to reach 59.5 to earnings to be tax free.

Permalink Submitted by Robert Wright on Fri, 2009-11-06 23:18

Thanks Alan.

I think I’m finally getting my head wrapped around this.

bob

Permalink Submitted by Robert Wright on Sat, 2009-11-07 00:25

So, if I understand the 5 year clock [It helps me to put things in my own words]:

1. The 2009 conversion dollars cannot be withdrawn penalty free for 5 years if the Roth IRA owner is under 59.5.

2. The 2009 conversion dollars could be withdrawn penalty free after four years if I turned 59.5 in the 4th year after the 2009 conversion.

3. The 2010 contribution dollars can be withdrawn penalty free anytime.

4. The earnings on the 2009 conversion dollars and the 2010 contribution dollars cannot be withdrawn income tax free for 5 years [after Jan 1, 2014] and if I’m older than 59.5 [or other exemptions].

Is this correct?