IRS Rule for 5 Year Holding Period and Return of Principal
Can you tell me where I would find the actual verbage in the IRS Code that states that persons who are over 59 1/2 and do a Roth conversion are not subject to the five year holding period? My understanding is that once the conversion occurs the only proceeds that are subject to the five year holding period are the earnings on assets post-conversion. If this is correct, can you also tell me where in the Code it says that contributions (or in this case converted assets) can be withdrawn before earnings?
Thank you,
Bob
Permalink Submitted by Alan Spross on Thu, 2010-03-11 01:30
Sec 408A(D)(3)(F) says that Sec 72t applies to Roth conversions held under 6 years. But Sec 72t indicates that the penalty does not apply after age 59.5, disability, death, first home, higher education, certain medical costs etc. In Pub 590, this is outlined on p 65 and 66. Earnings that must be included in income because the Roth is not yet qualified are also subject to 72t including the above exceptions to the 72t penalty.
Ordering rules apply to all non qualified Roth distributions. Under these rules, regular contributions, conversions, and earnings come out in that order. The ordering rules are on p 66 of Pub 590 and the applicable code Section is posted below:
>>>>>>>>>>>>>>>>>>>>>>>>>>>
(4) Aggregation and ordering rules
(A) Aggregation rules
Section 408(d)(2) shall be applied separately with respect to Roth IRAs and other individual retirement plans.
(B) Ordering rules
For purposes of applying this section and section 72 to any distribution from a Roth IRA, such distribution shall be treated as made –
(i) from contributions to the extent that the amount of such distribution, when added to all previous distributions from the Roth IRA, does not exceed the aggregate contributions to the Roth IRA; and
(ii) from such contributions in the following order:
(I) Contributions other than qualified rollover contributions to which paragraph (3) applies.
(II) Qualified rollover contributions to which paragraph
(3) applies on a first-in, first-out basis. Any distribution allocated to a qualified rollover contribution under clause (ii)(II) shall be allocated first to the portion of such contribution required to be included in gross income.
>>>>>>>>>>>>>>>>>>>>>>>>