A HOLDING PERIOD BEFORE ROTH WITHDRAWALS?
I am converting part of my IRA to a Roth. I understand the taxes I will pay upfront from outside cash and I’m 75 years old. So,can I start taking out Roth monies immediately after it is setup then and not pay any tax on the earning of the Roth in the future? Or is there a holding period before I can do that? My RDM will still be met through my IRA, I understand that.
Also, is there a holding period in my Roth that needs to be furfilled before my many beneficiaries can inherit the Roth tax free?
Permalink Submitted by [email protected] on Thu, 2010-03-25 17:12
ilnca2,
It depends on whether or not this is your first Roth IRA. In order for all distributions from a Roth IRA to be tax and penalty free you must be over 59 1/2 (or after death, disabilty or 1st time homebuyer up to $10,000) AND have had ANY roth IRA for more than 5 years. Since you are over 59 1/2, you don’t ever have to worry about any penalties. However, if this is your first Roth IRA, and you withdraw any earnings from the conversion within the first 5 years, those earnings will be subject to orinary income tax.
The good news though is that there is a system of taking dollars out of a Roth IRA called ordering rules. The first dollar out are contributions. If this conversion starts your first Roth IRA, you have none. The next dollars out are from conversions. Since you have already paid the tax on this money and are over 59 1/2 you can withdraw these amounts tax and penalty free at anytime. Earnings are the last dollars out – which would be taxable within the first five years.
Example:
You convert $100,000 from a Traditional IRA to a Roth IRA at your age, 75. By next year your account has grown to $120,000. You may, at anytime, withdraw the full $100,000 tax and penalty free. If you withdraw the $20,000 of gain though, you will owe ordinary income tax on that amount since it is within the first 5 years of having any Roth.
As far as your beneficiaries go, the same rules apply to them. They can always withdraw the amount you converted tax and penalty free. But if they withdraw any earnings during the first 5 years after YOUR first Roth IRA, they will owe income tax on those amounts, but no penalty.
If on the other hand, you have had a Roth already, the 5 year “clock” started on January 1 of the year in which you made that contribution and/or conversion – and this clock is the same for all your Roth IRAs
Example:
You made your first Roth IRA contribution in 2007. You can withdraw ANYTHING from ANY Roth IRA January 1, 2012 tax and penalty free.
Permalink Submitted by Alan Spross on Thu, 2010-03-25 19:15
Also, note that if your 2010 conversion is your FIRST Roth IRA of any type and you intend to defer the income to 2011 and 2012, ANY distribution taken prior to 2012 will accelerate your taxes into the year of the distribution. The taxable income is added to the amount you would have had to report anyway in that year.
Example: Convert 100,000 in 2010 and withdraw 30,000.
The result will be 30,000 reported in 2010, 50,000 in 2011 and 20,000 in 2012.
Net result is that there is no way to use the two year deferral to get current cash flow before the taxes are due. The funds must stay in the Roth until 2012.