5-year rule
IRC §408A(d)(2)(B) provides the 5-year Roth distribution rule. It says that the 5-year period begins with the first tax year for which the individual [i]or his or her spouse [/i] first makes a contribution. The spouse-contribution aspect of this is hardly ever mentioned.
So, here’s my question. Is it the spouse you’re married to at the time of contribution or the time of distribution? If nobody knows the answer, can someone explain the reasoning for the 5-year rule? Perhaps I can derive the best answer from that reasoning.
Permalink Submitted by Alan Spross on Tue, 2010-07-13 18:43
The 5 year holding period applies separately to the Roth IRA of each spouse. If a spousal contribution is made, the 5 year rule applies to the IRA of the spouse FOR WHICH the contribution is made, even though the funds are derived from the earned income of the other spouse.
If Spouse A makes a contribution for Spouse B, that contribution is not changed if Spouse B divorces and remarries Spouse C. And the 5 year holding period for Spouse B is not changed by the divorce and remarriage. The holding period still begins with the year FOR WHICH Spouse B received the funds to make a spousal contribution.
The 5 year holding period is one of two requirements for Roth distributions to become qualified for tax free treatment. The other requirement is usually reaching 59.5. but can also be satisfied by disability, death, or a first home purchase.
In conclusion, once a spousal contribution is made using the donor spouse’s earnings, any distributions taken from the receiving spouse’s Roth IRA are treated in the same manner as if the spouse made their own contribution.