403b Conversions & “Five-Year” Clock
In 2009 I converted a portion of my 403b plan to an IRA and subsequently to a Roth IRA.
If I continue to roll over/convert additional portions of the remaining 403b in 2010 and subsequent years, does the Roth five-year clock start again for each conversion?
(In other words, can I take a tax-free distribution of any or all funds in 2013, or just that portion that was rolled over/converted from the original conversion in 2009? I am over 59 1/2.)
Permalink Submitted by Alan Spross on Fri, 2010-10-15 19:16
Remember, there are two totally different 5 year holding periods for a Roth IRA:
1) 5 years for conversions to avoid the early withdrawal penalty. But this ends at age 59.5, so you do not need to be concerned about this one. You can withdraw these conversion amounts tax and penalty free anytime you wish. But there is a special rule for 2010 conversions that you defer income on to 2011 and 2012. For those, you accelerate the tax year you must report the income if you take out conversion funds prior to 2012. This only affects WHEN you owe the tax, and is not an additional tax. No penalty applies.
2) 5 year holding period for your Roth IRAs to be fully qualified for tax free treatment. This period starts on Jan 1 of the year for which your first Roth contribution of any type is made. If 2009 was your first Roth contribution, then your earnings are not tax free until 2014. But they are deemed to come out LAST, so you would not likely run into earnings taxes unless you withdrew nearly all of your Roth before 2014. Again, being over 59.5 there is no penalty for any taxable earnings.
Note that even though these funds started in a 403b, since you rolled them to a traditional IRA first, these are IRA conversions, not 403b conversions. You can also convert directly from a 403b to a Roth IRA if you wish.
Permalink Submitted by Martha Smick on Fri, 2010-10-15 19:49
Alan,
Thanks very much for the information and clarifications.
One further question to ask you based on your post. My very first Roth IRA was started in 1998, albeit with a different trustee from the one opened in 2009 . Are you saying that because I already have that Roth IRA which “matured” in 2003, I could now make tax-free withdrawals from the 2009 Roth?
Many thanks!
Permalink Submitted by Alan Spross on Fri, 2010-10-15 20:28
Yes, all your Roth IRAs are now fully qualified for tax free and penalty free distributions since your first Roth contribution was over 5 years ago and you are over 59.5. You would not even have to report them on Form 8606. You would just enter the gross amount on line 15a of Form 1040 with 0 on 15b.
Permalink Submitted by Martha Smick on Fri, 2010-10-15 21:46
Alan,
Again, thanks for sharing your expertise!
That’s good news!