Roth contributions and conversions
Individual is planning to start contributing to Roth IRA and continue for the next 5 or so yrs until retirement, also considering doing some annual conversions of Traditional IRA to ROTH. should he set up seperate ROTH accounts, one for the contributed amount and one for the converted amount? what are the differences in the 5yr rules as the apply to each account and annual contribution or conversion.
Permalink Submitted by Alan - IRA critic on Tue, 2017-03-28 17:07
Having a separate account for each conversion makes the recharacterization process simpler, but if he is going to invest the accounts in the same investments, it is probably not worth the trouble. The number of accounts is not a factor for taxation of withdrawals since for those purposes all his Roths are treated as one combined account regardless. All his Roths are fully qualified and tax free after 5 years from the first contribution and age 59.5. But before the Roths are qualified, there is a 5 year holding requirement for each conversion that will end when he reaches 59.5 if 59.5 comes sooner. If he withdraws conversion money before 5 years or 59.5, he will owe a 10% penalty on the conversions withdrawn. Roth IRA ordering rules apply with respect to which portion of the Roth comes out first. If he is already 59.5, the conversion 5 year holding period does not apply, but 5 years must still pass before any earnings will be tax free.
Permalink Submitted by Don Warnke on Thu, 2017-03-30 12:22
he is over 59.5, does the 5 yr clock apply to each contribution meaning each contribution has to be in the account before it will be considered a qualified distribution or does the 5 yr clock start when the first contribution was made and end 5 yrs later regardless of additional contributions or conversion amounts?
Permalink Submitted by Alan - IRA critic on Thu, 2017-03-30 18:52
Being over 59.5 there is no 5 year conversion clock to be concerned with. The other 5 year holding period applies for determining when the Roth will be qualified and the earnings will be tax free. This is measured from 1/1 of the year the first Roth contribution is made, whether a regular contribution or a conversion. Since he is over 59.5, at the end of this 5 year period his Roth will be totally tax free. Additional contributions or conversions do not affect this either way.