Roth Conversion 5 year rule
Client turns 59.5 on Sept 1, 2018. Converted 100k to Roth IRA on 2/1/18. My understanding is no 5 year rule applies to the earnings if all funds are needed after Sept 1, 2018 since client is 59.5. I also believe if contributions were made then 5 year rule would apply to earnings even after 59.5. However my situation above is only conversion dollars.
Permalink Submitted by David Mertz on Tue, 2018-08-21 19:21
Earnings in the Roth IRA are not tax free until 5 years have passed from the beginning of the year for which the individual first made a Roth IRA contribution to any Roth IRA account, whether by regular contribution, rollover contribution from an employer’s qualified retirement plan or conversion contribution. If the Roth conversion contribution establishes this individual’s first Roth IRA, earnings will not be tax free until 5 years after the beginning of the year in with the conversion contribution was made. However, if since the individual is over age 59½, a distribution of taxable earnings is not subject to penalty.
Permalink Submitted by MIKE KRUCHTEN on Thu, 2018-08-23 09:27
So if a 62 year old converts 100k from TIRA to Roth IRA on 1/2/18 and account grows to 150k on 8/1/18, and this is clients only Roth which was statrted with 1/2/18 conversion then all growth is tax free. No 5 year rule since conversion(not contribution) was done after age 59.5 ???
Permalink Submitted by David Mertz on Thu, 2018-08-23 16:05
No, for earnings to be tax free, the 5-year rule for qualified distributions (not the 5-year rule for conversions) must be met. Since the individual’s first Roth IRA contribution is for 2018, the earnings will become tax free on 1/1/2023. Prior to that any amount distributed in excess the original $100k conversion amount will be taxable but, since the individual is over age 59½, will not be subject to an early-distribution penalty.