ROTH IRA Distributions
Mrs. M. has a Roth IRA that she funded with two IRA Conversions of $10,000 each; the first was in 2015 and he second in 2017. The account has earned a small amount of interest.
If she were to take withdrawals from the account, how would the withdrawals be treated for tax purposes? Would the first $20,000 be tax-free?
Permalink Submitted by Alan - IRA critic on Tue, 2018-12-18 18:36
The first 20,000 would be tax free, however there is a 5 year holding requirement for each conversion to be withdrawn without a 10% penalty. This requirement ceases once the Roth owner reaches 59.5. If not 59.5, the 2015 conversion could be withdrawn without penalty starting in 2020, the second one in 2022. Note that all of the IRA early distribution exceptions are also available to waive this penalty if she is not yet 59.5 – eg disability, higher education, high unreibursed medical expenses, etc.
Permalink Submitted by Henry Woo on Tue, 2019-01-29 23:44
For some one older than 59.5, do I need to keep track of each tranche of Roth conversion for its own 5-year holding period? Or all I have to is to satisfy the 5-year clock started from the very first Roth Conversion or first Roth Contribution? I am getting conflicting advice/opinion from different people/advisor.Thanks in adance for your insight.
Permalink Submitted by Alan - IRA critic on Wed, 2019-01-30 01:13
You can forget the individual 5 year conversions clock after reaching 59.5, and if your first contribution of any type (except an excess contribution) was prior to 2015 you can forget all Roth IRA accounting because your Roth is now fully qualified and tax free. You no longer need to complete Form 8606 for any Roth distributions.
Permalink Submitted by Henry Woo on Wed, 2019-01-30 03:45
Thanks for the comment. For those of us whose first Roth IRA conversion was in July 2018, if I do another Roth conversion in 2019, does the 2019 conversion have to wait its own 5 years to become qualified distribution (for someone over than 59.5)?
Permalink Submitted by Alan - IRA critic on Wed, 2019-01-30 15:54
No. For purposes of the 5 year holding period for the Roth to be qualified, only the first contribution year is considered and later contributions are immaterial. The 5 year period starts on Jan 1 of the year for which the first contribution is made. For a conversion, it is the year in which the conversion contribution is deposited. For regular contributions it is the year that the first contribution is for. For example, you can make a 2018 contribution up till 4/15/2019 and a contribution made on the last date is treated as made on 1/1/2018. A conversion done this month is treated as a 2019 contribution even though it is made before the regular contribution in April. So if your first contribution was for 2014 or before, your Roth is qualified.