Roth 5 yr rules
I am 55 yrs old will be 56 in July, my wife is 55 and will turn 56 in June. I retired last year late July at 55 yrs old. She is also retired.
We have invested money in 6 Modified Single Premium Deferred Fixed Annuities for a source of guaranteed income in a few years, I will never annuitize as I have a lifetime payment guaranteed. The six separate contracts are as follows: The 1st is my Roth IRA (combination of 2 established Roth IRAs one established 1999, the other 2012), the 2nd is my wife’s Roth IRA (established 2010), the 3rd, 4th, 5th, and 6th are Traditional IRA’s that I moved from my Traditional IRA to equal amount contracts so I can convert one each year to Roth and pay the taxes but keep myself in my current tax bracket. I planned on having all the IRA’s in the annuity in Roth IRA’s before I turn 59.5 years old and will wait another year before I begin drawing on them for income until I am 61. The annuities were set up May,2024.
The main question that I cannot get a straight answer from anyone on is this: My Roth IRA was established back in the late 1990’s, my wife’s was established in 2010, and the other Roth I have was established in 2012. If I convert traditional IRA money to Roth IRA in 2024, 2025, 2026, and 2027 do I still have to wait 5 years after each conversion before I can draw my income from this annuity tax and penalty free? I will not pull anything from it like I said until I am 61 that would be in 2029. The IRS says “The distribution must be made in a taxable year that is at least 5 years after the first taxable year for which a contribution (including a rollover or a conversion) was made to any Roth IRA established for you.” and at least one of the following is met, which I will be older then 59.5. The others are to a beneficiary if I die, if I’m disabled, and a first time homebuyer one. Then the publication (IRS 590B attached) says (I’ve highlighted what messes me up) – As soon as the 5 year rule is satisfied for any one of your Roth IRA’s it is considered satisfied for all of your Roth IRA’s, except in the case of any amounts attributable to conversion contributions. (???) Its got be all balled up on the conversion part. We will have 6 Roth IRA’s when we turn 61, with one being over 28 yrs old, one being 19 years old, one being 17 years old and then the four recent conversions with one being over 5 yrs old, one being 4 yrs old, one being 3 yrs old and one being 2 yrs old. The annuity pays out a lump sum from all the contracts to both of us with a 100% survivorship payout if one of us dies. Are we tax and penalty free at 61 or do we have to wait 3 more years for the last 3 conversions to reach 5 yr maturity.
- Thanks for any insight into this, I’ve had three different financial advisors say yes and 2 other say no.
Permalink Submitted by Alan - IRA critic on Fri, 2024-06-14 16:27
Treat all your Roths as a single Roth for tax purposes. Both of your Roth IRAs will become fully qualified and tax free on the day each of you will reach 59.5, about 3.5 years from now. Upon that date all your conversions will become exempt from the conversion 5 year holding periods as well. Until age 59.5, any Roth distributions come first from your balance of regular Roth contributions and will be tax and penalty free. You should have been keeping track of this balance. Once regular contributions have been withdrawn, you tap conversions with the oldest conversions coming out first. If you withdraw a conversion prior to 59.5 and it has not been held 5 years you will owe the 10% recapture penalty, but no taxes. Finally, if you go through all the conversions prior to 59,5 you will then be tapping Roth gains, which will be subject to both tax and penalty. These rules are known as the Roth IRA ordering rules because they establish the order in which all your Roth contributions must be withdrawn. Again, you will need to track these amounts until 59.5, after which you will no longer need to keep track of them. Until age 59.5 all Roth distributions must be reported on Form 8606, and you will also need an 8606 to report conversions made from your IRAs. The 8606 is not needed to report your Roth distributions after 59.5 because both of your Roths will be qualified.
In reading Pub 590B regarding the 5 year holding periods, note that there are two different 5 year holding periods. The first is for your Roth to be qualified and income tax free, the other holding periods are for each conversion to be available without the 10% recapture penalty. The qualified distribution starts with the first you contributed to a Roth, and you have both met this several years ago. The conversion holding periods start 1/1 of each conversion year, but once you reach 59.5 all of the conversion holding periods (for penalty purposes) are erased. Again, treat both your Roths (for each spouse) as one combined account, but of course your wife’s Roth is totally separate from your Roths.
As you can see, everything is much simpler if you can wait until 59.5 before taking any distributions.
You did not ask, but you should not have all your IRAs in annuities. Your SS benefit is already a lifetime annuity, as well as any DB pensions you might have. Conversions should also not be done unless you can convert at a tax rate that is lower than (or sometimes equal to) your expected tax rate in retirement. But if you are going to convert, an ideal time is early retirement before you start to collect SS benefits.
Permalink Submitted by AlaskaMike on Sun, 2024-06-16 07:07
We only have about 35% of our retirement in annuities.