No 5 year wait on converted IRA principal?

Submitted by Robert Ryerson on Wed, 2024-08-21 13:55

Hello,

I am having trouble finding the cite on the IRS site regarding the fact that if you are over 59 1/2 years old, and do a ROTH conversion, you can withdraw all or part of that converted principal at any time with no tax consequences. In other words, can someone confirm for me the following…..

 

If a client is 62 years old and converts $100k this month to ROTH status, and pays the appropriate taxes due next spring on that converted $100k, and then needs to take, say, $50k out next summer for a new car, etc. he will certainly not need to pay taxes again on the $50k, right? There is no 5 year wait on the converted principal-only on any growth, correct?



Submitted by Alan - IRA critic on Wed, 2024-08-21 16:02

The amount converted can be withdrawn anytime without tax and without penalty because client is over 59.5. Any gains on the conversion will be taxable until 5 years has passed since the year of the first Roth contribution, but gains come out last, which will allow client to withdraw the entire 100k without tax or penalty.

Submitted by John Marmion on Thu, 2024-08-22 09:26

Does the 5 year rule apply to inherited Roth IRA’s. Specifically if a client inherits a Roth and wants to take out funds before the 5 year anniversary of the origination of the account by the deceased? Thanks

Submitted by Alan - IRA critic on Thu, 2024-08-22 10:23

The Roth must have been held for 5 years including the time the owner was alive and after they passed in order for the inherited Roth to be qualified. Until that time distributions will be tax free only up to the amount of the owner’s contributions and conversions. Therefore, the beneficiary will have to determine if the owner contributed prior to 5 years (prior to 2020 for any distributions in 2024). Since 10 year rule beneficiaries will not have to take RMDs until year 10, if they cannot determine when the owner first contributed, they will be safe after 5 year.

There is no longer a conversion holding period, as all distributions will be penalty free.

And once the inherited Roth is qualified, Form 8606 is no longer needed to report distributions. They just go on line 4a of Form 1040.

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