BETTER UNDERSTANDING THE “FIVE-YEAR ROTH IRA RULE????”

Submitted by ANTHONY SOKOLICH on Mon, 2022-12-05 17:19

HELLO. I OPENED UP MY FIRST ROTH IRA, ABOUT (15) – (20) YEARS AGO, AT VANGUARD. SINCE THEN, I HAVE OPENED UP SEVERAL MORE SMALLER ROTH IRA’S WITH OTHER MUTUAL FUND COMPANIES. I HAVE SORT OF SPREAD OUT MY INVESTMENTS, SO TO SPEAK. ABOUT (3) OR SO YEARS AGO, I OPENED UP A NEW ROTH IRA WITH MUTUAL FUND COMPANY, (JAMES BALANCE FUNDS). SINCE I OPENED UP MY VERY FIRST ROTH IRA (15) – (20) OR SO YEARS AGO, CAN A NOW WITHDRAW FUNDS FROM MY (JAMES BALANCED FUNDS) — WITHOUT PAYING ANY INCOME TAXES? IN OTHER WORDS, WOULD ANY WITHDRAWLS THIS MONTH FROM MY (JAMES BALANCED FUND ROTH IRA), WHICH I HAVE ONLY HELD FOR (3) ABOUT YEARS — QUALIFY AS A LEGITIMATE ROTH IRA UNDER THE (5) YEAR “ROTH IRA RULE?” I SEEM TO BE GETTING MIXED REVIEWS ON THIS SAME SUBJECT MATTER. ALSO, (JAMES BALANCE FUNDS) HAS RECENTLY BEEN TAKEN OVER, AND NOW I AM BEING ASSESSED AN “ANNUAL MAINTENANCE FEE.” I DON’T WANT TO PAY THE MAINTENANCE FEE. PLEASE REVIEW AND ADVISE. THANK YOU!



Submitted by Alan - IRA critic on Mon, 2022-12-05 18:58

  • You must keep track of your regular Roth contributions and distributions in order to properly report the distributions on Form 8606. For tax purposes, all your various Roth accounts are treated as one combined account, so it does not matter which one you withdraw from. You can also withdraw up to the amount of your total regular contributions anytime without tax or penalty. Therefore, holding 5 years is not even a requirement to withdraw your regular contributions. 
  • The 5 years only becomes a factor once you have also reached 59.5. At 59.5 all your Roth accounts will be qualified and entirely tax free including any gains, and you no longer would need to know your regular contribution balances since Form 8606 would not be required. If you do have not tracked your regular contribution balance and any distributions that were not rolled over, you probably will not be able to determine those amounts now. As such you would either have to wait until 59.5 to guarantee that all distributions are tax and penalty free, or limit your distributions to rollovers or direct transfers.
  • If all you want to do is eliminate this one Roth custodian, just request throught VG or another current custodian for them to process a direct transfer request from James to eliminate that account. Of course, James would probably deduct an exit fee and maintenance fee from the transfer.
  • You did not mention any conversions, but conversions have a different 5 year requirement that I will not go into here.
  • I think you are maintaining two many different accounts and this can become a hassle. But again, for tax purposes you are treated as having just one combined Roth account.

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