Roth IRA Conversion
I have been reading Ed Slott’s current book, “The Retirement Savings Time Bomb…” and I have a question. I am 62 years old, retired and have a substantial IRA I have had for many years. I also have a very small Roth IRA which I have also had for many years.
If I convert my IRA into my Roth will the five year holding period prevent me from receiving qualified distributions from the Roth IRA for five years on the money’s I convert?
Thanks in advance for your answer.
Permalink Submitted by Edward Czapor on Tue, 2008-04-01 18:00
No, any withdrawals will be qualified since the five year holding period is established with your first Roth contribution or conversion and you are over age 591/2. You also need not be concerned with the 5 year holding on any conversion for penalty purposes because you are over 591/2. In order to convert, your modified AGI must be under $100,000. if not, you would have to wait until 2010 when there is no income limitation. If able to convert, you should be aware of the tax consequences. It may be better to convert in increments, rather than all in one tax year.
Ed C.
Permalink Submitted by Steve Glasgow on Tue, 2008-04-01 18:09
Thanks Ed. That was the answer I was hoping for.
Permalink Submitted by Alan Spross on Tue, 2008-04-01 21:46
If you are going to convert at 62, it may be a good idea to defer starting SS retirement benefits, depending on your marginal tax bracket. If the conversion AGI causes more of your SS to be included in AGI up to 85%, the effective marginal tax rate on the conversion may be increased by a factor of 1.5 to 1.85 to the extent the conversion triggers SS inclusion in income. If the SS would already be 85% included, then the effect of the conversion is limited to just the tax rate schedule marginal rates.
Permalink Submitted by Steve Glasgow on Wed, 2008-04-02 15:08
My original question was, “If I convert my IRA into my Roth will the five year holding period prevent me from receiving qualified distributions from the Roth IRA for five years on the money’s I convert?”
I’m getting conflicting information concerning qualified distributions after converting from an IRA to a Roth IRA. The key is “money’s I convert”, I feel certain money previously held would be a qualified distribution. But what about the money’s I convert?
Ed Slott’s latest book says on page 226, “To be a qualified distribution, the funds must have been held in the account for more than five years AND conform to one of the following stipulations :
Be taken at or after 591/2 years of age
ETC.
Is this statement to be interpreted literally? Is there wiggle room? Or is it a misstatement?
Permalink Submitted by Edward Czapor on Wed, 2008-04-02 17:34
Your quote from Ed’s book (on pg. 224 in my copy) would apply if there was only one contribution or conversion. If you look on pg. 225 in the box for two five year rules, you will see where it states “For Roth IRA contributions, the five year rule does not restart for each contribution.”
As I previously stated, any distributions would be qualified for you because your five year holding period started with your first contribution and does not restart with additional contributions or conversions. Conversions are considered contributions for this rule.