Roth IRA Account 5 year qualification period
Hello…
I have a question regarding when to start counting the five year waiting period for my ROTH IRA accounts to be qualified as non-taxable.
In 2008, I am 53 years old. I understand that I cannot touch the ROTH IRA interest without penalty/tax until after 59 1/2. My question involves my confusion as to when to start counting the 5 year wait for the ROTH IRAs to be eligible for tax free distributions.
I opened an ROTH IRA account in BANK A with the maximum contribution in a CD in 2005. The following year (2006), I closed that account and rolled it over to a new ROTH account in BANK B. I held that account for two years and made the maximum contributions for 2006 and in 2007. In 2008, I opened a new ROTH IRA account in BANK C with my 2008 maximum contribution. In 2008, I also closed the account in BANK B and rolled it over to another new account in BANK D. Presently, I have ROTH IRA account in two banks.
My questions are:
1. How old is my ROTH IRA? Is it three years old counting from my original BANK A ROTH account? Or, do I have to start the count over with every new account opened?
2. Do you recommend that I at least keep all the contributions in one account? Is it okay to have several Roth IRAs with different institutions like Traditional IRA accounts?
3. How does one determine which portion of the IRA is contribution and which is earnings? How do they determine hold old the money is if the account has been accumulated for years and from other financial institutions?
Your response to my questions are very much appreciated.
…Gerrie
Permalink Submitted by Alan Spross on Tue, 2008-06-24 22:31
1) You have 3 years since the holding period starts Jan 1 of the year for which your first contribution is made.
2) You can have as many Roth accounts as you wish and the number does not affect the tax rules. Too many small accounts may result in additional fees in some cases and extra paperwork, but has no affect on tax rules.
3) You should keep track of your regular contributions and separately any conversion contributions. While your IRA custodians report this info to you and the IRS on Form 5498, it is up to you to keep track of the cumulative total so you will be able to correctly report any distributions you take prior to qualification of your Roth on Form 8606. Each IRA custodian has no knowledge of your activity with other custodians, and more recent custodians have no idea whether you have met the 5 year holding period or not. All they know is your age.
Since all Roths are considered combined, your regular contribution total for each account does not matter, only the accumulated total. The same for conversions. If you add up all your regular and conversion contributions over the years, your earnings is the amount your total balances exceed the contributions made. If you have losses, your total balances will be less than your contributed amounts.
Of course, you must adjust your running totals if you recharacterize contributions or take distributions. For example, since regular contributions always come out first, if you had 16,000 in regular contributions and took out 5,000, then your present total in regular contributions would be 11,000.
Roth distributions are much more difficult to report than tradtional IRA distributions, and most people are not prepared to report these correctly. This will become a problem unless they do not take any distributions until their Roth is qualified (5 years plus age 59.5). After those requirements are met, the breakdowns no longer matter for reporting or tax reasons. Everything will be tax free.
Permalink Submitted by Edward Czapor on Tue, 2008-06-24 22:36
1. Your Roth holding period begins on Jan 1 of the year of your first contribution (2005).
2. You can have any number of accounts or different IRA custodians. With one custodian it would be easier to keep track of your account.
3. You have the responsibility to keep track of of your Roth contributions.
The IRS also has a record of your contributions that are reported on Form 5498 by your IRA custodian. Assuming your maximum contributions were not reduced by income restrictions, your contributions should have been $4,500 for 2005, $5,000 for 2006 and 2007, and $6,000 for 2008. These amounts include the extra catch up amounts for age 50 or more.
Keep in mind that the ordering rules consider any amounts withdrawn as coming from your contributions first. The total of your contributions could be withdrawn at any time tax and penalty free. If you would get into any earnings withdrawal, then they would be taxed and penalized even after the 5 year holding period which would be in 2010. The earnings would become qualified when you reach age 591/2 or one of the other requirements for a qualified distribution after the 5 year holding period.
Permalink Submitted by Geraldine Staehs-Goirn on Wed, 2008-06-25 14:47
Alan-oniras and eczaporea…
Thank you so much for your quick and professional explanation of ROTH IRA contributions and distributions. I think I understand now and realize that we must keep explicit ecords for our and our beneficiaries’ future.
If my ROTH IRAs go to my non-spouse beneficiaries, do they have to take distribution of the entire account (basis and earnings) within five years? Is it all tax-free(given it is held for 5 years)? What if it isn’t held for five years, will the earnings be taxable to my heirs? Is there a stretch inherited IRA for Roths? And can spouse beneficiary just roll it over into their own name? Many thanks for your response.
…Gerrie
Permalink Submitted by Edward Czapor on Wed, 2008-06-25 15:36
Non-spouse beneficiaries are subject to RMD’s as with a traditional IRA. They can stretch distributions over their own lifetimes. If the Roth has been established for at least 5 years (which includes your holding period), then distributions are qualified and completely tax and penalty free. If the combined holding period is less than 5 years, then earnings would be taxed but not penalized. The ordering rules for withdrawals still apply, so contributions are considered taken before any earnings. Therefore it is unlikely that any taxes would be due even if the 5 year holding was not met unless the account is cashed out.
A spouse can roll a Roth to her own as with a TIRA. The ordering rules still apply to withdrawals. If she had her own Roth established prior to the rollover, then the longer holding period would apply for the 5 year rule, since all Roths are now hers.