Roth Conversion and 5 year waiting period

Submitted by [email protected] on Mon, 2008-11-03 15:42

Hi,

I have a question regarding the five year rule with Roth conversions. If a person who is 66 years old decides to convert $30k from a TIRA to a Roth, of which all contributions were deductible, are they still subject to the five year waiting period? I understand that the 10% early withdrawal penalty does not apply since they are past age 59.5 but just curious if they still have to wait five years to take tax-free distributions.

Thanks in advance for any answers.



Submitted by Edward Czapor on Mon, 2008-11-03 17:45

You are correct that there is no early withdrawal penalty on the converted amount or any earnings withdrawn. The converted amount can be withdrawn tax free since tax was paid on conversion. If this conversion establishes the first Roth account then a five year waiting period is required to for any earnings withdrawn to also be tax free. There is no exception to this five year rule. If a Roth has been established previously, the five year period starts with the first Roth established.

Ed C.



Submitted by [email protected] on Mon, 2008-11-03 17:50

Thanks Ed. So if total contributions were $50k to my TIRA and the value of the account is now $30k, I can convert the $30k and since I have no earnings, all subsequent withdrawals are actually just basis with no tax ramifications?

Thanks



Submitted by Clyde Wolf on Mon, 2008-11-03 18:37

jpgood16,

Taking distributions from a ROTH IRA the money comes out in a sequence ordered by law in this fashion:
First) Annual Contributions.
Second) Conversion amounts.
Third) Gains.

When you have no annual contributions in your Roth IRA, your first distribution would be from you Converted amount. This would continue until your converted amount is exhausted. At that time you would begin to (hopefully) receive gains from your ROTH IRA. If this is more than 5 years later, there would be no tax.
If within the 5 year period, the gains would be taxable.

Opening your first Roth IRA at any time during 2008, is the same as opening that first Roth IRA on January 1, 2008. This 5 year clock will expire on January 1, 2013. The same rule applies to a Conversion completed in 2008.



Submitted by Edward Czapor on Mon, 2008-11-03 18:48

If this conversion establishes your first Roth then only the $30 K basis would not be subject to tax within the five year holding period. Any earnings above this within the Roth would be taxable. Any loss in the TIRA is not considered since the basis was zero. Had there been any basis, it would have carried over to the Roth and you would not have been taxed on that portion.



Submitted by [email protected] on Mon, 2008-11-03 18:48

Thanks CWolf. I understand the five year rule and when it begins and sequence ordered by law. My only question is: If the $30k is all from the conversion and original contributions to the TIRA were $50k, can you withdraw the $30k tax-free within five years because there is no embedded gain in the $30k? I think that I could take the $30k without tax within the five-year window because there are no earnings but I am just looking for confirmation.

Thanks for the help!



Submitted by [email protected] on Mon, 2008-11-03 18:52

thanks eczaporea! This is what I assumed and I appreciate your confirmation.



Add new comment

Log in or register to post comments