Roth IRA
If a person starts a ROTH IRA Jan. 2006 and then converts a Traditional in 2010 and rolls it over to the Roth that was started in 2006 will the 5 year period be from the 2006 or 2010 date on the amount that was rolled over? Also how will the benefit be taxed at death during that 5 year period or I should say how will the earnings be taxed?
Permalink Submitted by Alan Spross on Wed, 2009-02-25 19:05
There are two different 5 year holding periods. The first is for the earnings to be tax free when the owner reaches 59.5 or dies. For this person, this period has been satisfied as of 1/1/2011.
The second 5 year holding period applies to the early withdrawal penalty on Roth conversions, and applies to each conversion separately. For a 2010 conversion, this period has been satisfied as of 1/1/2015, and is also satisfied if the Roth owner reaches 59.5 or dies.
If this owner dies prior to 2011, the Roth is not yet qualified, however any distribution the beneficiary takes comes from contributions before any earnings. Therefore unless the beneficiary takes a very large distribution, there is not likely to be any tax due. If the distribution is large enough to include earnings before 2011, then the earnings are taxed as ordinary income and reported on Form 8606 and line 15b of Form 1040.