5 year Roth rule?
I have a client over 591/2 who had a Roth IRA for over 5 years and then closed the account. It has been five months since closing and back office can no longer reopen same account. Client has very large contribution available to be put in a Roth (not a conversion but a contribution unrelated to yearly limitations of income or $ amount). Does his 5 year wait on earnings tax free start over or can his original Roth contribution date be salvaged even with account now closed?
Permalink Submitted by Alan Spross on Wed, 2009-04-29 21:03
Following is a copy of the IRS Regs regarding the 5 year period. The IRS has not limited the 5 year period to years when there is a Roth IRA balance. Note that the Regs do not refer to this period as a “holding period” either, which might suggest that the Roth must be held continuously. While the IRS has not said so categorically, I think we can conclude that the 5 year taxable period is not forfeited if the Roth is cashed out. The clock continues to run. However, the clock does not start until the year of the first allowable contribution. It cannot start with an excess contribution or failed conversion:
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Q–2. When does the 5-taxable-year period described in A–1 of this section (relating to qualified distributions) begin and end?
A–2. The 5-taxable-year period described in A–1 of this section begins on the first day of the individual’s taxable year for which the first regular contribution is made to any Roth IRA of the individual or, if earlier, the first day of the individual’s taxable year in which the first conversion contribution is made to any Roth IRA of the individual. The 5-taxable-year period ends on the last day of the individual’s fifth consecutive taxable year beginning with the taxable year described in the preceding sentence. For example, if an individual whose taxable year is the calendar year makes a first-time regular Roth IRA contribution any time between January 1, 1998, and April 15, 1999, for 1998, the 5-taxable-year period begins on January 1, 1998. Thus, each Roth IRA owner has only one 5-taxable-year period described in A–1 of this section for all the Roth IRAs of which he or she is the owner. Further, because of the requirement of the 5-taxable-year period, no qualified distributions can occur before taxable years beginning in 2003. For purposes of this A–2, the amount of any contribution distributed as a corrective distribution under A–1(d) of this section is treated as if it was never contributed.
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I am not sure what you mean by a “very large contribution”. A regular contribution with catch up is limited to $6,000, and all regular contributions are also subject to a modified AGI limitation, which is higher than the 100,000 MAGI limit for conversions. While his 5 year period should not start over, are you sure he is able to make a valid contribution for 2009?
Permalink Submitted by BRENT WAINSCOTT on Wed, 2009-04-29 21:07
This is a qualified rollover amount listed on form 8935 due to airline bankruptcy issues according to Worker Recovery Act of 2008. Many airline employees can put in as much as $200,000 not subject to income limits or contribution limits.
I too cannot see anything in IRS rules restarting 5 year period based on a closed account.
Permalink Submitted by Alan Spross on Wed, 2009-04-29 21:30
OK, airline rollover explains it.
Since he is over 59.5, his Roth should be fully qualified because of the former completion of the 5 year tax period. However, even if his Roth was not deemed qualified, the earnings would not come out until the entire conversion amount was distributed. Therefore, any doubt as to the 5 year period would be completely erased by 1/1/2014 and this would not become a factor unless he distributed more than the airline rollover amount prior to then. But even if he did, he should just report the distribution as qualified, not use an 8606, and enter the distribution amount on line 15a of Form 1040, nothing on 15b.