Airline Payments rolling to ROTH IRAs
What about the 5 yr rule? Does this apply or are these dollars coming into the ROTH and being treated as ROTH basis just like contributions? IRS Pub 590 discusses qualified and non qualifed distributions but doesnt clarify what catagory these payments fall under. Thoughs?
Permalink Submitted by Alan Spross on Tue, 2009-05-05 23:15
I believe that both 5 year holding periods would apply to these airline “qualified rollover” contributions, despite the lack of specific statements in IRS and other releases on this specific issue. Very little analysis on what happens once the payments are in the Roth IRA.
Per the 5498 instructions, these are to be reported on Form 5498 as Box 2 “rollovers”, but not Box 3 conversions which are limited to Roth IRA from other IRA transfers. This does not appear to make the treatment of such rollovers any different than conversions however. Pub 590, on p. 67 indicates that the early withdrawal penalty applies to both conversions and “certain rollover contributions”, and the airline payments constitute “certain rollover contributions”. Of course, this penalty disappears at age 59.5.
The other 5 year holding period for Roth IRA distributions to become qualified for the earnings to come out tax free will also still apply. This is measured from the year of the first valid Roth IRA contribution, whether by regular, “qualified rollover”, or conversion contribution.
Under age 59.5 then, it appears that removal of the airline rollover contribution would be subject to the early withdrawal penalty if done prior to 5 years or age 59.5. This would be important for recipients to know in assessing how much of their distribution should be rolled to a Roth IRA.