Roth IRA’s
When someone converts from a traditional to a Roth IRA I realize there is a five year holding period before tax-free and penalty free distributions can be taken. However, if someone converts over a period of years does each subsequent conversion create its own holding period or is the five year clock only relevant to the “first” conversion?
Follow up question: If person is over age of 59 1/2, then does the same holding period for each conversion still apply?
Permalink Submitted by Anonymous (not verified) on Mon, 2009-06-29 16:59
The five year holding period [u]does[/u] apply to each conversion separately, but this is really only an issue for individuals under 59 1/2 . Unlike the five year rule with is linked to the 59 1/2 and age rule. Example:
If you are 35 and start your Roth with a conversion in 2009 and also convert in 2011, the IRS will allow you take the each conversion out tax and penalty free at the end of each of the respective five year holding points. Ofcouse any contributions made anywhere after are always considered first out, based on the ordering rules.
If you started a Roth at age 50 with a contribution and convert at age 58, 59, and 60, you are immediately eligible to take all funds out tax and penalty free (even earnings) since you satisfied age and “any or “a”” five year holding period in a Roth.
pmk
Permalink Submitted by Alan Spross on Mon, 2009-06-29 18:55
Good reply.
Note that counting the 5 year conversion holding period is subject to some special rules. The holding period always starts on January 1st of the year of the conversion and ends on 12/31 of the 5th year. The year of the conversion can be DIFFERENT with respect to ordinary income taxation than for counting the holding period.
Example: You withdraw from your TIRA in December and complete the 60 day rollover conversion in January. This conversion is taxed in the year of TIRA distribution, however the holding period starts in the year of CONTRIBUTION to the Roth IRA. That particular conversion would have to be held until the end of the 6th year counting the year it was reported as taxable income. This also holds true in determining when the 5 year period for qualification of your Roth is completed if you start it with a conversion of a prior year distribution. In this situation, the years shown on the 5498 will be one year later than the year of the 1099R reporting the distribution from the TIRA.
REGULAR Roth contribution holding periods start with the year the contribution is credited to. If you contribute in April for the prior year, the 5 year holding period for qualified distributions starts with Jan 1st of that prior year.
Note that all the usual IRA early withdrawal penalty exceptions also can be used to waive the early distribution penalty on a Roth conversion not held for the 5 year period. Accordingly, if you have qualified higher education costs you could withdraw from your Roth conversion under the ordering rules right after conversion and the conversion holding period would not apply.