Roth IRA Question
If I am 62 years old and convert my IRA to a Roth IRA, does the 5 year waiting period still apply for tax-free earnings upon withdrawal or does that go away once you are over 59 1/2 and all earnings can be withdrawn tax free without any time limit? Also,I cannot find any reference that answeres this question.
Permalink Submitted by Alan Spross on Tue, 2010-01-12 19:27
If this is your first Roth account of any type, you must wait 5 years for your earnings to be tax free. There is also a totally different 5 year holding requirement for conversions if you withdraw the conversions, but this is does NOT apply to you because you are over 59.5.
Therefore, if you had a Roth IRA prior to 2006, your Roth is fully qualified and all distributions are tax and penalty free. If this is your first Roth, then no earnings come out until you have withdrawn your converted amounts, and you would not normally be draining the Roth that quickly anyway.
See page 67 of Pub 590 for further details.
Permalink Submitted by Allan Browns on Thu, 2010-06-17 14:56
I have not been able to find the exemption to the 10% additional tax for amounts converted to a Roth IRA that is suggested in the example below. An individual who converts an amount to Roth IRA at or after age 56 appears to be subject to the 10% additional tax if the conversion does not age 5 years. The following sites seem to suggest that there is no exemption to this 10% addtional tax; the example refers to an individual who establishes their Roth IRA with the conversion at or after age 56 and takes a distribution after age 59.5 before the 5 year aging period has been completed.
IRC § 408A(d)(3)(F)
Treasury Reg. § 1.408A-6 A-5
Notice 2008-30, Q&A-3
Also, the IRS Instructions for Forms 1099R states that to be coded with a “Q” the individual must meet the following:
Use Code Q for a distribution from a Roth IRA if you know that the participant meets the 5-year holding period and;
• The participant has reached age 591/2,
• The participant died, or
• The participant is disabled.
Note: If any other code, such as 8 or P, applies, use Code J.
Regardless of whether the individual has a Qualified distribution, the conversion itself has a separate 5 year aging period.
This is a very confusing area based on the information that is circulated in the industry, and with the $100,000 AGI limit being lifted in 2010 this situation may become more and more prevalent.
Would someone be so kind to give me the sites where it states that the individual is not subject to the 10% addtional tax on conversions before the 5 year period after the individual reaches age 59.5?
Thanks,
Allan Browns
Permalink Submitted by Alan Spross on Fri, 2010-06-18 03:59
The answer lies in the last sentence of IRS Reg 1.408A-6, Q&A 5 copied below:
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Q–5. Will the additional tax under 72(t) apply to the amount of a distribution that is not a qualified distribution?
A–5. (a) The 10-percent additional tax under section 72(t) will apply (unless the distribution is excepted under section 72(t)) to any distribution from a Roth IRA includible in gross income.
(b) The 10-percent additional tax under section 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution, if the distribution is made within the 5-taxable-year period beginning with the first day of the individual’s taxable year in which the conversion contribution was made. 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 purposes of applying the tax, only the amount of the conversion contribution includible in gross income as a result of the conversion is taken into account. The exceptions under section 72(t) also apply to such a distribution.
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All those exceptions under 72t apply to this potential penalty, but reaching 59.5 is the most likely. Note that this is also more clearly spelled out in Pub 590, p 65.
“Unless one of the exceptions listed later applies, et al”. All of the potential exceptions are listed on p 66.
Exceptions apply even if you convert and then set up a 72t plan and start distributions from the Roth IRA right away. Since the distributions are part of a substantially equal payment plan, there is no penalty (or tax) on distributions from conversions prior to the 5 year holding period.