5 Year Rule
Sorry to be asking another question about the 5 year rule, but I just want to be certain.
In 2008 a person over 70 1/2 converted to a Roth, held by custodian A.
In 2010 he plans to convert another Roth, but held by custodian B.
When can the earnings on each Roth be withdrawn tax-free?
Permalink Submitted by Alan Spross on Wed, 2010-01-13 21:40
If 2008 was the person’s first owned Roth account, earnings will not be tax free until 2013 from either account. However, until 2013 the Roth is not qualified and earnings come out LAST. Therefore, unless the lion’s share of the account is drained, they will never get to the earnings amount. The actual converted dollars will come out without penalty since person is over 59.5, but distributions of 2010 converted dollars will accelerate the due date of the income tax on the 2010 conversion which would otherwise not be due until 4/2012 and 4/2013.
Permalink Submitted by Robert Wright on Mon, 2010-01-25 20:12
Alan,
You said in your response above “but distributions of 2010 converted dollars will accelerate the due date of the income tax on the 2010 conversion which would otherwise not be due until 4/2012 and 4/2013”.
Why does withdrawing the 2010 conversion dollars accelerate the taxes due on the conversion dollars?
— Thanks.
Permalink Submitted by Alan Spross on Mon, 2010-01-25 22:38
It was part of the legislation in 2005 that provided for the special 2010 conversion rules. Since the taxes could be deferred for two more years, Congress did not want people using conversions to defer the taxes when they really wanted the funds distributed. They made the tax bill for 2010 conversion distributions due just as if there were no special rules and 2010 was just like any other year. In either case, the taxes are due when the Roth owner actually receives distributions, and only those conversion amounts that remain in the Roth until 2012 receive the full two year deferral.