5 Year Roth Holding Period
1. TAXES OR PENALTIES ON CONVERSIONS: Are there penalties or other taxes on early withdrawl of conversion money (not earnings) if not held 5 years and if the owner is under 59-1/2 (assume no special reason)?
2. 5 YEAR HOLDING: Can holding an older Roth be useful if you do conversions? Each Roth conversion appears to create its own 5 year holding. Thus, if someone wants to contribute annually to a Roth but earn over the income limit, I assume you can create an IRA then convert it to a Roth. Each time youconvert, another 5 year period is started. However, if you already have a 5 year old Roth, and have this hold the converted assets, will you automatically be waived from the 5 year wait because it has been fulfilled? WIll this also work for rolling a large 401k to a Roth IRA?
Permalink Submitted by Alan Spross on Wed, 2010-01-13 21:51
1) No tax, but 10% early withdrawal penalty on the taxable portion of the conversion would apply.
2) The older Roths will not help with the conversion 5 year holding period which applies to each conversion as you indicated. This is true even if the conversion is made into such older Roth. The only thing the older Roths will do is to start the 5 year period for EARNINGS to be qualified sooner. It will not help with the conversion holding period to avoid the 10% penalty.
Permalink Submitted by [email protected] on Wed, 2010-01-13 22:08
Thanks, Alan–
So if someone rolled a 100k IRA to a Roth, and then, a year later, withdrew all the converted money they would owe $10k penalty (10% x original 100k conversion)?
Permalink Submitted by Alan Spross on Wed, 2010-01-13 23:04
Yes, if they had not yet reached age 59.5 or met another penalty exception. If there are after tax amounts in that conversion the penalty does not apply to those amounts, only the pre tax amounts.
Permalink Submitted by Carol Novak on Thu, 2010-01-21 16:34
Just want to clarify to make sure I understand this. If you convert an IRA that only has pretax contributions, you can’t access any of that before you are 59 1/2 without incurring the 10% penalty (assuming no exception applies) even though you have paid tax on 100% of the converted amount? I am assuming this is to avoid people from converting just to avoid the 10 penalty if they think they will need their IRA before 59 1/2?
Permalink Submitted by Alan Spross on Thu, 2010-01-21 19:33
That is correct.