Built in Gain
A client had $50,000 in a TIRA invested in a start-up bio tech company. The stock is expected to be acquired in a buy-out Q4 of this year for 10x. The client converted to a ROTH in late 2009. When the buy-out occurs will the gain (9X) be considered income and subject to the 5 year hold (from date of conversion) or will the entire amount (10X) be available for tax-free distribution?
Permalink Submitted by Edward Czapor on Fri, 2010-05-28 02:10
The 5 year clock for taxation starts with the first year of a Roth contribution or conversion. The timing of gains within the IRA do not matter. If this is the only IRA, the 5 year clock for taxation and the penalty on withdrawal of the converted amount will end on 1/1/14. If the client is at least age 591/2 when funds are withdrawn, then the 10% penalty would not apply. For the earnings in the account to be tax free, the client would generally have to be at least age 591/2 and have a Roth established at least 5 years making the distribution a qualified distribution, which is completely tax and penalty free. The amount taxed when converted can always be withdrawn tax free, but not necessarily penalty free.