5 Yr Wait Period for Conversions
I’m puzzled at the early withdrawal rules and Pub 590 doesn’t address my situation explicitly.
In my case at age 60 I have a ROTH account opened over 5 yrs ago and a second ROTH account opened in September 2009 that contains funds from a conversion. My plan was to do a trustee-to-trustee rollover after Oct 15, 2010 from the conversion ROTH to the older ROTH once I could no longer re characterize the conversion.
However after reading P590 it looks like the earnings from the conversion will be taxable to me and my beneficiaries until January 1, 2014. If that’s the case should I keep the accounts separate until 2014? Is there any reason not to do the rollover in 2014 just to reduce the number of accounts since I plan partial conversions every year for the next several years?
Thanks,
Dave
Permalink Submitted by Anonymous (not verified) on Thu, 2010-09-02 18:34
The short answer is that you could distribute all your Roths this afternoon and neither be taxed nor penalized on [u]any[/u] portion.
You satisfied “any” 5-year tenure in a Roth and are over 59 1/2.
pko
Permalink Submitted by Dave Haynie on Thu, 2010-09-02 19:59
I’m more confused and want to be sure that my facts are understood. The Sept 09 ROTH is a new Conversion ROTH not an existing ROTH that I converted some TIRA funds to. I know that my age meant there would be no penalty for withdrawal, but I thought that taxes would be owed regardless of age on earnings withdrawn prior to the end of the new 5 year clock required for each conversion.
Your answer sounds like the list of exceptions applies to both penalty and taxes, therefore if you are over 59.5 in age there is no 5 year clock. Is that the correct interpretation of your reply?
Really appreciate the help.
Permalink Submitted by Alan Spross on Thu, 2010-09-02 20:17
Remember there are two different 5 year holding periods:
1) For each conversion to be penalty free, but this one stops at 59.5
2) For earnings to be tax free, ie your entire Roth is qualified. This only has to be attained one time based on the year of your first Roth contribution. Once that 5 years is met, all your ROth accounts are considered to have met the requirement, even ones you just opened.
So as pko indicated, your Roth is fully qualified, tax and penalty free. There is no need to continue to have these accounts separated, but your Roth is qualified whether you combine them or not.
Permalink Submitted by Anonymous (not verified) on Thu, 2010-09-02 22:25
Reference Pub 590 p.65 (the flowchart) and you will see how your distributions are completely tax and penalty free.
pko
Permalink Submitted by Dave Haynie on Thu, 2010-09-02 23:28
I see where I was having trouble with the P590. I assumed that conversion earnings were part of the conversion, but it’s clear that they are actually only talking about the original conversion amount.
Thanks for the help both of you.