Roth Conversion
I have a 61 year old client, who has had a Roth IRA open for over 5 years. If he converts his Traditional IRA into that same Roth, does the 5-year “waiting period” start over for those new funds, or do the new funds become part of that Roth and the original 5-year window?
Permalink Submitted by Alan Spross on Wed, 2010-09-22 18:38
Remember that there are two different 5 year holding periods, one for earnings becoming tax free at 59.5, and the other for conversions to avoid the penalty if withdrawn prior to 59.5.
In this case, the first one has been satisfied, since the first Roth is over 5 years old AND client is over 59.5
And the second one is also satisfied, since client is over 59.5.
Therefore, all of his Roth including a current conversion would be tax and penalty free if withdrawn, regardless of when the withdrawal occurs.
Permalink Submitted by Kevin Dillon on Wed, 2010-09-22 18:54
thanks!
Permalink Submitted by William Starnes on Thu, 2010-09-30 18:32
Does this mean that in 2010, a 70 year old client (or anyone over 59&1/2 for that matter) who, for example, needs to take $150,000 out of an IRA could instead, convert $150,000 to a Roth IRA, defer the income assoicated with this conversion for two years YET immediatley withdraw the funds (converted dollars and earnings) from the Roth IRA.
If so, this would be a nice strategy to defer taxable income.
Permalink Submitted by Alan Spross on Thu, 2010-09-30 19:55
Good idea, but it won’t work. This was anticipated when the 2010 conversion rules were passed. If you convert and defer the income, any distributions that do not come from your regular contribution balance that you take out in 2010 or 2011 will accelerate the due date of those taxes into the year of the distribution.
Example: Convert 200k and report 100k in 2011 and 2012
Take out 100k in 2010
The result is now you have 100k taxable in 2010 and 100k in 2011
or Take out 100k in 2011 instead.
Now you have all 200k taxable in 2011
Form 8606 is being re designed to reflect these rules that prevent cash flow strategies on these conversions from working. The draft was just released this week, so will have to review it to see how various scenarios are reported, eg if your Roth was fully qualified prior to the 2010 conversions or not.