Earnings and taxation on a Roth
Scenario:
On April 13th, 2011 open new Roth and contribute $5,000 designated for 2010. Next day convert $10,000 from TIRA into Roth plan.
Now the qualified distribution of contribution 5 year clock is retro started to Jan 1st, 2010, while the separate conversion 5 year wait clock retro starts on Jan 1st, 2011, a year later than the other “clock.”
If person is over age 59 1/2 but wants to take out whole account in 2015, assuming there are earnings on all money–the whole 15,000. The qualified distribution clock on the initial will have been satisfied, but not the conversion clock.
I think this still may be considered a qualified distribution and all tax free.
If that is the case then I assume it is because the earnings on the $10,000 conversion money aren’t taxed for not meeting the conversion 5 year wait because the regular tax only applies to whether it is a qualified distribution and not whether it met the 5 year conversion waiting period?
Is this the case?
Thanks in advance,
Lee
Permalink Submitted by Alan Spross on Tue, 2011-08-02 00:20
You are correct, as of 2015 all distributions from the Roth IRA are tax and penalty free because the Roth is fully qualified (59.5 plus 5 year holding met).
All conversion 5 year holding periods end when taxpayer reaches age 59.5 because the conversion holding only affects the 10% early distribution penalty, not ordinary taxes. Roth earnings go into one large pot whether the earnings come from regular contributions or conversions. And once the Roth becomes qualified in total, the earnings are tax free along with the rest of the balance.