Over 59 1/2 5 year rule for conversions – have roth already
If you are over 59 1/2 and already have a roth IRA that was established more than 5 years ago, if you convert this year and then take money out with earnings from the converted amount, will there be taxes on the earnings of the converted amount?
For example: Person is 65. Has a $10,000 roth established 10 years ago. Converts $1,000,000 IRA to Roth this year. Earns $200,000 in roth next year and distributes full amount next year. Are there taxes owed on the earnings or not because the person already had roth established? If there are no taxes owed, I assume that this would flow through to non-spouse beneficiaries if person died?
Thanks for your help.
MIke
Permalink Submitted by Alan Spross on Wed, 2011-09-28 18:41
No taxes for any of your Roth distributions because your Roth IRA is now fully qualified. No more holding periods to meet or any other restrictions.
Anyone inheriting a fully qualified Roth could also take tax free distributions at any time, as the owner’s holding period continues for the benefit of the beneficiary.
Permalink Submitted by Mike Garrison on Wed, 2011-09-28 19:02
Even if you distribute the conversion which took place less than 5 years before distribution
Seperate question: If you are over 59 1/2 and have not held a Roth for more than 5 years, then the earnings are taxable – correct?
Permalink Submitted by Alan Spross on Wed, 2011-09-28 19:24
Yes, the 5 year holding period must be completed for the Roth to be qualified. Until that happens, the ordering rules apply to any distributions. Therefore, for a non qualified Roth (inherited or owned), the earnings would be taxable, but they would not be distributed until all the regular and conversion amounts were already distributed.
This means in most cases, an inherited Roth will become qualified before the beneficiary reaches the earnings. RMDs would normally not penetrate the earnings balance in the period needed to complete the 5 years. The exception would occur when the owner already took out most all of those contributions leaving only earnings behind, but that would be quite rare.