In re Roth IRA 5-taxable-year calendar
Trying to determine an answer to the following question:
Taxpayer opens his first and only Roth IRA on 4/1/2010 with a contribution for the 2009 tax year.
5-year calendar start date is 1/1/2009.
In 2012, the taxpayer completely surrenders the Roth IRA. Does not roll over the funds. Pays tax and penalty (if applicable) on earnings. No other Roth IRAs exist.
On 4/1/2014 the client makes a contribution to a new Roth IRA for the 2013 tax year.
Does the taxpayer now have a new 5-taxable-year calendar starting 1/1/13 or does he continue using the original 1/1/2009 start date?
I have read different answers in different places.
Section 408A(d)(2)(B) does not seem to provide an answer:
“A payment or distribution from a Roth IRA shall not be treated as a qualified distribution under subparagraph (A) if such payment or distribution is made within the 5-taxable year period beginning with the 1st taxable year for which the individual made a contribution to a Roth IRA (or such individual’s spouse made a contribution to a Roth IRA) established for such individual.”
We know from §1.408A-6, Q&A-2 that contributions removed as corrective distributions timely made are treated as having never happened. This would mean that a client establishing a Roth IRA who then terminates that Roth IRA through a recharacterization would be treatged as not having made a Roth contribution. As a result, the clients 5-taxable-year period for Roth IRAs would be based on any future Roth contributions made by the client.
But the issue of fully distributing the Roth and then starting a Roth at a later date does not seem to be addressed. It feels off to think that a taxpayer could establish a Roth, distribute it, then establish a Roth years later and be able to use the same start date.
Comments?
Permalink Submitted by Alan - IRA critic on Fri, 2015-05-01 19:19
While there is no “on point” guidance from the IRS, there is nothing in the current Regs to suggest that a Roth balance must be held continuously in order to retain the original holding period. All Regs refer to the first year the taxpayer makes a Roth contribution, so the general consensus is that the year of the first (valid) Roth contribution applies regardless of how many times the Roth might be fully distributed before it becomes qualified. 2009 would therefore be the permanent start of the 5 year holding period. Similarly, there is no guidance on how long a Roth IRA must remain without a balance if the taxpayer fully distributes all Roth accounts and claims a misc itemized deduction for the amount of loss. In this case, it seem advisable to at least avoid any new contributions in or for the year the Roth was closed to avoid having a 5498 issued showing a contribution for the itemized deduction year.