Roth Timeline
I’m looking for some help/confirmation pertaining to the 5-year rule of my Roth IRA.
I established my Roth IRA in 2014 when I was 56 years old using a backdoor conversion due to higher earnings (the contribution was for the 2013 tax year, but the conversion was done in 2014.) A second conversion was done in 2015 into the same Roth IRA (using a contribution for 2014.)
My earnings were lower last year, and I’m looking at making a direct contribution for 2015 before the tax filing deadline.
I retired at the beginning of this year and have an after-tax 401k account that I want to rollover to my same Roth this year.
I will be 59 1/2 in 2017, so my understanding is that after that time I will not be subject to the 10% early withdrawal penalty on any of the above no matter when the contributions were made. Correct?
My understanding for the conversions is that each conversion starts it’s own 5-year time clock, so with that my 2014 conversion would be tax free in 2019; and the 2015 conversion goes tax free in 2020. Correct?
What time line would I use for the direct contribution and the rollover of the after tax? When do these go tax-free?
Also, given the distribution order, would the direct contribution made for the 2015 tax year and the rollover done in 2016 come out first, and then the two conversions?
Thank you in advance.
Permalink Submitted by Alan - IRA critic on Wed, 2016-03-23 17:27
You are correct. At 59.5 all 10% penalties disappear. If your first Roth IRA contribution of any kind was in 2014, your Roth will be fully qualified and tax free on 1/1/2019. Before that date your distributions are non qualified and occur under the ordering rules. Your regular contributions like your 2015 contribution come out first tax and penalty free. Next out are your conversions and qualified rollover contributions (from 401k), oldest first. These have already been taxed, but the pre tax portion of each rollover comes out before the post tax for each respective year and the pre tax portion is subject to penalty of 10% until the date you reach 59.5. Therefore any conversion 5 year holding period will effectively end at 59.5 since you reach that age before the 5 years is completed. But you do need to keep track of all these contributions and the year you made them because you still have to report a non qualified Roth IRA distribution on Form 8606 even if it is not taxable.
Permalink Submitted by Renee Grey on Wed, 2016-03-23 19:44
Great information. So because my first Roth was in 2014 and I’ll be over 59 1/2, then my entire Roth will be fully qualified and tax/penalty free on 1/1/2019, no matter if conversions were done in multiple years or if the 401k after tax money is later added.Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2016-03-23 19:50
Yes, and starting in 2019 you will no longer need to keep track of contributions because you will no longer need to file Form 8606.