5 yr Limit on converted Roth

Submitted by Dave Haynie on Tue, 2016-07-26 18:23

I want to confirm my understanding of this limit in my wife’s situation:

Age 65, did a TIRA to RIRA conversion in 2014. Investments are illiquid and after conversion is now in Chapter 11, thus our best solution may be to get out of the Roth. (lesson learned, no more illiquid investments in qualified accts.)

My understanding is that because she’s past 59-1/2 she can have a qualified withdrawal from this Roth regardless of the time, i.e no tax or penalty.

True???



Submitted by Alan - IRA critic on Tue, 2016-07-26 18:34

A Roth distribution is qualified after 5 years and age 59.5. So if her first Roth contribution was for 2011 or earlier, her Roth is now fully qualified. And even if her first contribution was later, her Roth basis is likely more than it’s current value especially if this illiquid investment is a large portion of her Roth. If her contributed amounts including conversions is more than her Roth is worth. there would be no tax or penalty to cash it in. That said, the damage is mostly done now. What value would the custodian place on this holding if you distributed it in kind?

Submitted by Dave Haynie on Tue, 2016-07-26 21:26

More details to be sure I don’t misrepresent anything: She has a 10+ yr old Roth acct for about 50% of total Roth value, she has a 2016 Conversion Roth acct for about 25% of total Roth value.The 2014 Conversoin Roth is the remaining 25% of total Roth value (different acct and custodian than the first two Roths).  In addition to the investments being illiquid, and in this case there is zero market until coming out of Chapter 7, they are hard to value assets.  The planned distribution of the Roth is to be in-kind since there is no market.  I was not envisioning any issue on valuation unless she and I both pass before chapter 7 is settled and heir needs to take RMD’s.  I’m 67 & primary beneficiary and daughter is contingent.The settlement we hope will return about 90% of her original investment within five or so years, but a small portion maybe 5% will be lumped into a common trust with other investors and it wouldn’t surprise me to be 20 years to settle out that last 5%.  The motivation to distribute is the complexity of having a 3rd party IRA custodian and the associated fees will exceed the value of that 5% in probably less than ten years. So in this scenerio is the 5 yr rule for a 2014 conversion Roth in effect since she is 65?Thanks for the help.  

Submitted by David Mertz on Wed, 2016-07-27 11:23

  • Since she is over age 59½ and had a Roth IRA before 2012, *any* distribution she makes from any of her Roth IRA accounts is a qualified distribution, tax and penalty free.
  • Even if the distribution was not a qualified distribution, the 5-year rule that imposes an early-distribution penalty on conversions distributed within 5 years does not apply to someone who is over age 59½ at the time of the distribution.  Distributions from an IRA (traditional or Roth) after age 59½ are never subject to a penalty because being a 59½ is an exception to the early-distribution penalty.

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