Roth IRA Conversion

Submitted by MIKE KRUCHTEN on Fri, 2017-02-24 00:40

I have a client who has been converting 50k from his Trad IRA to Roth IRA for past 5 years. All conversions occurred after 59.5. His aggregate conversion total is $250,000 with a CV of $350,000. I was under impression each conversion had its own 5 year period for earnings. His CPA stated he could liquidate entire IRA and have zero taxes to pay. I believe this information is wrong. I agree the $250k is tax free and earnings from the first 50k conversion would be also since 5 year period has been met but not all earnings. Any insights would be appreciated?



Submitted by Alan - IRA critic on Fri, 2017-02-24 01:10

The 10% recapture penalty never applies once the taxpayer reaches 59.5. Therefore, a conversion done at 58.5 only needs to be held 1 year before it can be withdrawn penalty free. Earnings are another matter and do not become tax free until the Roth is qualified. This client apparently made his first contribution prior to 2013 and if so his Roth is now qualified and fully tax and penalty free. He can withdraw whatever amount he wishes tax and penalty free and does not need an 8606 to report it. CPA is therefore correct.

Submitted by MIKE KRUCHTEN on Fri, 2017-02-24 01:58

Assuming the client is over 59.5 for simplicity, after first conversion assuming 5 years ago all conversions after have no individual 5 year hold period only the time to reach 5 year mark from 1st conversion? If a contribution was made 7 years ago does the 1st Roth conversion then have to wait 5 years or only 3 years since Roth was opened. Thanks for the info, had always believed each Roth had it own 5 year period for earnings to be tax free but never understood how IRS could track what earnings came from each conversion.

Submitted by Alan - IRA critic on Fri, 2017-02-24 02:37

  • Yes, that is correct. The first Roth contribution that determines when the 5 year holding period for the Roth to become qualified can either be a regular contribution or a conversion. If it is a conversion the conversion has a separate 5 year holding requirement, this one relating to the 10% penalty. If 59.5 comes before the 5 years, there is no longer a conversion holding requirement. If a distribution includes earnings before the Roth is qualified, the earnings are taxable and also subject to penalty, but the penalty only applies before 59.5. The amount of earnings in a Roth IRA is the adjusted Roth balance at year end that exceeds the total of regular and conversion contributions. There are no sub categories of earnings related to different contributions, just one earnings figure over all Roth IRA accounts.
  • Regarding example of first Roth contribution 7 years ago, if a regular contribution it will start the 5 year clock for determining when the Roth is qualified. Roth is qualified at both 5 years and 59.5. Each conversion done has it’s own 5 year clock only for determining the 10% penalty. If 59.5 comes before the conversion is held 5 years, the penalty does not apply.
  • This conversion 5 year holding period is an artitrary time limit set by Congress to prevent a TIRA owner from converting to get around the 10% penalty for a withdrawal. If that were possible, people would convert then withdraw the conversion right away with no penalty. 5 years was considered long enough that no one would plan that far in advance to get around the penalty. This stops at 59.5 because at that age a distribution could be taken from a TIRA without a penalty, so it makes sense the conversion holding period would also stop at 59.5.

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