Roth Conversion in stages and the five year holding period
A client is interested in converting a large IRA account to a Roth IRA, in order to minimize tax consequences the are interested in converting in stages. When does the five year period begin? With the initial deposit or each subsequent transfer?
Permalink Submitted by Alan - IRA critic on Wed, 2017-07-05 17:46
Sounds like you are asking about the 5 year holding period that applies to each conversion with respect to the 10% penalty, and NOT the 5 year holding period for the entire Roth to become qualified and tax free. If so, the 5 year holding period for all conversions done in a particular year starts on Jan 1 of that year. Oldest conversions come out first, but only after all regular contributions have been distributed tax and penalty free. Finally, all 5 year conversion holding periods automatically end once taxpayer reaches 59.5.
Permalink Submitted by Dwayne Adams on Wed, 2017-07-05 17:55
I actually need to know with respect to the taxation of the account. The client is over 59.5.
Permalink Submitted by Alan - IRA critic on Wed, 2017-07-05 18:25
What was the first year the client contributed to a Roth IRA, by either regular contribution or conversion? If prior to 2013, his Roth is already fully qualified and tax free. Otherwise, tax will be due only for earnings distributed from the Roth before the 5 years is completed, but earnings come out last. So if the Roth is not yet qualified and a 50k conversion is done this year, client or client’s beneficiary could take out that 50k tax and penalty free anytime. But any earnings gains distributed before 5 years will be subject to tax.