IRA to Roth Conversion 5-year period
I am over 60 and I’m considering converting some IRA funds to Roth. I plan to do this over the next 4 to 5 years. Per IRS Pub 17, Ch 17, under para titled “Additional tax on distributions of conversion and certain rollover contributions within 5-year period.” It states that “A separate 5-year period applies to each conversion and rollover.”
If I did 4 or 5 conversions does this mean I have 4 or 5 different 5-year periods? A financial advisor is saying that the 5-year period only applies to the first conversion and all the later conversion funds fall under this. What is the correct answer?
Permalink Submitted by David Mertz on Fri, 2018-04-20 20:32
The 5-year holding periods for individual conversions only serve to eliminate the early-distribution penalty (“additional tax”) on subsequent distributions of converted amounts. Since you are over 60, there is no early-distribution penalty, so there is no 5-year holding period for each conversion. The financial advisor is likely instead referring to the (different) 5-year holding period needed to make earnings within your Roth IRAs tax free when distributed and is established with your first contribution to a Roth IRA. Your converted amounts are distributed first and will tax free no matter when they are distributed.