Roth IRA distributios
I understand an Roth IRA must be in place for 5 years before one can access the money without penalty, i.e., when the tax free benefits of the Roth can be realized. Does this 5 years apply to money placed into the Roth in years 2 through 5 after the initial contribution? Or, does the 5-yr clock start with each contribution?
Permalink Submitted by Alan - IRA critic on Fri, 2018-07-20 20:46
There are two 5 year clocks. The first one (along with reaching 59.5) determines when all earnings in the Roth will be tax free. This clock starts 1/1 of the year for which the first Roth contribution is made and does not change. The second 5 year holding period is for each conversion and determines when the conversion can be withdrawn without the 10% penalty. A regular contribution can be withdrawn without tax or penalty anytime. A conversion can be withdrawn without penalty after 5 years of when taxpayer reaches 59.5 if sooner. Regular contributions come out first, then conversions starting with the oldest. Earnings come out last and are subject to tax and usually penalty as well until the Roth is qualified. These distribution rules are called the “ordering rules”, so you need to keep track of what your Roth is composed of in order to know what portion of the Roth is being distributed. Before your Roth is qualified, you report distributions on Form 8606 and must know the balance of your regular contributions and conversions because that balance is entered on the 8606.