Five year Rule
I’d like to get a clarification on the 5 year holding rule for Roth conversions for someone over 59.5 years old. Is the 5 year holding period applicable for EACH conversion or does the holding period start with the first conversion (or Roth contribution) and its then attributed to all future conversions or contributions?
Permalink Submitted by Alan - IRA critic on Thu, 2020-10-01 17:04
Once you reach 59.5, the 5 year conversion holding period ends for all conversions you did less than 5 years ago, and there is no holding period for conversions done after 59.5. If your Roth is qualified by the first contribution of any any having been made prior to 2016, after you reach 59.5, all your Roth accounts are fully tax and penalty free.
Permalink Submitted by Krista McBeath on Mon, 2020-10-05 20:19
My client is 58 and would like to utilize a Roth Conversion over the next few years. She has an existing Roth IRA. Since the 5 year rule won’t apply once she turns 59 1/2, I don’t see a reason to open a separate account for her converted Roth. Am I correct in this? She has plenty of funds available to her elsewhere, so she will not need to access this account until after 59 1/2.
Permalink Submitted by Alan - IRA critic on Mon, 2020-10-05 21:04
No need to open a separate account for separate conversions, even if the client is younger. For tax purposes, the IRS considers all of a person’s Roth accounts as one combined account. Of course, taxpayers need to track the basis in their Roth IRAs until their Roth is qualified. Each conversion adds to conversion basis.
Permalink Submitted by Pat Osler on Sat, 2023-10-14 18:49
I am 73, retired with a large IRA, small Roth IRA that was converted many, more than 5, years ago, and an annuity in another IRA.To reduce future taxes and the risk of IRMA on my Medicare payments, I am considering an additional conversion in 2023, before year end.My plan is to transfer $25k from my brojer held IRA to that broker converted Roth. Do this for simplicity and to not touch/hold funds. Then I plan to transfer the funds to another account with a financial advisor to open a Roth annuity.I would start taking distributions from my existing IRA annuity in 2024.I would take distributions at some future date from the new Roth IRA, maybe within 2 years.Question: am I correct that I will pay taxes this year on the $25k distribution, but no penalty on any funds no matter how soon I start taking Roth IRA distributions from either account? And all Roth distributions will be tax free no matter when taken?Related: if I convert the existing Annuity IRA to a Roth, and I do it in a few years when the contract value is small, will the tax on the conversion be on the contract amount. The annuity has an income rider and will continue to pay out at a large amount. Will all those future distributions be tax free and with no penalty? Thank you so much for a timely reply – the impact to my wife and I could be large. She has exactly the same accounts and is 72.
Permalink Submitted by Alan - IRA critic on Sat, 2023-10-14 19:58
Permalink Submitted by Pat Osler on Tue, 2023-10-17 21:54
FirseROTH CONVERSIONPermalink Submitted by oslerpa-gmail.com on Sat, 2023-10-14 14:49I am 73, retired with a large IRA, small Roth IRA that was converted many, more than 5, years ago, and an annuity in another IRA.To reduce future taxes and the risk of IRMA on my Medicare payments, I am considering an additional conversion in 2023, before year end.My plan is to transfer $25k from my brojer held IRA to that broker converted Roth. Do this for simplicity and to not touch/hold funds. Then I plan to transfer the funds to another account with a financial advisor to open a Roth annuity.I would start taking distributions from my existing IRA annuity in 2024.I would take distributions at some future date from the new Roth IRA, maybe within 2 years.Question: am I correct that I will pay taxes this year on the $25k distribution, but no penalty on any funds no matter how soon I start taking Roth IRA distributions from either account? And all Roth distributions will be tax free no matter when taken?Related: if I convert the existing Annuity IRA to a Roth, and I do it in a few years when the contract value is small, will the tax on the conversion be on the contract amount. The annuity has an income rider and will continue to pay out at a large amount. Will all those future distributions be tax free and with no penalty? Thank you so much for a timely reply – the impact to my wife and I could be large. She has exactly the same accounts and is 72.
newYES, CORRECT THAT YOU WILLPermalink Submitted by Alan-iracritic@… on Sat, 2023-10-14 15:58
thank you so much for your thorough and very prompt response.The only thing I am uncertain about is the basis for the tax on a future conversion of the annuity IRA. The annuity has an income rider and the distribution is based on a fixed “Income rider basis” that is significantly above the actual cash/contract value. I expect the cash/contract value will drop quickly to a nominal amount in a few years. My hope/idea is that if I convert it then, the tax would be based on that low cash/contract amount and that all subsequent distributions would be tax free and there is no 5 year rule in effecct for that cconversion. Is that correct?thanis again.Pat and Cheryl Osler
Permalink Submitted by Alan - IRA critic on Tue, 2023-10-17 23:21