Designated Roth account open for 5 years rolled to new Roth IRA
My short question: If you roll a designated Roth account that has been open for over 5 years into a new Roth IRA, does the Roth IRA meet the 5 year rule?
(The longer, more detailed underlying question: I’m trying to determine if Roth IRA earning distributions a taxpayer received are subject to tax and penalty. The taxpayer received the Roth IRA via her divorce. Her ex-spouse had a designated Roth account that got rolled into a Roth IRA for her in the divorce. Both the taxpayer and the ex-spouse are under 59 1/2. The ex-spouse’s designated Roth account was open for over 5 years. The taxpayer’s Roth IRA was newly opened i.e. not open for over 5 years. The taxpayer is considered is disabled and seems as though she could avoid tax + penalty on the earnings that were distributed if she is considered to have met the 5 year rule via her ex-spouse’s designated Roth account being open for 5+ years. The distributions in question are in excess of basis.)
Permalink Submitted by Alan - IRA critic on Wed, 2023-01-04 19:14
The holding period in the Roth 401k does not transfer to a Roth IRA, but the basis does. Taxpayer’s Roth IRA will not be qualified (due to disability) until the Roth IRA itself satisfies the 5 year holding period. That said, the Roth 401k basis (shown in Box 5 of the direct rollover 1099R) is treated as regular Roth IRA contribution basis which can be distributed anytime without tax or penalty. However, any gains in the Roth IRA (value in excess of the contribution basis) will be taxable if distributed before the Roth IRA itself satisfies the 5 year holding period. The disability status will waive any penalty on distributed gains. Most likely this Roth IRA is mostly basis and any gains would come out last.