Trying to make sense of this scenario and seeing conflicting reports…
Client age 60 is retired and has no Roth IRA. If he converts $100K from his traditional IRA, will he be subject to the 5-year rule? Or would he be eligible to distribute the amount of the conversion ($100k) tax and penalty free anytime since over 59.5?
My understanding in the past was that each and every Roth IRA conversion (not contributions) ever transacted would need to start and complete their own individual 5 year time frame to be withdrawn tax-free, unless you are in one of the never tax retirement monies states. However, you mention that if an individual is over 59.5 years and has had a Roth initially opened for 5 years, ANY and ALL conversions’ principal, interest and earnings are distributed tax-free. On any future conversions with the initial 5 year start rule completed, all withdrawals will never be taxed. (Just a re-clarification on these specifics. Do you agree?)
Yes, that is correct. And even prior to completing any 5 year holding period a distribution of conversions would not be taxed since the tax has already been paid. However, prior to 59.5 and holding a conversion 5 years, the withdrawal of a conversion would be subject to the 10% penalty.
Permalink Submitted by Alan - IRA critic on Wed, 2023-08-30 00:35
There are two Roth IRA 5 year holding period. The first determines when the Roth is qualified and earnings are tax free. This one will not be satisfied until 2028. The other is for conversions with are distributed within 5 years to be free of the 10% recapture penalty. The client is over 59.5 and therefore the conversion holding period no longer applies. Client can distribute 100k anytime tax and penalty free, but if more than 100k is distributed before 2028, the excess amount will be earnings and the earnings will be taxable as stated in your last question.
Permalink Submitted by Justin R on Wed, 2023-08-30 00:46
Thanks!