I wanted to confirm that a client of ours who did a large Roth Conversion in 2021 is not bound to the 5 year withdrawal rule or any penalties on withdrawals since she was and is over the age of 59.5.?
Thanks.
Yes, it does. If that conversion was the first contribution to the Roth it will start the 5 year clock for the Roth to be qualified by the end of 2025. Meanwhile, if that conversion was the first contribution, most of the balance could be withdrawn tax free since there would be far more contributions in the account than gains.
And in this case if the client took the money before 2025 and is over 59.5 only the gains would be taxable with no penatly, since she didn’t wait 5 years since the first opening of the account via a conversion. Correct? Meaning after 2025 there would be not taxes at all….
Yes, that is correct. Since most of the Roth balance is the converted amount, she could withdraw the converted amount any time without tax or penalty. But the balance in excess of the contributions would be taxable until 2026. Form 8606 is needed to report all distributions prior to 2026, but not for distributions thereafter.
Permalink Submitted by Alan - IRA critic on Wed, 2024-02-28 01:11
Yes, the conversion 5 year holding period does not apply after 59.5, however the first year of any Roth contribution determines the 5 year holding period for distributions to be qualified. So if client’s first Roth contribution of any type was prior to 2020, her Roth is fully qualified.
Permalink Submitted by Josh Harmon on Wed, 2024-02-28 12:32
Thank you. Just to clarify the conversion in 2021 doesn’t count as a contribution though correct?