Roth Conversion five year rule
I have read on this forum, in multiple threads, that there is no penalty or income tax on distributions to beneficiaries who are over 59.5 within five years of conversion. I agree there will be no income tax on the distribution if the amount was taxed when converted, but I believe the 10% penalty will apply.
Example, I am age 62 and have $50,000 in a traditional IRA. I contributed $2,000 to a Roth IRA in 2000. Now suppose, I convert $50,000 of the IRA to my Roth account in 2008, and I include $50,000 of income on my 2008 1040. In 2010 I need cash and take a $5,000 distribution from my Roth.
Can anybody confirm that there is no penalty on the distribution?
Permalink Submitted by Alan Spross on Thu, 2008-12-04 21:22
There is NO penalty. The early withdrawal penalty ceases at age 59.5 including Roth conversions done prior to age 59.5. This is confirmed in IRS Pub 590, p 66. The last paragraph on p 65 also indicates “unless one of the exceptions listed later appplies” and on p 66 it lists all of the exceptions including reaching 59.5.
In addition, in your example your Roth is fully qualified since you have met both the 5 year holding requirement (first Roth in 2000), and are over 59.5.
A fully qualified Roth distribution is totally tax and penalty free including earnings. You could take a full distribution a day after the large conversion and it would be tax and penalty free.
Permalink Submitted by Barney Rubble on Mon, 2008-12-08 19:15
Thanks, I missed the exception paragraph on the following page.
However, why would any distributions be qualified? I understand I wouldn’t have to pay any tax on distributions which were already taxed, but what about earnings after I converted? Specifically I am referring to Pub. 590 p. 65 which states, “A separate 5-year period applies to each conversion.” Doesn’t this mean I will have to wait 5 years for the conversion amount to be a qualified distribution?
Thanks
Permalink Submitted by Alan Spross on Mon, 2008-12-08 21:12
No.
Since you have already met the conditions for qualification, all earnings are tax free in addition to the return of your contributions. The definition of a qualified distribution is also on p 65 of Pub 590.
Also, note that receipt of a qualified distribution is never subject to the 10% early withdrawal penalty. Note the paragraph on p 65 prior to explanation of the conversion holding period:
“If you receive a distribution that is NOT a qualified distribution, you may have to pay the 10% additional tax on early distributions, etc”
But since any distribution you could take is qualified, the 5 year conversion holding period does not even apply to you.
You are in the best possible situation with this account:
1) Any distribution is tax free, regardless of amount. And it will not contribute to taxation of your SS benefits.
2) No RMDs will be required at age 70.5 as opposed to a TIRA
3) All earnings the account generates will be tax free
The only downside is that the conditions are so beneficial, you don’t feel like you should be tapping the account at all, except in an emergency.
Permalink Submitted by charles lore on Tue, 2008-12-09 02:14
Put another way … a separate 5 yr period starts for each conversion only for purposes of 10% penalty. This is a mute point if you are 59 1/2.
As for earnings all are qualified since more than 5 yrs have elapsed since you opened your first roth and you are 59 1/2.