5 Year Rule…
When converting Trad IRA $ into an existing Roth IRA…when does the 5 year “clock” begin? Jan 1 of the year the Roth IRA was opened? Jan 1 of the year the Trad IRA was converted to the Roth IRA…the exact day the conversion occured? I’m talking to several clients over 59 1/2 that are interested in converting in 2010, but are confused on when the interest portion of any conversion is available without taxation.
Permalink Submitted by Alan Spross on Tue, 2009-08-11 21:23
Apparently, they are only concerned about the 5 year holding requirement for Roth distributions to become qualified as totally tax free. That period begins on Jan 1st of the first year in which a Roth contribution of any type was made, apparently in this case to the existing Roth.
After 5 full calendar years, the Roth is fully qualified for those also over 59.5. But even if their oldest contribution year is less than 5 years, any regular or conversion contributions will come out tax and penalty free. They would not withdraw earnings until all these other contributions were already distributed from the Roth, ie earnings come out LAST. They would therefore never reach their earnings unless they withdrew a very heavy portion of the account balance. In normal circumstances, the 5 year period would be achieved long before anyone went through all their conversions and regular contributions.
The “other” 5 year holding period for individual conversions is moot, because that ends at age 59.5 regardless of the age on the conversion date.
Permalink Submitted by Alan Spross on Tue, 2009-08-11 21:29
I should also add that there is another issue that might come up here, since they seem to be concerned with the taxation impact of distributions on 2010 conversions. Since 2010 conversions are taxed in 2011 and 2012, there is a special rule that states if any portion of the conversion amounts is distributed prior to 2012, the tax bill is accelerated to the year of distribution. This prevents someone from converting, deferring the taxes for 2 years, and then taking tax free distributions out of the Roth that came from the conversion. That would have resulted in taxes being deferred on a distribution rather than a conversion, and the two year deferral was only meant to apply to taxes on funds that remain in the Roth, not for those funds that are withdrawn.