The 5-Year Rule and Multiple Beneficiaries: Today's Slott Report Mailbag
By Andy Ives, CFP®, AIF®
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I’m 66 Years old. Less than a year ago I converted into my Roth from my traditional IRA with the intention of parking it there until I could finalize the details of a summer house purchase. I know I have taxes to pay on the conversion. However, now that I wish to use the money and remove it from the Roth, am I going to be subject to a penalty due to a 5-year rule? I was of the understanding that only “earnings” (which for me meant any money earned ON the money I had deposited into the Roth) had to stay in the Roth for 5 years. Does the 5-year rule actually apply to ALL the money I put into the Roth via conversion from the traditional IRA? I have spoken to a few different advisors and have gotten conflicting responses, so I’ve decided to go to the IRA Guru for an accurate, reliable answer.
Since you are over age 59 ½, you couldn’t get a 10% penalty on your IRA even if you wanted one. A person always has access to their Roth IRA contributions tax- and penalty-free, but since you are over age 59 ½, you also have immediate access to all of your Roth IRA conversion dollars tax- and penalty-free. Even if you tapped the earnings, there would not be a penalty. And if you had any Roth IRA for 5 years, those earnings would also be tax-free. If your Roth conversion less than a year ago was your first entry into a Roth IRA, you would have to wait 5 years for the earnings to be tax-free, but the 10% penalty is permanently off the table for you.
My question relates to multiple types of IRA beneficiaries. If we split the beneficiary designation between a person and a charity, would the person then be subject to the same payout rules as the charity? My understanding is a charity may be required to distribute the IRA within 5 years after the death of the IRA owner. If the other beneficiary is a person, would they also now be subject to the 5-year payout?
If the beneficiary designation on an IRA is split between a living person and a charity, regardless of the percentage split, the person could potentially be stuck with a shortened payout structure after the death of the IRA owner. However, this would only happen if there was a delay in processing the post-death accounts. After death, you have until December 31 of the year after death to split the account into inherited IRAs or, in this case, to cash out the charity. As long as the charity is timely cashed out after death and the remaining beneficiaries have individual inherited IRAs set up for them before the deadline, they will not be negatively impacted and can follow the payout rules applicable to living people.
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