Roth IRAs: When Does the 5-Year Rule Start?
By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
Roth IRA questions continue to come in to advisors. This week's top question was the following.
A client over the age of 59 ½ established a Roth IRA in 2008. He then did a conversion to a separate Roth IRA in 2009. Now he wants to combine the accounts at a new custodian, but when does the 5-year clock begin for tax-free distributions? Does he have to keep the accounts separate?
The clock for income-tax-free distributions will start on January 1, 2008; the year he first established a Roth IRA. This date will apply to all future Roth IRA contributions and conversions in all Roth accounts that he has. Since he is over the age of 59 ½, he must wait for five years (2008 + 5 = 2013) until he can take earnings out of the account income-tax-free (since he is over the age of 59 ½ there will never be a 10% early distribution penalty on any funds taken out of any Roth IRA).
However, he can take tax-free distributions from the account before 2013. The first money out of a Roth IRA is contributions; when they are exhausted then conversions are distributed; and when they are exhausted, then earnings are distributed. Since income tax was paid on both the contributions and the converted amounts when they go into the Roth IRA, they can be distributed income tax free at any time, even before the five-year holding period is up.
And, no, he does not have to keep the accounts separate, especially since he is beyond the date to do a recharacterization of the Roth conversion (October 15, 2010). What he does have to do, at least until he hits that five-year mark, is keep track of what amount is from annual contributions, what amount is from conversions, and what amount is from earnings.
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to email@example.com for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at firstname.lastname@example.org or (516) 536-8282 with any questions.