When Does the Roth IRA 5-Year Clock Begin?
By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
For anyone who did a Roth IRA conversion in 2010 – and there were a lot of you because of the “deal,” the two-year spread for the taxes due – you have now fulfilled the 5-year waiting period for taking penalty-free distributions from your 2010 Roth conversion. You have also passed one test for taking a qualified distribution, the other being attainment of age 59 ½, death, disability, or a distribution for a first-time home purchase. A qualified distribution means there is no tax or penalty on any funds withdrawn from your Roth IRA – ever – for the rest of your life.
Here’s what you need to know about when the 5-year clock begins.
The clock begins on January 1 of the year for which the contribution (or conversion) is made. That is how we know that all of you who did a conversion in 2010 have met your 5-year holding period. It doesn’t matter if you did your conversion on January 2nd because you just couldn’t wait, or if you did it on December 31st because you are the best (or worst?) procrastinator in the United States. You have met your 5-year holding period. You could even make a Roth IRA contribution on April 14, 2015 for 2014 and your clock would start ticking as of January 1, 2014.
What if your Roth IRA account that you opened in 2010 is closed out in 2013? Does that mean that you have only three years out of the five you need? Actually, you still have met the 5-year exclusion period. The wording in the tax code is that the five years starts beginning in the year in which the Roth IRA is established. There are no rules that say that the Roth must remain in existence or that the funds must remain in a Roth IRA for the full five years.
If you die before the end of your 5-year holding period for qualified distributions, your beneficiaries inherit the time you have accumulated and must finish out the 5-year period in order to take qualified distributions. This shouldn’t create too many problems for beneficiaries, though. If they are taking only required minimum distributions from the inherited Roth IRA, those distributions will generally be tax free. The only funds in the inherited Roth IRA that would potentially be taxable are the earnings in the account. The beneficiary will only owe income tax on those earnings if they cash out the entire account before the five years are up.
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.