Roth 5 Year Clarification

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Tedinnh
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Roth 5 Year Clarification

Post by Tedinnh »

I have completed my first conversion of tIRA funds to a Roth IRA. I will continue partial conversions (to max of 15% tax bracket) for the next few years until I reach age 70 and start Social Security & RMD's. I am age 66 today. While I have no intent to withdraw the Roth funds at any time soon (maybe never in my lifetime) I wonder if one of my fellow BH's would clarify the 5 year Roth withdrawal rule.
It is my understand that if a Roth conversion takes place when the individual is over age 59 1/2 there is no 5 year rule applicable. All funds are immediately available without penalties.
Correct?

Thanks,

Ted
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grabiner
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Re: Roth 5 Year Clarification

Post by grabiner »

The rules are in IRS Publication 590

The rule you are looking for is on page 70:
Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.
Thus there will be no 10% penalty, because one of the exceptions is that you are over 59-1/2 (and thus you could have withdrawn the money directly from the traditional IRA without a 10% penalty).

However, if you haven't held the Roth for five years, the withdrawals are not qualified and any earnings on those withdrawals are subject to tax. Thus, if this is a brand-new Roth, you will pay tax on any earnings if you withdraw the money in 2017 or earlier; if you opened a Roth in 2008 or earlier, you can withdraw earnings today without tax or penalty. In a Roth, earnings are withdrawn after contributions or conversions.
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elgob.bogle
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Re: Roth 5 Year Clarification

Post by elgob.bogle »

Does this 5-year rule apply to the rolled funds if they were originally deposited into a newly- created, separate ROTH IRA and then later comingled with funds from another, approximately 10 year old ROTH IRA? Or does it not matter, as long as one has had a ROTH for over 5 years? What if the ROTH was in a different institution?

elgob
ASUGrad
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Re: Roth 5 Year Clarification

Post by ASUGrad »

The Roth's start date is when the first contribution goes into the roth. So if you started a Roth with 1k 5 years ago and now you are adding to it 'everything' is considered to have been in their for the entire 5 years, even if you do a 100k conversion or 100k roth 401k rollover into that 1k Roth. They also keep that original start date if you move them... for instance from Fidelity to Vanguard.

Small difference with Roth 401ks, they don't keep their original date if moved or rolled over. So if you roll a roth 401k you have had for 20 years into a new roth IRA your start date is now. If you roll it into a new roth 401k at your new employer, and then you roll that roth 401k into a roth IRA 10 years from now your start date is 10 years from now.

In summary: Its smart to start at least a small Roth IRA at 54 if you have a Roth 401k so you won't have to worry about the date reset.
MN Finance
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Re: Roth 5 Year Clarification

Post by MN Finance »

ASUGrad wrote:The Roth's start date is when the first contribution goes into the roth. So if you started a Roth with 1k 5 years ago and now you are adding to it 'everything' is considered to have been in their for the entire 5 years, even if you do a 100k conversion or 100k roth 401k rollover into that 1k Roth. They also keep that original start date if you move them... for instance from Fidelity to Vanguard.

Small difference with Roth 401ks, they don't keep their original date if moved or rolled over. So if you roll a roth 401k you have had for 20 years into a new roth IRA your start date is now. If you roll it into a new roth 401k at your new employer, and then you roll that roth 401k into a roth IRA 10 years from now your start date is 10 years from now.

In summary: Its smart to start at least a small Roth IRA at 54 if you have a Roth 401k so you won't have to worry about the date reset.
Each separate Roth conversion has it's own 5 year clock not relevant to the start date of the contribution clock which starts at the first Roth contribution.
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grabiner
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Re: Roth 5 Year Clarification

Post by grabiner »

elgob.bogle wrote:Does this 5-year rule apply to the rolled funds if they were originally deposited into a newly- created, separate ROTH IRA and then later comingled with funds from another, approximately 10 year old ROTH IRA? Or does it not matter, as long as one has had a ROTH for over 5 years? What if the ROTH was in a different institution?
There is no issue of commingling. When you make a withdrawal from a Roth IRA, all your Roth IRAs together are treated as one account; you can thus make a direct contribution to a Vanguard Roth IRA, convert an existing Fidelity traditional IRA to a Roth, and then withdraw a Fidelity balance equal to your Vanguard contribution with no penalty.
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elgob.bogle
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Re: Roth 5 Year Clarification

Post by elgob.bogle »

Thanks! I was a little worried about the 5-year rule. For some reason, I had it in my mind that the 5-year wait was effective separately for each in a series of annual TIRA to ROTH conversions - DUH!!!!

thanks again

elgob
sscritic
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Re: Roth 5 Year Clarification

Post by sscritic »

There are two 5 year rules, as grabiner indicated in his first response.
The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution.
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Epsilon Delta
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Re: Roth 5 Year Clarification

Post by Epsilon Delta »

MN Finance wrote:
ASUGrad wrote:The Roth's start date is when the first contribution goes into the roth. So if you started a Roth with 1k 5 years ago and now you are adding to it 'everything' is considered to have been in their for the entire 5 years, even if you do a 100k conversion or 100k roth 401k rollover into that 1k Roth. They also keep that original start date if you move them... for instance from Fidelity to Vanguard.

Small difference with Roth 401ks, they don't keep their original date if moved or rolled over. So if you roll a roth 401k you have had for 20 years into a new roth IRA your start date is now. If you roll it into a new roth 401k at your new employer, and then you roll that roth 401k into a roth IRA 10 years from now your start date is 10 years from now.

In summary: Its smart to start at least a small Roth IRA at 54 if you have a Roth 401k so you won't have to worry about the date reset.
Each separate Roth conversion has it's own 5 year clock not relevant to the start date of the contribution clock which starts at the first Roth contribution.
Not once you're 59.5. When you attain that age the separate 5 year clocks become irrelevant, and you only need to deal with the "global" clock started by the first contribution or conversion.
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elgob.bogle
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Re: Roth 5 Year Clarification

Post by elgob.bogle »

I guess that I had it partly correct - but didn't carefully study the responses. Thanks for the clarification. It appears that reaching age 59.5 trumps all provided one has a 5-year old ROTH IRA! Is this scenario and others discussed somewhere in the Wiki?

elgob
2comma
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Re: Roth 5 Year Clarification

Post by 2comma »

Below is a "table approach" for understanding Roth IRA withdrawal rules which can be found in the Fairmark forum. The discussion that went on while it was being created is also helpful fairmark.com/forum/read.php?2,54159

Roth IRA Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-Yes
Earnings: Tax-Yes Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No
Earnings: Tax-Yes Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No
Earnings: Tax-Yes Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Withdrawals Are Qualified

No Taxes
No Penalties
If I am stupid I will pay.
kaneohe
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Re: Roth 5 Year Clarification

Post by kaneohe »

The table above is more easily understood if you put a semicolon after each yes/no.
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elgob.bogle
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Re: Roth 5 Year Clarification

Post by elgob.bogle »

Thank you all!

elgob
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Epsilon Delta
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Re: Roth 5 Year Clarification

Post by Epsilon Delta »

kaneohe wrote:The table above is more easily understood if you put a semicolon after each yes/no.
Its also more easily understood if you turn it upside down, so that the simplest, "normal" case is at the top. Talk about burying the lede.
OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Withdrawals Are Qualified

No Taxes
No Penalties
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