Question about the 5 Year Rule for Roths

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JamesNYC
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Question about the 5 Year Rule for Roths

Post by JamesNYC » Thu Nov 07, 2019 1:05 pm

I am looking for some clarity around the 5 Year rule for Roth IRAs. Here is the situation:

1. In 2006, I opened a Roth IRA with what is now Morgan Stanley Wealth Management
2. At some point, but not before 2012, I withdrew some contributions to this Roth IRA after the 5 year rule had been satisfied.
3. In 2015, I moved all of the funds in this account from Morgan Stanley to Fidelity. I made no further contributions from 2015 until present.
4. In 2020, I want to make new contributions to the Fidelity Roth IRA, but I also may want access to the contribution funds.

I am confused if the contributions made in 2020 would reset the 5 year rule because the satisfaction of that rule is nixed once I moved the funds from MS to Fidelity. I know that hypothetically you are only supposed to have to satisfy the 5 year rule once, but once the funds moved are they considered "rollover" funds and no longer contributions? And, if that's the case, does this reset the 5 year timer for any contributions to the Fidelity Roth IRA?

Thanks for any assistance in advance.

magicrat
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Re: Question about the 5 Year Rule for Roths

Post by magicrat » Thu Nov 07, 2019 1:19 pm

The 5-year rule applies to earnings, not contributions. You can withdraw contributions at any time.

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samsoes
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Re: Question about the 5 Year Rule for Roths

Post by samsoes » Thu Nov 07, 2019 1:31 pm

Roth contributions are Roth contributions, regardless of the number of times you roll them around to different custodians. Just keep your 5498 forms to substantiate the aggregate contribution amount.

Edit: I mistakenly said 1099-R when I meant 5498. These are received in May and reflect IRA contributions for the previous tax year, including contributions made through the April 15 filing deadline.
Last edited by samsoes on Fri Nov 08, 2019 3:20 pm, edited 1 time in total.
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JamesNYC
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Re: Question about the 5 Year Rule for Roths

Post by JamesNYC » Thu Nov 07, 2019 1:46 pm

Thanks for the quick responses. Was this always the law? When I withdrew money from the Roth IRA the first time around, I recall the Accountant advising me I could do it only because it was past 5 years (but I only took contributions). Perhaps the accountant was misinformed.

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FiveK
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Re: Question about the 5 Year Rule for Roths

Post by FiveK » Thu Nov 07, 2019 2:51 pm

JamesNYC wrote:
Thu Nov 07, 2019 1:46 pm
...I recall the Accountant advising me I could do it only because it was past 5 years (but I only took contributions). Perhaps the accountant was misinformed.
Given those facts, the accountant was misinformed. Roth contributions are deemed to be first in line when you withdraw. Gets a little more complicated after that (conversions, earnings, etc.) but it's clear for the "contribution only" portion.

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JamesNYC
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Re: Question about the 5 Year Rule for Roths

Post by JamesNYC » Thu Nov 07, 2019 3:09 pm

Thank you!

kaneohe
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Re: Question about the 5 Year Rule for Roths

Post by kaneohe » Thu Nov 07, 2019 11:49 pm

This table by kawill originally from the fairmark.com site may be useful.
It reflects the ordering rules: that contributions come out first, then conversions (oldest first) and within each conversion
the taxable part comes out first followed by the nontaxable portion, and finally earnings last. Note that all your Roth IRAs
are considered one big Roth so moving accounts around (rollovers) does not change the contributions.

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
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 (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
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 (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earni :x ngs: Tax-Yes; Penalty-No

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

All Distributions Are Qualified

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Jerry55
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Re: Question about the 5 Year Rule for Roths

Post by Jerry55 » Fri Nov 08, 2019 12:25 am

JamesNYC wrote:
Thu Nov 07, 2019 1:46 pm
When I withdrew money from the Roth IRA the first time around, I recall the Accountant advising me I could do it only because it was past 5 years (but I only took contributions). Perhaps the accountant was misinformed.
I opened a ROTH IRA (via the Federal CSRS VCP, Voluntary Contribution Program, I made a one time 6 figure deposit ) with Vanguard in April 2011 and heard about the 5 year rule, however, I heard it was a HARD 5 year rule, that is, I can't withdraw until April of 2016 (60 months). Same if I Opened one in Nov 2011, I'd have to wait til Nov 2016. Then, I believe I read it was by year, in other words, I could withdraw funds in Jan 2016 and not wait til Nov 2016.

I was talking to the IRS on another matter and asked that question, and the IRS person said I'd have to wait til NOV 2016.
Further reading told me that the IRS person misled me, and I still believe it's 5 calendar years later, not 60 months later.

Maybe someone here can add to that, as I have no need to withdraw even now, but, I suspect I'm right, and that IRS person was wrong.
Anyone ???
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RickBoglehead
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Re: Question about the 5 Year Rule for Roths

Post by RickBoglehead » Fri Nov 08, 2019 6:39 am

Jerry55 wrote:
Fri Nov 08, 2019 12:25 am
JamesNYC wrote:
Thu Nov 07, 2019 1:46 pm
When I withdrew money from the Roth IRA the first time around, I recall the Accountant advising me I could do it only because it was past 5 years (but I only took contributions). Perhaps the accountant was misinformed.
I opened a ROTH IRA (via the Federal CSRS VCP, Voluntary Contribution Program, I made a one time 6 figure deposit ) with Vanguard in April 2011 and heard about the 5 year rule, however, I heard it was a HARD 5 year rule, that is, I can't withdraw until April of 2016 (60 months). Same if I Opened one in Nov 2011, I'd have to wait til Nov 2016. Then, I believe I read it was by year, in other words, I could withdraw funds in Jan 2016 and not wait til Nov 2016.

I was talking to the IRS on another matter and asked that question, and the IRS person said I'd have to wait til NOV 2016.
Further reading told me that the IRS person misled me, and I still believe it's 5 calendar years later, not 60 months later.

Maybe someone here can add to that, as I have no need to withdraw even now, but, I suspect I'm right, and that IRS person was wrong.
Anyone ???
As stated, contributions can be withdrawn immediately.

Earnings are 5 tax years. Jan 2016 in your case.
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neurosphere
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Re: Question about the 5 Year Rule for Roths

Post by neurosphere » Fri Nov 08, 2019 8:29 am

samsoes wrote:
Thu Nov 07, 2019 1:31 pm
Roth contributions are Roth contributions, regardless of the number of times you roll them around to different custodians. Just keep your 1099-R forms to substantiate the aggregate contribution amount.
Aren't contributions reported on a 5498, and distributions/withdrawals on a 1099-R?

I wish I had kept my 5498 forms from 1998. I hope never to make early withdrawals, and/or if I do I'll have enough 5498s from recent years to substantiate contributions. (aside: I wonder if Vanguard has copies of my 5498 forms from 1998 until 2011, after which I see that they are available to me electronically in my account).
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

kaneohe
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Re: Question about the 5 Year Rule for Roths

Post by kaneohe » Fri Nov 08, 2019 9:21 am

RickBoglehead wrote:
Fri Nov 08, 2019 6:39 am
Jerry55 wrote:
Fri Nov 08, 2019 12:25 am
.................................................

I opened a ROTH IRA (via the Federal CSRS VCP, Voluntary Contribution Program, I made a one time 6 figure deposit ) with Vanguard in April 2011 and heard about the 5 year rule, however, I heard it was a HARD 5 year rule, that is, I can't withdraw until April of 2016 (60 months). Same if I Opened one in Nov 2011, I'd have to wait til Nov 2016. Then, I believe I read it was by year, in other words, I could withdraw funds in Jan 2016 and not wait til Nov 2016.

I was talking to the IRS on another matter and asked that question, and the IRS person said I'd have to wait til NOV 2016.
Further reading told me that the IRS person misled me, and I still believe it's 5 calendar years later, not 60 months later.

Maybe someone here can add to that, as I have no need to withdraw even now, but, I suspect I'm right, and that IRS person was wrong.
Anyone ???
As stated, contributions can be withdrawn immediately.

Earnings are 5 tax years. Jan 2016 in your case.
Contributions to a Roth IRA can be withdrawn at any time w/o penalties.

Your case may be somewhat different. I didn't know what Federal CSRS VCP is and after reading a bit about it
https://plan-your-federal-retirement.co ... ributions/ , I'm jealous :happy
The table in a post above is for IRAs only and things get more complex when you throw after-tax 401Ks (which I'm thining
CSRS VCP is) into the mix. You'll need to get verification from Alan S. but I had the impression that when you move funds
from aftertax 401K to a Roth IRA, you are "making a conversion" of aftertax funds and pretax earnings.........so contributions
to the VCP are changed into a conversion.

If this is true,then the table above says (assuming you're a youngster and you have no other Roths)
since you have no original contributions, the first withdrawals are the taxable part (earnings) of your
VCP conversion..........this has a penalty until you have met the 5 yr conversion period. The next
withdrawals are the nontaxable part (VCP contributions) which have no penalty. However you can't
get to them w/o taking the taxable portion w/ penalty first. The confusing part is that the VCP
contributions have morphed into the conversion (not contribution) part of the table.

I believe that your interpretation of the 5 yr rule starting in Jan is correct so it is really a 4+/5- yr rule.

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

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samsoes
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Re: Question about the 5 Year Rule for Roths

Post by samsoes » Fri Nov 08, 2019 3:18 pm

neurosphere wrote:
Fri Nov 08, 2019 8:29 am
samsoes wrote:
Thu Nov 07, 2019 1:31 pm
Roth contributions are Roth contributions, regardless of the number of times you roll them around to different custodians. Just keep your 1099-R forms to substantiate the aggregate contribution amount.
Aren't contributions reported on a 5498, and distributions/withdrawals on a 1099-R?

I wish I had kept my 5498 forms from 1998. I hope never to make early withdrawals, and/or if I do I'll have enough 5498s from recent years to substantiate contributions. (aside: I wonder if Vanguard has copies of my 5498 forms from 1998 until 2011, after which I see that they are available to me electronically in my account).
Yes, you are correct. I'll amend my posting. Thanks!
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Jerry55
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Re: Question about the 5 Year Rule for Roths

Post by Jerry55 » Fri Nov 08, 2019 9:42 pm

RickBoglehead wrote:
Fri Nov 08, 2019 6:39 am
As stated, contributions can be withdrawn immediately.
Earnings are 5 tax years. Jan 2016 in your case.
That's understood, as I have no need to withdraw anything, I'm leaving it as legacy for my children.
FWIW, I was referring to the erroneous information put out by the IRS agent who told me it would be 60 months.
Hopefully, someone who has a need to withdraw either contributions OR earnings will not speak with the same agent I did. :oops:

Thanks though...
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!

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Jerry55
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Re: Question about the 5 Year Rule for Roths

Post by Jerry55 » Fri Nov 08, 2019 9:52 pm

kaneohe wrote:
Fri Nov 08, 2019 9:21 am
I didn't know what Federal CSRS VCP is and after reading a bit about it
https://plan-your-federal-retirement.co ... ributions/ , I'm jealous :happy
The table in a post above is for IRAs only and things get more complex when you throw after-tax 401Ks (which I'm thining
CSRS VCP is) into the mix.

Lots of reading, but in short...the VCP is an already taxed savings account held by the US Gov't for me to use.
I can tell them to pay me over my lifespan in addition to my pension, or since it's already taxed, move it into a ROTH IRA.
No Conversion necessary. One can move UP TO 10% of one's Federal lifetime earnings.
i.e. If one earned 50K / year for 30 years ($1.5 million) and you had 150K in savings, you can put that into the VCP in one fell swoop
then immediately transfer that into a ROTH IRA. That's it in a nutshell. My VCP to ROTH IRA is totally separate from my TSP though.
Best Move I ever made, closing down my two HY Bond Mutual Fund accounts, but it IS an IRA. ROTH IRA.
The OP is referring to a ROTH IRA :beer

BTW...the author of that book I spoke with on the phone, he's based out of Alaska and very knowledgeable. I bought his .pdf book
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!

MarkNYC
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Re: Question about the 5 Year Rule for Roths

Post by MarkNYC » Fri Nov 08, 2019 10:05 pm

Jerry55 wrote:
Fri Nov 08, 2019 9:42 pm
RickBoglehead wrote:
Fri Nov 08, 2019 6:39 am
As stated, contributions can be withdrawn immediately.
Earnings are 5 tax years. Jan 2016 in your case.
That's understood, as I have no need to withdraw anything, I'm leaving it as legacy for my children.
FWIW, I was referring to the erroneous information put out by the IRS agent who told me it would be 60 months.
Hopefully, someone who has a need to withdraw either contributions OR earnings will not speak with the same agent I did.
IRS telephone representatives are well-trained in explaining procedures for filing, and payment, and dealing with IRS correspondence, but it is a mistake to assume they are knowledgeable regarding specific aspects of tax law.

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