When does the 5-year clock start on a second Roth?

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When does the 5-year clock start on a second Roth?

Post by oldcomputerguy » Sat Jul 30, 2016 6:15 am

Several years ago, I opened a Roth IRA and funded it for some years. I found later that I was very unhappy with the provider's handling of my account, and closed it. (I was over 59-1/2 at the time, and it had been more than five years since the account was set up, so no penalty on the withdrawal.) A few months later, I opened another Roth with another provider and put those funds into that Roth.

Here's my question: did the five-year clock for distributions from the Roth reset and re-start with the opening of and contribution to that second Roth, or does it only extend from my first Roth?

I've looked at the language of the statute, and it's a bit unclear.
A payment or distribution from a Roth IRA shall not be treated as a qualified distribution under subparagraph (A) if such payment or distribution is made within the 5-taxable year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA (or such individual’s spouse made a contribution to a Roth IRA) established for such individual.
It seems to me that the language referring to "a Roth IRA" could be read to mean that the clock runs from the opening of any Roth IRA. So since it's been more than five years since I opened and funded the first Roth, when would distributions from the second Roth be considered "qualified"?
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Re: When does the 5-year clock start on a second Roth?

Post by desertbandit442 » Sat Jul 30, 2016 8:41 am

Notably, under Treasury Regulation 1.408A-6, Q&A-2, for the purposes of this 5-year rule the clock starts the first time any money is funded into any Roth IRA, whether by contribution or conversion. There is not a new 5-year clock for each Roth contribution, nor for each Roth account that is held. All Roth IRAs (but not Roth 401(k)s) are aggregated together to determine whether the 5-year rule is met for any/all of them (which indirectly means that rollovers from one Roth IRA to another do not change or reset the 5-year requirement). In the case of rollovers from a Roth 401(k), any years in the Roth 401(k) are not added to the years for the Roth IRA; thus, if the individual did not otherwise have a Roth IRA already, the rollover from a Roth 401(k) begins a new 5-year period, even if the Roth 401(k) itself had already satisfied the 5-year requirement (per Treasury Regulation 1.408A-10, Q&A-4(a)).

The fact that the 5-year requirements are aggregated across IRAs effectively means that once the 5-year rule has been satisfied once for a taxpayer (i.e., if you’ve already had a Roth for at least 5 tax years), it’s been satisfied for good; in turn, this means that recent contributions may actually be eligible for withdrawal as a qualified distribution even if they’ve been in the account for less than 5 years, as long as the taxpayer overall has met the 5-year requirement with respect to any Roth IRA.

Bear in mind, though, that regardless of whether the 5-year rule is met, for the distribution to be qualified, it must still also satisfy the first part of the test (a distribution made after 59 1/2, death, disability, or under the first-time homebuyer rules).

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Re: When does the 5-year clock start on a second Roth?

Post by whaleknives » Sat Jul 30, 2016 6:23 pm

The Figure 2.1 flowchart in IRS Publication 590-B (2015), Distributions from Individual Retirement Arrangements (IRAs), says only this: "Has it been at least 5 years from the beginning of the year for which you first set up and contributed to a Roth IRA?"
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Re: When does the 5-year clock start on a second Roth?

Post by Alan S. » Sat Jul 30, 2016 10:00 pm

Similarly, a Roth IRA does not have to exist continuously. You could close your Roth IRA entirely and re start contributions in a later year and the year of your first Roth contribution will carry through.

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Roth Transfer

Post by EyeDee » Sat Jul 30, 2016 11:14 pm

.
Smartinwate,

I might be just misinterpreting your statement, but when you say "a few months later", did you mean two months or did you mean three or more? The reason I ask is that I thought a transfer between Roth accounts had to be completed within 60 days to avoid being disallowed.
smartinwate wrote:Several years ago, I opened a Roth IRA and funded it for some years. I found later that I was very unhappy with the provider's handling of my account, and closed it. (I was over 59-1/2 at the time, and it had been more than five years since the account was set up, so no penalty on the withdrawal.) A few months later, I opened another Roth with another provider and put those funds into that Roth.
Randy

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Re: Roth Transfer

Post by oldcomputerguy » Sun Jul 31, 2016 7:09 am

EyeDee wrote:.
Smartinwate,

I might be just misinterpreting your statement, but when you say "a few months later", did you mean two months or did you mean three or more? The reason I ask is that I thought a transfer between Roth accounts had to be completed within 60 days to avoid being disallowed.
It wasn't a transfer or roll-over. It was a straight distribution and closing of the account, followed later by the opening of a new account and funding with the (saved) proceeds of the old at a new provider. So the 60-day clock was not involved. As I was 59 years 10 months old at the time, and had maintained that Roth for over five years, it was a qualified distribution, so no penalty on that front either.

A bit of history:

I had opened the Roth with Raymond James a few years back, and funded a little at a time as able, but I was absolutely ignorant of investing in a Roth. About a year and a half ago, it occurred to me that the fees of maintaining the account ($50 annually, as it turned out) were nibbling away at the principal, and there were no gains at all. Come to find out the money I had put in the account was sitting in core (cash) all that time, rather than being invested. I tried to get access to the funds online to invest them, but the RJ website wouldn't let me (I could see the account but couldn't take action). When I asked them about that, they said there was some paperwork I had to fill out and send in to get access to be able to invest these funds, so I did. Still couldn't get access to invest the money. When I asked again, their guy told me they didn't allow investment access online (even though I'd been told that submitting their paperwork would grant me that access). I got tired of being jerked around, so I closed the account (which cost me another $100 account closure fee) and moved on with life. I later put that money into a Roth at Fidelity. Much better user experience.
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Re: When does the 5-year clock start on a second Roth?

Post by oldcomputerguy » Sun Jul 31, 2016 7:12 am

Alan S. wrote:Similarly, a Roth IRA does not have to exist continuously. You could close your Roth IRA entirely and re start contributions in a later year and the year of your first Roth contribution will carry through.
That's exactly my situation (although the re-opened Roth is at a different provider). Thanks.
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Re: Roth Transfer

Post by kaneohe » Sun Jul 31, 2016 8:16 am

smartinwate wrote:
EyeDee wrote:.
Smartinwate,

I might be just misinterpreting your statement, but when you say "a few months later", did you mean two months or did you mean three or more? The reason I ask is that I thought a transfer between Roth accounts had to be completed within 60 days to avoid being disallowed.
It wasn't a transfer or roll-over. It was a straight distribution and closing of the account, followed later by the opening of a new account and funding with the (saved) proceeds of the old at a new provider. So the 60-day clock was not involved...............................
EyeDee may be on to something tho it is impossible to tell because the question is never answered. This is a rollover so the 60 day clock is involved.

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Re: When does the 5-year clock start on a second Roth?

Post by kaneohe » Sun Jul 31, 2016 8:21 am

smartinwate wrote:
Alan S. wrote:Similarly, a Roth IRA does not have to exist continuously. You could close your Roth IRA entirely and re start contributions in a later year and the year of your first Roth contribution will carry through.
That's exactly my situation (although the re-opened Roth is at a different provider). Thanks.
That's not exactly your situation......Alan talks about restarting contributions in a later year. You are talking about putting the old proceeds
into the new account. That doesn't change the 5 year clock from the original Roth but it does affect if your Roth is valid.

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Re: Roth Transfer

Post by oldcomputerguy » Sun Jul 31, 2016 8:36 am

kaneohe wrote:
smartinwate wrote:
EyeDee wrote:.
Smartinwate,

I might be just misinterpreting your statement, but when you say "a few months later", did you mean two months or did you mean three or more? The reason I ask is that I thought a transfer between Roth accounts had to be completed within 60 days to avoid being disallowed.
It wasn't a transfer or roll-over. It was a straight distribution and closing of the account, followed later by the opening of a new account and funding with the (saved) proceeds of the old at a new provider. So the 60-day clock was not involved...............................
EyeDee may be on to something tho it is impossible to tell because the question is never answered. This is a rollover so the 60 day clock is involved.
Well, to answer the question, the original Roth was closed and the funds distributed on June 14 of last year, the new Roth was opened and funded on August 10. So even if it were relevant, this is within 60 days. I'm not sure, though, why the 60-day clock should even be relevant. This was not a roll-over, there was no direct transfer from one account to the other, no trustee-to-trustee transfer, no check cut payable to the new provider, it was a straight lump-sum distribution and account closure. What makes it a roll-over subject to the 60-day clock? (Not meaning to be argumentative, just wanting to learn, as I know I don't know everything about this.)
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Re: When does the 5-year clock start on a second Roth?

Post by kaneohe » Sun Jul 31, 2016 9:02 am


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Re: Roth Transfer

Post by cherijoh » Sun Jul 31, 2016 9:15 am

smartinwate wrote:
EyeDee wrote:.
Smartinwate,

I might be just misinterpreting your statement, but when you say "a few months later", did you mean two months or did you mean three or more? The reason I ask is that I thought a transfer between Roth accounts had to be completed within 60 days to avoid being disallowed.
It wasn't a transfer or roll-over. It was a straight distribution and closing of the account, followed later by the opening of a new account and funding with the (saved) proceeds of the old at a new provider. So the 60-day clock was not involved. As I was 59 years 10 months old at the time, and had maintained that Roth for over five years, it was a qualified distribution, so no penalty on that front either.

A bit of history:

I had opened the Roth with Raymond James a few years back, and funded a little at a time as able, but I was absolutely ignorant of investing in a Roth. About a year and a half ago, it occurred to me that the fees of maintaining the account ($50 annually, as it turned out) were nibbling away at the principal, and there were no gains at all. Come to find out the money I had put in the account was sitting in core (cash) all that time, rather than being invested. I tried to get access to the funds online to invest them, but the RJ website wouldn't let me (I could see the account but couldn't take action). When I asked them about that, they said there was some paperwork I had to fill out and send in to get access to be able to invest these funds, so I did. Still couldn't get access to invest the money. When I asked again, their guy told me they didn't allow investment access online (even though I'd been told that submitting their paperwork would grant me that access). I got tired of being jerked around, so I closed the account (which cost me another $100 account closure fee) and moved on with life. I later put that money into a Roth at Fidelity. Much better user experience.
Well you must not have had much money in it, since you were subject to the annual contribution limits that way. Had you rolled it over within 60 days, you could have added additional funds as your yearly contribution.

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Re: When does the 5-year clock start on a second Roth?

Post by kaneohe » Sun Jul 31, 2016 9:38 am

why the 60 days is important; Excess Contributions https://www.taxact.com/support/1280/ira ... ributions/

If the 60 day rule is violated, the funds in the Roth constitute excess contributions. The above link explains how there is a 6% tax on the excess contributions for every year that they are not removed.

btw......you may want to recheck those dates. Looks like one of them is a Sunday .

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Re: When does the 5-year clock start on a second Roth?

Post by oldcomputerguy » Sun Jul 31, 2016 10:20 am

kaneohe wrote:why the 60 days is important; Excess Contributions https://www.taxact.com/support/1280/ira ... ributions/

If the 60 day rule is violated, the funds in the Roth constitute excess contributions. The above link explains how there is a 6% tax on the excess contributions for every year that they are not removed.

btw......you may want to recheck those dates. Looks like one of them is a Sunday .
Excess contributions aren't a factor. Funds from the RJ account were about $2k, total contributed to the Roth in December was $6500 (which was the maximum as I was over 59-1/2 at the time).

I pulled that date from an email exchange with the RJ guy, actual date was that date +/- a day or to.
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Re: When does the 5-year clock start on a second Roth?

Post by LadyGeek » Sun Jul 31, 2016 10:22 am

This thread is now in the Personal Finance (Not Investing) forum (Roth IRA).
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Re: When does the 5-year clock start on a second Roth?

Post by kaneohe » Sun Jul 31, 2016 11:19 am

smartinwate wrote:
kaneohe wrote:why the 60 days is important; Excess Contributions https://www.taxact.com/support/1280/ira ... ributions/

If the 60 day rule is violated, the funds in the Roth constitute excess contributions. The above link explains how there is a 6% tax on the excess contributions for every year that they are not removed.

btw......you may want to recheck those dates. Looks like one of them is a Sunday .
Excess contributions aren't a factor. Funds from the RJ account were about $2k, total contributed to the Roth in December was $6500 (which was the maximum as I was over 59-1/2 at the time).

I pulled that date from an email exchange with the RJ guy, actual date was that date +/- a day or to.
Excess contributions refers to anything that doesn't belong in the Roth. Just talking here about the "rollover" if the 60 day rule was violated, not the $6500 original contribution in Dec. June 14 - Aug 10 = 57 by my count so if there is some slop in the dates it might be good to doublecheck real data
that you trust.

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Re: When does the 5-year clock start on a second Roth?

Post by Alan S. » Sun Jul 31, 2016 11:54 am

How the new contribution was reported to Fidelity is how it is characterized for good. The Fido 5498 for 2015 would accordingly indicate whether the contribution they received was a regular contribution or a rollover contribution. The Fido account records would also indicate this. If a regular contribution, the usual requirements apply such as having earned income for 2015 and MAGI not being too high to contribute.

Since the distribution in June was qualified, it does not have to be reported on Form 8606, just on line 15a of Form 1040. If it happened to be designated as a rollover contribution, that would also show on the line next to 15b.

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Re: When does the 5-year clock start on a second Roth?

Post by oldcomputerguy » Sun Jul 31, 2016 3:21 pm

Alan S. wrote:How the new contribution was reported to Fidelity is how it is characterized for good. The Fido 5498 for 2015 would accordingly indicate whether the contribution they received was a regular contribution or a rollover contribution. The Fido account records would also indicate this. If a regular contribution, the usual requirements apply such as having earned income for 2015 and MAGI not being too high to contribute.

Since the distribution in June was qualified, it does not have to be reported on Form 8606, just on line 15a of Form 1040. If it happened to be designated as a rollover contribution, that would also show on the line next to 15b.
The Fido 5498 for TY2015 only shows the $6500 contribution, and does not indicate any rollovers.
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Re: When does the 5-year clock start on a second Roth?

Post by retiredjg » Sun Jul 31, 2016 4:29 pm

I think what is confusing people (myself included) is you described this as putting the old Roth money into a new Roth IRA. If this happens w/in 60 days, it could be a 60 day rollover. No problem.

But you say you didn't roll it over. That means you must have made a new contribution of $6,500. To do that, you'd need at least $6,500 in compensation for the year 2015 (if the contribution was for 2015). It just happens to be the same dollars, but if this is a contribution instead of a rollover, where the dollars came from is irrelevant.

If you did not have compensation in 2015, I think you need to get this recoded as a rollover (since you did make it within the 60 days). If you did not have compensation, you were not eligible to make a contribution and the IRS will eventually figure that out and send you a letter.

MAGI limits would also apply.

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Re: When does the 5-year clock start on a second Roth?

Post by kaneohe » Sun Jul 31, 2016 5:48 pm

smartinwate........to help clarify, could you provide the dates (month/year)/amounts of the Fidelity deposits.
btw....I want the film rights to this drama :D

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Re: When does the 5-year clock start on a second Roth?

Post by oldcomputerguy » Sun Jul 31, 2016 7:00 pm

kaneohe wrote:smartinwate........to help clarify, could you provide the dates (month/year)/amounts of the Fidelity deposits.
btw....I want the film rights to this drama :D
Yeah, this turned out to be way more involved on the "drama" front than I think it's probably worth.

Okay, one more time:

Original Roth account opened years ago, funded in little bits along. I, being the ignorant investor I was at the time, didn't pay much attention.

Last year (2015), it finally sunk into my attention span that this thing was slowly losing money, as it turns out being eaten up by fees. Investigation shows it wasn't invested. Note: no contributions to that Raymond James Roth account were made in 2015, and I was gainfully employed the entire year (and still am, for now).

Somewhere between June 1 and June 16' I closed the account. (Unfortunately I cannot put my hands on the actual,date at this point.) The custodian (Raymond James) sent me a check in the mail for the funds, in the amount of $2,042.79, which I deposited into my brick-and-mortar bank on June 17. At that point I had passed age 59-1/2 and had owned the account more than five years.

On August 10 I opened the new Roth with Fidelity and funded it to the tune of $6,500. I was full-time employed and earned enough in 2015 to cover the contribution to the Roth. Fidelity classes the contribution as a contribution, not a roll-over.

Wow. Has this thread ever drifted away from my original question.
:?
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Re: When does the 5-year clock start on a second Roth?

Post by kaneohe » Sun Jul 31, 2016 8:17 pm

"the original Roth was closed and the funds distributed on June 14 of last year, the new Roth was opened and funded on August 10. "

"Funds from the RJ account were about $2k, total contributed to the Roth in December was $6500"

"On August 10 I opened the new Roth with Fidelity and funded it to the tune of $6,500"

These are the "facts" that confused me. Sounded to me like you had a deposit in Aug and then another one in Dec. Perhaps you can clarify.....

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