I am considering converting some rollover IRA funds to Roth IRA this year (because of some education tax credits, which would make the tax on the conversion essentially zero). I am 60 years old. I have other Roth IRA funds from regular contributions, beginning more than 5 years ago. Is it true that, if I convert the Rollover IRA to a Roth IRA, I cannot withdraw any of that converted money for 5 subsequent years without a 10% penalty? If so, should I open a separate Roth IRA for the conversion to simplify paperwork in the future? Thanks in advance.
No, that is NOT true. Since you are already over 59-1/2, there is no longer an early withdrawal penalty. All your future withdrawals (including earnings) are now tax and penalty free for the rest of your life.
Not necessary. All future withdrawals are tax-free, regardless of which account they come from. By turning
59-1/2 you have already eliminated most future paperwork.
No. That only applies to the _initial establishment_ of a Roth IRA. Once established for 5 years, you are free to withdraw funds as you wish -- _assuming_ you are over age 59
1/2. Remember: You will have paid taxes on any funds you have deposited in a Roth (theoretically -- at least upon distribution, they were "exposed" to taxation). Therefore, you completely _avoid_ taxation on only the gains, or earnings, from those funds. That's a desirable benefit, but it was wisely determined that once the Roth was established for 5 years, the record-keeping would become burdensome if individuals had to segregate future contributions.
No need, as noted above. You should only have one Roth IRA account. Bill
No, that is not the case. You are still taxed on the conversion, you simply happen to have a credit which you estimate will be approximately the same as the tax you owe. What's more relevant is the tax bracket that your converted money will be taxed at. Generally, you don't want to convert so much that it pushes you into a higher tax bracket.
No, you meet the over-59.5 exception. Otherwise the answer would be yes.
I guess I am confused by the following from IRS Publication
590: "Distributions of conversion contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted (the conversion contribution) that you had to include in income. **A separate 5-year period applies to each conversion.** See Ordering Rules for Distributions, later, to determine the amount, if any, of the distribution that is attributable to the part of the conversion contribution that you had to include in income. "The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion contribution **is separately determined for each conversion**, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions, earlier. "For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2000, and makes a regular contribution for 1999 on the same date, the 5-year period for the conversion begins January 1, 2000, while the 5-year period for the regular contribution begins on January 1,
1999." [asterisks added for emphasis]. Is this 'rule' overridden because I an over 59 1/2, and have an existing Roth IRA that is > 5 years old?? Thanks in advance.
The taxpayer is talking about a conversion -- the five year clock starts separately for each conversion, regardless of when the Roth was originally funded. I alluded to this in my first response which somehow didn't make it in with the rest of the first-responder batch. So to summarize: over 59.5, you're home free. Otherwise, you can take out your contributions, but not earnings, penalty-free if they've been in there for at least five years, with conversions having their own five year clock separate from regular contributions.
Could you clarify that a bit? You said to "a Roth", does that mean to any Roth? I am in much the same position as tobe. I have had a Roth for many years in a Credit union. I would like to open a separate Roth in a brokerage account where I have a traditional IRA which I would like to start converting and the investment choices are much better with the brokerage account. Does the 5 year wait start over for each new account or have I already met that requirement with my existing Roth?
Like traditional IRAs, the IRS considers them as a total, no matter how many sub-accounts you might have. The qualifying
5-year holding period begins with the FIRST Roth IRA you contribute to, regardless of later contributions.
Conversion of a traditional IRA to a Roth IRA starts a different 5-year holding period, one that is specific to EACH Roth conversion you make. Once you turn 59-1/2, these holding periods become moot (i.e. do not apply), although the original "qualifying" holding period applies at any age.
Your entire quote was from a section of Pub 590, under the heading, "Additional Tax on Early Distributions." My comments were directed to your situation, which you summarized later, as:
And the answer is: Yes. Here's a link to the exact on-line clarification of my response, in the form of a handy chart (from page 61 of the 2005 edition of Pub 590):
formatting link
This graphic depiction clearly illustrates my explanation that, being age 60+, you do not have to worry about taxable distributions of funds which have been properly contributed (or "rolled over") into your Roth IRA. As I stated, you will have alread paid tax on those funds -- except for gains
-- when you made the conversion (or at least, the funds will have been "exposed" to taxation). I hope this clears up my response for you, and others.
The first is a one-time five-year clock and that starts Jan 1 of the year you first open a Roth IRA account. Once the clock runs out, it remains satisfied forever.
The other clock is on conversions from a trad IRA to a Roth IRA. This clock only matters if you're not over 59.5 when you do the conversion. Every single conversion carries its own, separate 5-year clock. When you do a conversion, you pay a 10% penalty if you withdraw that conversion before five years have gone by (unless you're over 59.5).
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