I have been told that the income and gains from the assets within a Roth-IRA are, like the assets themselves, not taxed upon withdrawal after "5-year aging". Is this correct? I've also been told that the "5-year aging" of income/gains only applies to the initial assets contributed to the Roth when it is established, and not to subsequent assets added to the Roth at a later date. Is this also correct? Thanks for any comments. I really need a reality check on this.
Excuse me for replying to my own post, but I don't think I did a good job of presenting my question. What I am considering is converting an existing Traditional IRA to a Roth by transferring 15% or 20% per year of the Traditional to the Roth. What I want to know is are the earnings from ALL conversions from the Traditional to the Roth subject to the 5-year aging rule, or does the rule just apply to the FIRST conversion? Item-4 below is what's confusing me (quoted from
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Contributions can be withdrawn tax-free and penalty-free at any time.
There is 5-year clock 'A'. Clock 'A' starts on the first day of the first tax year in which any Roth IRA is opened and funded.
Earnings can be withdrawn tax-free and penalty-free after Clock 'A' hits 5 years and a qualifying event (such as turning 59.5, disability, etc.) occurs.
4 Additional 5-year clocks 'B', 'C', etc. start running for each traditional IRA that is converted to a Roth IRA. Each clock applies just to that conversion.
================== Item-4 seems to be referring to multiple Traditionals converted to multiple Roths, but I'm not sure. Thanks for any help.
"Qualified" distributions from a Roth are tax-free. There's a two-part test to determine whether distributions are qualified. Half of that test is the 5-year aging. On top of that, you must meet one of the conditions for qualified distributions, as explained in IRS Publication 590. The most common is that you're over 59 1/2 at the time of distribution.
No. You also have to be over age 59.5. If you meet both of these tests, it's a qualified distribution. Let's use the terms "contributions" and "earnings" to distinguish between the two main types of money in the account. Contributions (but not conversions from Trad. IRA) can be withdrawn at any time without tax or penalty. Earnings are subject to a variety of rules to determine possible tax and penalties.
There is a five-year rule for the initial contribution to any Roth IRA, yes. There is a also a slightly different five-year rule for conversions from a Trad. IRA that allows the conversions to be withdrawn without tax or penalty after five years, at any age.
You've heard wrong. After 5 years, you may withdraw an amount equal to your contributions and conversions without tax, but the gain/growth/earnings on those amounts will be taxable (both income tax and the 10% excise tax) unless you reach age 59.5 or another exception applies.
The taxability of funds in your Roth IRA are fully explained in IRS Pub 590, but since you apparently missed the memo, I will repeat them here. Your CONTRIBUTIONS (which are made with after tax funds) can ALWAYS be withdrawn TAX and PENALTY FREE. There is NO holding period. If the Roth IRA has been open for 5 tax years AND you are age 59.5, or older, ALL distributions are TAX and PENALTY FREE. The 5 year holding period begins on January 1 of the first year of contributions and applies to all subsequent contributions. If you convert some or all of your Traditional IRA (subject to the $100,000 AGI restriction) you start a DIFFERENT 5 year holding period before you can withdraw those funds without PENALTY. There is no TAX due, as the conversion resulted in this contribution being made with after-tax funds. Each conversion starts a NEW 5 year period and withdrawals are made on a FIFO basis. Once you turn 59.5 the holding period becomes moot. Earnings (with some exceptions) are taxable and subject to PENALTY until they become QUALIFIED. That means that the account is more than 5 tax years old (which actually could be less than 4 calendar years from the date of contribution) AND you have turned 59.5 years old. After that point, ALL withdrawals are TAX and PENALTY FREE! Withdrawals are ALWAYS made in the following order:
1) Annual contributions, made by April 15 of the year AFTER they are credited to the account.
2) Conversion contributions
3) Earnings
If you are in a withdrawal mode, you first will withdraw (1) until it is depleted, then (2), finally (3). Roth IRAs are not subject to RMD withdrawal, the money can be left alone and used as a legacy for your heirs.
That statement is wrong. There is only one 5-year clock for qualified distributions, and it starts running the tax year the first Roth contribution, cash or conversion, is made. See IRS Publication 590. For people under 59 1/2 and, thus, subject to the premature distribution penalty there is a separate 5-year clock for each conversion, but only with respect to the penalty. (Note that these distributions are not "qualified" even after 5 years unless one of the other conditions explained in Pub 590 is met.)
Please stop confusing earnings with contributions and conversions. Earnings are taxed and penalized if not distributed in a qualified fashion.
Each conversion has its own five year clock. After five years, you can withdraw the converted amount (but not necessarily earnings) tax and penalty free, as if it were a contribution. So, this is a way to get money out of a Trad IRA without penalty and without meeting any of the other early distribution exceptions. But of course you did have to pay tax on it at the beginning of the five year period, when you converted it to a Roth. Keeping your IRA money at one institution or spread around at several is largely irrelevant, other than management fees and and other benefits related to the balance in your account at each. Generally speaking, you have one overall Trad. IRA balance, and one overall Roth IRA balance, no matter how many "accounts" you have split them into.
Maybe this will lessen your confusion. When you convert, you pay the tax. Now that the money is in a new and ROTH account, the clock starts ticking. Don't confuse what your IRA earns before the conversion and think it mixes with what the ROTH will earn after conversion. ChEAr$, Harlan
There is no penalty, but if the Roth (not the specific earnings/contribution) is less than 5 years old AND you withdraw earnings, the earnings are taxable income.
And I think a "word to the wise" would be appropriate here.
Anybody who has a ROTH account needs to keep excellent records. I mean of all contributions, withdrawals, etc, in order to determine if and when a withdrawal might be taxable.
I've a case right now where client has a 1099R for final distribution from the ROTH account. All she remembers is that she started putting either 25 or 50$ a month into it in 2000. Yes, she's under that magic age, too.
I sure hate to take the easy way out and slap the whole 519$ on the return, though.
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