Updated Monday, April 21, 2014 as of 10:41 AM ET
Blogs - Ask Ed Slott
Clarifying the Five-Year Rules for Roth IRAs
Thursday, May 10, 2012
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Ed Slott was named "The Best" source for IRA advice by The Wall Street Journal and called "America's IRA Expert" by Mutual Funds Magazine. He is a widely recognized professional speaker and educator specializing in retirement distribution planning, teaching both financial advisors and consumers how to best take advantage of our complicated tax code.

-- Have something you want to ask Ed? Send your questions to mailbag@irahelp.com

This week, IRA expert Ed Slott answers investors’ questions about the five-year rules for Roth IRAs.

Question 1 (from our Facebook page):

Ed,

I have an immediate annuity IRA that will pay out over a two-year period. I am set up for Medicaid and my wife is in a nursing home. I will get $10,000 per month for 24 months, and then it ends.

The insurance company will not transfer it directly to another IRA; instead they will only send me the money. Can I roll these payments into a new IRA every month, i.e., does it qualify for the 60-day rollover since it will be happening 12 times per year coming out of just one IRA? I don't need the money and will only need to take a required minimum distribution (RMD) since I am 71. Any help is appreciated.

Answer:

When funds are withdrawn from an IRA where the intention is to roll over those funds to another IRA, the rollover must be completed within 60 days from the day the funds were received by the IRA owner. You can only do one rollover per account, per year (365 days). In your case you can do one rollover in the first 12 months and another one 12 months later. You also cannot do any rollovers until after your required distribution for the year has been paid out.

Question 2:

Ed and his genius staff,

I have been building a Roth IRA with yearly contributions since about 2002. I converted about half of an IRA in December 2010 to that Roth, with the taxes split over 2011 and 2012. I was 59 years and nine months old at the time. Both my parents are alive in their mid 80's so I think I have a 25-year planning horizon.
All of the taxes are being paid with money outside IRAs.

From your 2012 book, it appears I have a five-year clock running to hold the conversion funds in the Roth before tax- and penalty-free withdrawal of conversions and earnings thereof. I'm considering another Roth conversion in 2013, probably within a completely different mutual fund company to keep the books distinct. 



Do the separate five-year clocks run in parallel, one starting in 2010 and the other in 2013? Or, does the 2013 conversion completely lock out withdrawing the funds from the 2012 conversion?

I have the viewpoint that today’s budget deficits are tomorrow’s taxes, so I completely agree with your thesis that Roth IRAs are about the best deal around. I want to keep on doing Roth conversions in subsequent years to game the tax system and stay in favorable tax brackets. Is this feasible?

Thanks in advance,

David

Answer:

The five-year rule is somewhat confusing. There are actually two five-year rules for Roth IRAs, one for tax-free distributions and one for penalty-free distributions. The five-year rule for tax-free distributions starts when the first Roth IRA was established. That Roth IRA can be used to satisfy any additional Roth IRAs established. In your case, this rule was satisfied about 2007, five years after your first Roth contribution.

Converted funds in a Roth IRA have their own five-year rule, if the account owner is under age 59 ½. You are over age 59 ½ so this rule does not apply to you. For those under 59 ½ with the converted amount held for less than 5 years, the distribution is subject to the 10% early distribution penalty. EACH CONVERSION HAS ITS OWN FIVE-YEAR HOLDING PERIOD – if you are under age 59 ½.

We like Roth IRAs basically for the reasons you mentioned. If you can afford to pay the income taxes due on the conversions with outside, non-IRA money, Roth conversions make a lot of sense.

Question 3:

Is there anyway you can return the funds back to an IRA account from a foundation?

Thank you,

Tilden

Answer:

Assuming the funds came out of an IRA, you have 60 days after the receipt of the funds to put them back into an IRA. If you cannot get the funds back from the foundation, you can use personal funds for the replacement. As indicated in question # 1, you can only do one rollover per year per account and you can only roll over amounts in excess of any required distribution for the year.

-- Have something you want to ask Ed? Send your questions to mailbag@irahelp.com

 

 

 

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