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Roth 5 year holding period
Old 07-18-2017, 10:59 AM   #1
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Roth 5 year holding period

The rules state that in order for Roth earnings to be tax free, they cannot be withdrawn until after 5 years from the opening of the first Roth. How is the first Roth defined? I have a Fidelity Roth that was opened long ago and a Vanguard Roth that was opened only a few years ago. Clearly the Fidelity Roth meets the requirement, what about the Vanguard Roth? Also, what about Roth conversions? If they are converted into a Roth that is 5 years old are they are accessible tax free?
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Old 07-18-2017, 11:28 AM   #2
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Distribution Overview - Fairmark.com Fairmark.com is my go-to source for such questions. From what I read there:


Quote:
Treat all Roth IRAs as one



In applying these rules, treat all Roth IRAs as one IRA.
and
Quote:
Beginning on the first day of the fifth year after the year you first established a Roth IRA, can be withdrawn with no tax and no penalty if you’re over age 59 or otherwise meet the requirements for a qualified distribution (death, disability, first-time homeowner). Otherwise, withdrawals of earnings continue to be taxable as ordinary income and, unless an exception applies, subject to the 10% early withdrawal penalty.
and don't forget
Quote:
Regular contributions



  • Can be withdrawn at any time with no tax and no penalty.

Assuming "long ago" means 5 years or more, and assuming you are 59.5 or older, my take is that you can withdraw whatever you want tax free. Do your own reading and research and make sure you agree.
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Old 07-18-2017, 11:42 AM   #3
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Actually, there is a relatively short answer to this question:
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).
https://www.kitces.com/blog/understa...d-conversions/
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Old 07-18-2017, 11:45 AM   #4
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I'd not thought about it before, but this is an argument for someone who has no Roth IRAs at all to establish a Roth IRA and convert a few dollars into it from a traditional IRA, even if that tax rate is high, merely to get the 5-year clock ticking.
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Old 07-18-2017, 12:02 PM   #5
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I'd not thought about it before, but this is an argument for someone who has no Roth IRAs at all to establish a Roth IRA and convert a few dollars into it from a traditional IRA, even if that tax rate is high, merely to get the 5-year clock ticking.
perhaps but the ordering rules also help.....withdrawals are considered to be contributions, then conversions (oldest first) , and then finally earnings. Unless you are going to withdraw everything at once, the earnings come out last so a phased withdrawal might buy you those 5 yrs before you get to earnings.
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Old 07-18-2017, 12:27 PM   #6
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Thanks for the information.
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Old 07-18-2017, 12:40 PM   #7
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Roll me in flour and call me a biscuit...... I did not know this.

I don't have a Roth IRA (obviously) but plan on converting some tIRA funds to Roth next year. Maybe I should do a little now, even if this last year of w*rk with be a 28%er (?).
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Old 07-18-2017, 12:42 PM   #8
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Keep in mind, this counts for gains from contributions. Rollover conversion principal has its own timeline.
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Old 07-18-2017, 12:48 PM   #9
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Originally Posted by GrayHare View Post
I'd not thought about it before, but this is an argument for someone who has no Roth IRAs at all to establish a Roth IRA and convert a few dollars into it from a traditional IRA, even if that tax rate is high, merely to get the 5-year clock ticking.
We did this--converted 10K each just so that we'd have the first five year clock satisfied at our respective ages 59.5. (59.5 age takes away the second clock for conversions.)

Second the recommendations for both the Fairmark and the Kitces links, the latter of which explains the age 59.5 exception to the second/conversion 5 year clock.
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Old 07-18-2017, 12:58 PM   #10
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Originally Posted by LRDave View Post
Roll me in flour and call me a biscuit...... I did not know this.

I don't have a Roth IRA (obviously) but plan on converting some tIRA funds to Roth next year. Maybe I should do a little now, even if this last year of w*rk with be a 28%er (?).
Yes! Open a Roth with some minimal amount (determined by the minimums at your brokerage house) and get that clock ticking!
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Old 07-18-2017, 04:11 PM   #11
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Originally Posted by Alex The Great View Post
Actually, there is a relatively short answer to this question:
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).
https://www.kitces.com/blog/understa...d-conversions/
If I understand it correctly the section you quoted from the Kitces blog applies to the 5 year rule for ROTH contributions, not ROTH conversions.

From Kitces:
Quote:
Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once. When withdrawals occur from conversion amounts, they are deemed to be withdrawal on a first-in, first-out basis under IRC Section 408A(d)(4)(B)(ii)(II), which effectively means the oldest conversions (most likely to have finished their 5-year requirement) are withdrawn first, and the most recent conversions are withdrawn last. (Overall, the ordering rules from Roth IRAs stipulate that withdrawals are after-tax contributions first, conversions second, and earnings third.)
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Old 07-18-2017, 04:20 PM   #12
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Yep, that's right: for conversions (for example from traditional to Roth IRA) 5 years count is separate. Thanks for pointing it out.
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Old 07-18-2017, 04:30 PM   #13
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So we have 3 five year clocks...one for cash funded Roth, one for Roth conversions, and one for Roth 401k.

For those of you who are interested in just getting your Roth started, I can say that at the time I looked (when each daughter was earning her first few dollars in a college work-study program), Schwab was taking small Roth accounts, in the $1,000 range, I think.

I basically funded the Roth up to the modest amount each kid earned in their work-study jobs. They have full control, but I "suggested" they leave all that money in there until retirement. "They" always say you need to start investing young, and it's five times as hard if you start ten years later (well, they don't really say exactly that, but that's the sentiment).
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Old 07-18-2017, 06:30 PM   #14
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Ok, let me get this straight. The 5 year clock for Roth conversions is irrelevant if you are 59 1/2 or older. Principle and gains can be accessed tax free anytime, right?
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Old 07-18-2017, 06:38 PM   #15
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No, you have to be 59.5 AND have funded your first Roth 5 years ago to pull gains, as I understand it. Principal, any time. Sounds like people are in agreement that there is a 5 year clock for each conversion.


Really, unless you have no other choice, it seems best not to touch the Roth as long as you can, since it grows tax free forever. There may be exceptions. I could see a case for pulling from a Roth to keep income low for an ACA subsidy, for example.
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Old 07-18-2017, 06:54 PM   #16
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My suggestion is for everyone who plans to access a Roth prior to age 59 1/2 to look at IRS Form 8606 ASAP.

Part 3 "Distributions from Roth IRAs" shows what needs to be filed if you plan to access a Roth, penalty free, before age 59 1/2.

There is quite a bit of bookkeeping that needs to be done to calculate all the various basis correctly. The instructions explain this in great detail. It is especially tricky if funds are rolled over from a 401k to a Roth IRA.

I had all my IRA statements going back to the late 1990s so I was covered. I was also able to get old 1099-Rs and 5498s from the IRS for the last 10 years.

I now intentionally pull about $10 from my Roth each year which forces a Part 3 on form 8606. This strategy avoids me having to go back multiple/many years to calculate my contribution/conversion basis correctly.

This would have been a most unpleasant surprise if I waited until I needed to actually pull funds from a Roth to review the bookkeeping requirements.

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Old 07-18-2017, 08:14 PM   #17
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Something that has been posted here before on the subject:

Fairmark Forum :: Retirement Savings and Benefits :: Distributions from RIRA after TIRA transfer

in a handy chart format
Roth_Rules.jpg
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Old 07-18-2017, 08:23 PM   #18
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edit to add: JH beat me to it. Glad you find it handy.
I find this table by kawill of the fairmark.com site very useful. (almost no thinking or remembering involved)

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)
Earnings: Tax-Yes; Penalty-No

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

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.

note that withdrawals are in the same order as listed in the table:
contributions, conversions, last earnings.
Within the conversion family , the oldest goes first and within each conversion the taxable part goes first, the non-taxable part goes second.

The table does not cover Roth 401Ks explicitly.
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Old 07-18-2017, 10:03 PM   #19
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Old 07-18-2017, 10:32 PM   #20
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Originally Posted by RunningBum View Post

<SNIP>


Really, unless you have no other choice, it seems best not to touch the Roth as long as you can, since it grows tax free forever. There may be exceptions. I could see a case for pulling from a Roth to keep income low for an ACA subsidy, for example.
I guess I questioned this as well. Back in the day - and even now, I would find SOME other way to come up with money rather than busting one of my heard-earned Roth IRAs. As RunningBum pointed out, there might be some reason to do so, but I'm hard pressed to think what it would be. Heh, heh, I would have lived off credit cards for a few months to avoid giving up a Roth. Each to his own and no disrespect. I'm just suggesting that you need a really good reason to give up the perks of a Roth. Just sayin' so, YMMV.
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