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Roth 5 year holding period
07-18-2017, 09:59 AM
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#1
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Full time employment: Posting here.
Join Date: Apr 2011
Location: Castro Valley
Posts: 788
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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The rules state that in order for Roth earnings to be tax free, they cannot be withdrawn until after 5 years from the opening of the first Roth.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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07-18-2017, 10:28 AM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,228
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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.
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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Beginning on the first day of the fifth year after the year you first established a Roth IRA, can be withdrawn with no tax and no penalty if you’re over age 59½ or otherwise meet the requirements for a qualified distribution (death, disability, first-time homeowner).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.
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and don't forget
Quote:
Regular contributions
- Can be withdrawn at any time with no tax and no penalty.
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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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07-18-2017, 10:42 AM
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#3
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Recycles dryer sheets
Join Date: Nov 2016
Location: San Jose
Posts: 471
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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/
__________________
Retired Sep 2023 @56
Target AA: 50% stock / 20% bond / 30% cash
Target WR: ~3.6%
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07-18-2017, 10:45 AM
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#4
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Thinks s/he gets paid by the post
Join Date: Nov 2011
Posts: 3,906
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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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07-18-2017, 11:02 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Jan 2006
Posts: 4,172
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Quote:
Originally Posted by GrayHare
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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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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07-18-2017, 11:27 AM
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#6
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Full time employment: Posting here.
Join Date: Apr 2011
Location: Castro Valley
Posts: 788
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Thanks for the information.
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07-18-2017, 11:40 AM
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#7
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Thinks s/he gets paid by the post
Join Date: Aug 2010
Location: Back woods of Fennario
Posts: 1,170
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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 (?).
__________________
"Time wounds all heels...." - Groucho Marx
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07-18-2017, 11:42 AM
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#8
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Thinks s/he gets paid by the post
Join Date: Sep 2016
Location: Acworth
Posts: 1,214
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Keep in mind, this counts for gains from contributions. Rollover conversion principal has its own timeline.
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07-18-2017, 11:48 AM
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#9
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Thinks s/he gets paid by the post
Join Date: Apr 2012
Location: Nashville
Posts: 2,506
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Quote:
Originally Posted by GrayHare
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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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.
__________________
OMY * 3 2ish Done 7.28.17
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07-18-2017, 11:58 AM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2005
Location: Chicago
Posts: 13,186
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Quote:
Originally Posted by LRDave
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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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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"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
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07-18-2017, 03:11 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Jul 2007
Posts: 3,229
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Quote:
Originally Posted by Alex The Great
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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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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07-18-2017, 03:20 PM
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#12
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Recycles dryer sheets
Join Date: Nov 2016
Location: San Jose
Posts: 471
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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.
__________________
Retired Sep 2023 @56
Target AA: 50% stock / 20% bond / 30% cash
Target WR: ~3.6%
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07-18-2017, 03:30 PM
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#13
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Moderator
Join Date: Oct 2010
Posts: 10,725
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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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07-18-2017, 05:30 PM
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#14
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Full time employment: Posting here.
Join Date: Apr 2011
Location: Castro Valley
Posts: 788
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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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07-18-2017, 05:38 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,228
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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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07-18-2017, 05:54 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Aug 2011
Posts: 3,609
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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.
-gauss
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07-18-2017, 07:14 PM
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#17
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gone traveling
Join Date: Oct 2015
Posts: 138
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07-18-2017, 07:23 PM
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#18
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Thinks s/he gets paid by the post
Join Date: Jan 2006
Posts: 4,172
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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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07-18-2017, 09:03 PM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,376
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Quote:
Originally Posted by LRDave
Roll me in flour and call me a biscuit...... I did not know this. ...
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You biscuit!
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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07-18-2017, 09:32 PM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,930
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Quote:
Originally Posted by RunningBum
<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.
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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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