Roth withdrawal rules

[LBrowning]

Can someone kindly explain the rules for making Roth withdrawals? I plan to draw down my 401K, using part to supplement my pension while delaying SS to age 70. I will likely make contributions to the Roth 2-3 times/year. Does each contribution have to "age" 5 years before earnings are tax-free? Or, does the account itself have to be open for at least 5 years? Or, something else entirely?

[jazz4cash]

I think more information is needed. I need to understand this also, but I believe the gains for each withdrawal need to have been held for 5 tax years to avoid penalty but principal can be withdrawn at any time.
https://www.law.cornell.edu/cfr/text/26/1.408A-6

[kaneohe]

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

[madsquopper]

The time starts from the point at which you first opened the Roth account. And it doesn't even need to be the same account you're now contributing to (in case you have 2 accounts). Individual contributions don't have "age tracking".

https://www.rothira.com/blog/the-fiv...ra-withdrawals

[CRLLS]

One 5-year period per person. The person can have more than one Roth IRA. So long as any one of them meet the 5 year period, the principle and interest can be withdrawn without being taxed provided they are:

Made on or after the date on which the owner attains age 59 1/2, made to a beneficiary or the estate of the owner on or after the date of the owner's death, attributable to the owner's being disabled within the meaning of section 72(m)(7), or to which section 72(t)(2)(F) applies (exception for first-time home purchase)

[fosterscik]

Quote:

Originally Posted by madsquopper The time starts from the point at which you first opened the Roth account. And it doesn't even need to be the same account you're now contributing to (in case you have 2 accounts). Individual contributions don't have "age tracking". https://www.rothira.com/blog/the-fiv...ra-withdrawals

That's true for contributions but not conversions. In the article you quote it states:

Quote:

Instead the clock starts with the very first contribution you ever deposited into the Roth. Note that, this is not the case with a Roth IRA conversion: The five-year–rule clock restarts for every conversion with the amount and date it was converted.

[kaneohe]

Quote:

Originally Posted by fosterscik That's true for contributions but not conversions. In the article you quote it states:

"Instead the clock starts with the very first contribution you ever deposited into the Roth. Note that, this is not the case with a Roth IRA conversion: The five-year–rule clock restarts for every conversion with the amount and date it was converted."

and even when the conversion clock ends, the earnings are still not necessarily available w/o tax or penalty. From the table in a link above:

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

........................................
Earnings: Tax-Yes; Penalty-Yes

[Sunset]

Strangely some of the posted links above seem to contradict each other.

So I went the the IRS site, if you search this link for the exceptions list item: "You have reached age 59½." without quotes.
You can read that roth withdrawals of conversions when past age 59.5 are not taxable, even if 5 yrs not met.
withdrawals of contributions need a 5 year period (of any roth opened) when past age 59.5 to be tax free
(Please correct me if I read it wrong).

https://www.irs.gov/publications/p59...link1000231057

[kaneohe]

from your link:
"Are Distributions Taxable?
You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)"

This means your regular contributions (not conversions) are not taxed when withdrawn.
Qualified distributions are also not taxed.

"What Are Qualified Distributions?
A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
The payment or distribution is:
Made on or after the date you reach age 59½,"

This means that after you reach 59.5 and your first contribution (either regular or conversion) to a Roth was 5 yrs ago, all withdrawals are qualified and not subject to tax.

Note that there are 2 types of 5 yr clocks. One tracks when your oldest Roth was opened and applies when you are over 59.5. The other type of clock tracks each conversion and applies when you are less than 59.5. Once you reach 59.5, the other clock (oldest Roth) takes over and negates the conversion clocks because the withdrawals are qualified.

[jazz4cash]

Most of my Roth funds are in my 401k plan. They are intermixed with with tax-deferred (regular 401k) funds. I called Fidelity to see if I could separate the Roth funds from the pre-tax funds by converting them to my Fidelity Roth IRA. They said "sure, that's probably a good idea" (without much conviction, so bailed on the conversion idea and decided I needed to dug deeper). So seeing this thread I checked around and it seems that my Roth 401k funds passed the 5yr mark in 2012. If I convert them to the Roth IRA, my understanding is the clock resets to 0. This is complicated and easy to screw up.

[CRLLS]

Quote:

Originally Posted by jazz4cash Most of my Roth funds are in my 401k plan. They are intermixed with with tax-deferred (regular 401k) funds. I called Fidelity to see if I could separate the Roth funds from the pre-tax funds by converting them to my Fidelity Roth IRA. They said "sure, that's probably a good idea" (without much conviction, so bailed on the conversion idea and decided I needed to dug deeper). So seeing this thread I checked around and it seems that my Roth 401k funds passed the 5yr mark in 2012. If I convert them to the Roth IRA, my understanding is the clock resets to 0. This is complicated and easy to screw up.

I have no idea if the clock starts over. There are noticeable differences between Roth IRA's and Roth 401K's that need to be mentioned. The Roth 401K allows much higher annual contributions. The Roth 401K allows you to take a loan, which may be of interest. The Roth 401K requires RMD's. The RMD's won't be taxed, but assuming you will roll that over to a taxable account, the growth on those RMD's will be taxed.

To maximize future flexibility, I would suggest:

1)Even if you don't need access to the money in the next 5 yrs, open up a Roth IRA now with other money to start the clock ticking.

2)Make that Roth IRA contribution as a 2017 contribution as the 5 yr clock starts Jan 1st of the year the account is funding, not when you actually open the account, making the start date Jan 1 2017.

3)Consider if it is wise to keep the Roth 401K for as long as you are contributing big $$ and the Roth IRA account has met the 5 yr rule. Then convert to a Roth IRA before the RMD's kick in.

An unexpected layoff in your later working years can throw a wrench in anyone's "plans". My advice, even though you haven't asked, is to keep the maximum amount of flexibility.

[Sunset]

Simple and great advice to give everyone who does not have an external Roth account, is open a normal Roth account anywhere that does not charge a service fee or maintenance fee, and put $1.00 into it.
Start the 5 clock today, then later if you need it, you will be glad you did, it's too easy to forget about it and suddenly wish it had been done.

Post crossed with CRLLS

[CRLLS]

^ +100

[Sunset]

Quote:

Originally Posted by kaneohe from your link: "Are Distributions Taxable? You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)" This means your regular contributions (not conversions) are not taxed when withdrawn. Qualified distributions are also not taxed. "What Are Qualified Distributions? A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and The payment or distribution is: Made on or after the date you reach age 59½," This means that after you reach 59.5 and your first contribution (either regular or conversion) to a Roth was 5 yrs ago, all withdrawals are qualified and not subject to tax. Note that there are 2 types of 5 yr clocks. One tracks when your oldest Roth was opened and applies when you are over 59.5. The other type of clock tracks each conversion and applies when you are less than 59.5. Once you reach 59.5, the other clock (oldest Roth) takes over and negates the conversion clocks because the withdrawals are qualified.

Excellent way to summarize. Why can the IRS not speak so well

[kaneohe]

Quote:

Originally Posted by Sunset Excellent way to summarize. Why can the IRS not speak so well

Thanks.....but that summary wasn't quite right

Note that there are 2 types of 5 yr clocks. One tracks when your oldest Roth was opened and applies when you are over 59.5. The other type of clock tracks each conversion and applies when you are less than 59.5. Once you reach 59.5, the other clock (oldest Roth) takes over and negates the conversion clocks
( The last 5 words were incorrect....."because the withdrawals are qualified".)
Once the oldest Roth clock is 5 y.o. (and you are over 59.5), the withdrawals are qualified.

The issue would be when you had only made conversions late in the game so
your oldest Roth was a conversion not yet 5 yrs old when you turned 65. The oldest Roth clock would take over but it would be the same as the oldest conversion so not yet qualified. Thus all the suggestions to open a Roth , even a mini-roth ,to get that second clock ticking is a good one.