Five-year waiting rule for Roth IRAs?

[timo2]

Every internet source I have ever found states that the 5 year waiting period for a Roth IRA starts January 1 of the year in which the account is opened. I'm looking for verification of that. Because just this week I had a financial advisor tell me the 5 year waiting period started the day the account was opened. Has something changed that I don't know about?

The circumstances were that I attended a 'free' overview of the Federal Employee Retirement System (FERS). (I say 'free' because it was conducted by a financial advisor group, and nothing is free.) They said the 5 year waiting period for the Roth portion of the TSP started the day the account was opened. AFAIK, the TSP is treated as a 401K by the IRS.

[RunningBum]

I don't think it's changed, but I don't know for sure. Fairmark.com is my source for such things, and it says Jan 1. The only way to know for absolute certain is to read the tax code. I also don't know much about FERS to know if they are really treated the same.

Also for a Roth remember you can take out your contributions tax and penalty free at any time. It's only the earnings part that are subject to limitations.

[REWahoo]

Quote:

Originally Posted by RunningBum The only way to know for absolute certain is to read the tax code.

IRS Publication 590, page 70...

[2B]

You can read the IRS Publication 590 link but it depends heavily on your age. The 10% penalty is clearly designed to not allow someone to transfer money from an IRA to a Roth IRA and avoid the 10% early withdrawal penalty. The five year waiting time only applies if you are under 59 1/2 or don't meet one of the other requirements.

If you are converting, there is a 5 year waiting period from the first day of the tax year you make the rollover. That's been January 1 for my lifetime. Once you are 59 1/2, there is no penalty.

If you really need the money right away, transfer it to a regular IRA and do a 72t. Also, check into the withdrawal rules for your TSP. My 401k allows no penalty withdrawals after age 55 in no longer employed.

[Willers]

From IRS Pub 590:

"Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. "

[martyb]

I just withdrew $17k from our Roth IRA's (all contributions) for a home purchase. No taxes or penalties due, since all funds withdrawn were contributions, & the accounts had been in existence for more than one year. I am 55, wife is 52.

[sengsational]

Quote:

Originally Posted by martyb I just withdrew $17k from our Roth IRA's (all contributions) for a home purchase. No taxes or penalties due, since all funds withdrawn were contributions, & the accounts had been in existence for more than one year. I am 55, wife is 52.

So when you say "all funds withdrawn were contributions", that's a different case than if the funds had come from a rollover or conversion, right? But still, I have a question...how do you specify that you want the contributions to come out first, or is that the default?

[kaneohe]

That is the default. The IRS has an "ordering rule" that specifies that withdrawals are considered contributions first, then conversions in order from oldest to youngest, then finally earnings . There is more detail within each conversion that may create more subdivisions.
http://www.irs.gov/pub/irs-pdf/p590.pdf
see p.69 and click on link for ordering rules

The term "rollover" is confusing to me.....are you talking about a move from one Roth to another Roth or from a TIRA to a Roth? I for some reason think of the latter more as a conversion even tho it might involve 2 different companies but some might think of it as a rollover or perhaps both.

[Kaufmanrider]

Quote:

Originally Posted by 2B If you really need the money right away, transfer it to a regular IRA and do a 72t. Also, check into the withdrawal rules for your TSP. My 401k allows no penalty withdrawals after age 55 in no longer employed.

I believe you have to retire in the year you turn 55, or later, to avoid the 10% penalty. If you retire before, you get hit.

[Free To Canoe]

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[Mike Piper]

Quote:

Originally Posted by timo2 Every internet source I have ever found states that the 5 year waiting period for a Roth IRA starts January 1 of the year in which the account is opened. I'm looking for verification of that. Because just this week I had a financial advisor tell me the 5 year waiting period started the day the account was opened.

In case you want the actual IRC reference, here it is.

However, a TSP account is not an IRA. So while that answers your first question, it doesn't really apply to what you want to know.

IRC 402A has the rules for Roth contributions to employer-sponsored plans. 402A(d)(2)(B) is where the 5-year rule for these purposes is discussed.