Roth IRA Withdrawal and "Seasoning Period"

[chinaco]

I was looking at the rules on the "Seasoning Period" for a Roth IRA and withdrawal rules.

I read something that contradicted how I thought it worked.

I thought that the account needed to be 5 years old (and the owner 59.5) to take tax free withdrawals. Are there any restrictions on time period (Seasonsing) on funds that were converted or is the seasoning period just for the account (i.e., once the account is seasoned all funds in the account are tax free regardless of when they were converted from a Trad IRA)?


What is your interpretation of the rules and limitations? What is your experience with the Seasoning Period?

 

[kaneohe]

check out the updated tabl near the bottom of this thread.
Fairmark Forum :: Retirement Savings and Benefits :: Roth IRA Rules - Table Approach

I don't know the material well enough to vouch for it but it has Alan S.'s blessing in the thread which is almost always an indication that it's ok.

I'm not sure exactly what you are asking about but generally there are 5 yr seasoning periods for each conversion although age 59.5 buys you some special powers. There are also differences between withdrawing
conversion principal vs earnings.

The flow chart on pg 65 here may also be useful.
http://www.irs.gov/pub/irs-pdf/p590.pdf

 

[chinaco]

There are some articles that seem to contradict other articles... or perhaps they are poorly worded.



What is a little confusing is the 5 year period for the Roth IRA account (5 years from the time it was established) and a 5 year period that converted assets (and earnings) need to be held.

Are taxes and penalties on withdrawals after age 59.5 due if those withdrawals are on converted assets and earnings that were converted less than 5 years in the past?

I looked at 590. The flow chart seems to depict that after 59.5 there are no penalties or taxes due on any asset in the account regardless of when they are withdrawn. But there is additional discussion about early distribution... Early from what? 59.5 or 5 years since a specific conversion?


Look at example 3 in this Motley Fool article read to the end of the page.

... But remember that there are still different five-year holding periods for conversions and contributions. Don't get lulled into thinking that, as long as your contribution holding period has been met, your conversion holding period has also been met. The five-tax-year holding period for conversions begins in the tax-year each conversion is made.

Fool.com: All About IRAs - The Roth IRA Withdrawals


Perhaps this article was just poorly worded or the author shifted context of the discussion from the 59.5 example.


I was hoping that someone who has been doing conversions and withdrawing could share some insight.

Ideally someone that has consulted a Tax Savvy CPA on the matter.

 

[kaneohe]

Look at example 3 in this Motley Fool article read to the end of the page.

Fool.com: All About IRAs - The Roth IRA Withdrawals

Perhaps this article was just poorly worded or the author shifted context of the discussion from the 59.5 example.

I think your last sentence summarizes the reality............although to be fair, this is a complex subject and unless words are precisely used, it is easy to be confused. That, to me , is the beauty of the Table from fairmark.com. Simple, easy to read. Hard(er) to get confused.

I looked at the IRS flow chart again.......don't see any references to "early" distributions if you follow the
>age 59.5 yrs flow. There is discussion below the chart but it is not a footnote to the chart but simply a general discussion (which includes <age 59.5 y.o. situations) and early in a general context can include all of the possibilities....age, 5 yr holding from start of 1st roth , 5 yr conversion period for each conversion but age conquers all it seems......except for 5 yr from start.

 

[Nords]

There is discussion below the chart but it is not a footnote to the chart but simply a general discussion (which includes <age 59.5 y.o. situations) and early in a general context can include all of the possibilities....age, 5 yr holding from start of 1st roth , 5 yr conversion period for each conversion but age conquers all it seems......except for 5 yr from start.

By the time I figure this out I'll be older than 59.5...

 

[powerplay]

By the time I figure this out I'll be older than 59.5...

+1

I guess it'll just be easier to wait until I'm sure all the waiting periods are over before I withdraw any Roth $$.

 

[Bikerdude]

Most of the confusion comes from the different rules for contributions vs conversions.

 

[chinaco]

I looked at the Fairmark site a little further... They have some examples in the "taking money out" section on this page.

Guide to Roth IRA, 401k and 403b Retirement Accounts


Here is the author's bio.... he would appear to have the creds... About the Author


On the site he has this explanation... the conversion provision was apparently to close a possible loophole.

Subject to various exceptions, if you take a withdrawal from a traditional IRA before you reach age 59½, any part of the distribution that is taxable is also subject to a 10% penalty. Congress was concerned that taxpayers might use Roth IRAs to avoid this rule as follows:

1. Instead of taking money directly from a traditional IRA, use a conversion to move it to a Roth IRA. Pay tax but no penalty at the time of this rollover.
2. Shortly thereafter, take the money from the Roth IRA, paying no tax (because tax was paid on the rollover) and no penalty (because the early distribution penalty only applies to taxable distributions).

http://fairmark.com/rothira/rolldist.htm

 

[kaneohe]

Nice find.......it's comforting to know that there is some method to the madness and that it's not just a bunch of arbitrary rules.
A good way to attempt to remember things but I still like the table so I won't have to memorize anything. I'd say IRS did a nice job of making things consistent between TIRA and Roth.
Kaye Thomas is the chief honcho at Fairmark but he usually doesn't vocalize on the forums unless everyone else is stumped or makes an error.......then he'll chime in to clear things up.

If you haven't already, for your graduate study you might want to think about Roth conversions from a mixed bag of deductible and non-deductible TIRAs..........or even just withdrawals from that mixed bag.

 

[Nords]

If you haven't already, for your graduate study you might want to think about Roth conversions from a mixed bag of deductible and non-deductible TIRAs..........or even just withdrawals from that mixed bag.

As for withdrawals from that mixed bag, that's why we've been converting to Roths.

When I grumbled about the mixed-bag Roth conversions on Ed Slott's forum, I was advised to stop over-thinking the process and just plug through Form 8606. All the previous Forms 8606 have provided the basis needed to plug through the conversion calculation on the next Form 8606.

 

[kaneohe]

As for withdrawals from that mixed bag, that's why we've been converting to Roths.

When I grumbled about the mixed-bag Roth conversions on Ed Slott's forum, I was advised to stop over-thinking the process and just plug through Form 8606. All the previous Forms 8606 have provided the basis needed to plug through the conversion calculation on the next Form 8606.

Yes, i remember your remarks about that subject so I have stopped fighting it and just go w/ the (8606) flow now. My comments to OP were less focused on the taxation part that 8606 deals w/ but on the penalties that occur if you do early withdrawals of mixed conversions.......I believe there's another form that deals w/ that .........presumably it also leads you by the hand, but I think I'd prefer to avoid getting in that situation in the first place.
Still interesting to think about if you have too much time on your hands.