Roth IRA withdrawal question

[FREE866]

I know Roth's have been discussed ad nauseum, but this is a very specific question regarding the tax ramifications on withdrawals from Roth IRAs that I can't seem to get confirmation on.


The rule is:
At age 59½, you can withdraw both contributions and earnings with no penalty, provided that yourRoth IRA account has been open for at least five tax years.

Does that mean in year 6 you can withdraw ALL of the money in the Roth IRA and not be taxed? Even money you converted into the Roth in the year right before you withdraw money ?

Or for a tax free withdrawal do the contributions made have to have been held in the account for 5 years?

 

[TheWizard]

Correct...

 

[FREE866]

Correct...

Correct to which question?

 

[Dtail]

Correct to which question?

Both

 

[FREE866]

Both

Im actually over here because I asked 3 questions. Answer cant be yes to all 3!





so you're saying yes to the first two?


please clarify


thx

 

[Al18]

I agree you can withdraw contributions and earnings. But each conversion has its own 5 year clock. This was recently discussed https://www.early-retirement.org/fo...-earning-and-5-year-rule-age-60-a-119962.html

 

[FREE866]

I agree you can withdraw contributions and earnings. But each conversion has its own 5 year clock. This was recently discussed https://www.early-retirement.org/fo...-earning-and-5-year-rule-age-60-a-119962.html

Thats what got me started on this. So then you're saying no to my first two questions?


theres discrepancy all over on this one.


Any accountants care to chime in?

 

[SecondCor521]

Yes, yes, and no in that order. After 59.5 and first Roth > 5 years, you can withdraw as much or as little as you want from your own Roth IRA tax and penalty free, regardless of the contribution/conversion/earnings history and resulting mix.

Al18's comments about a conversion still requiring a 5 year clock is incorrect if the two criteria in my previous paragraph are met.

You can read it for yourself in the 2023 IRS Form 8606 Part III instructions, which say to exclude:

"Distributions made on or after age 59 1/2 if you made a contribution (including a conversion or a rollover from a qualified retirement plan) for any year from 1998 through 2018."

-- https://www.irs.gov/pub/irs-dft/i8606--dft.pdf, page 10, column 2

Distributions excluded from Part III will not end up being taxed, as you can see by looking at the rest of Part III and realizing that if the above distributions are excluded (as they properly should be), then line 25c, the taxable amount, must necessarily be zero.

Form 5329 Part I, where the 10% early withdrawal penalty would be calculated, clearly says in the instructions to only include Roth distributions which end up on 25c of Form 8606, which is, again, zero. 10% of zero is zero:

"Distributions from Roth IRAs. If you received an early distribution from your Roth IRAs, include on line 1 the part of the distribution that you must include in your income. You will find this amount on line 25c of your 2022 Form 8606."

-- https://www.irs.gov/pub/irs-pdf/i5329.pdf, page 3, column 2.

Not an accountant, but I am a certified tax prepare for AARP Foundation Tax Aide for the past several years. If @cathy63 agrees with me, then you can count on it being correct. ;-P

 

[Dtail]

Each Roth conversion does NOT have its own clock, if one is over 59.5 y.o. and the FIRST roth account has been open for 5 years.

 

[FREE866]

Yes, yes, and no in that order. After 59.5 and first Roth > 5 years, you can withdraw as much or as little as you want from your own Roth IRA tax and penalty free, regardless of the contribution/conversion/earnings history and resulting mix.

Al18's comments about a conversion still requiring a 5 year clock is incorrect if the two criteria in my previous paragraph are met.

You can read it for yourself in the 2023 IRS Form 8606 Part III instructions, which say to exclude:

"Distributions made on or after age 59 1/2 if you made a contribution (including a conversion or a rollover from a qualified retirement plan) for any year from 1998 through 2018."

-- https://www.irs.gov/pub/irs-dft/i8606--dft.pdf, page 10, column 2

Distributions excluded from Part III will not end up being taxed, as you can see by looking at the rest of Part III and realizing that if the above distributions are excluded (as they properly should be), then line 25c, the taxable amount, must necessarily be zero.

Form 5329 Part I, where the 10% early withdrawal penalty would be calculated, clearly says in the instructions to only include Roth distributions which end up on 25c of Form 8606, which is, again, zero. 10% of zero is zero:

"Distributions from Roth IRAs. If you received an early distribution from your Roth IRAs, include on line 1 the part of the distribution that you must include in your income. You will find this amount on line 25c of your 2022 Form 8606."

-- https://www.irs.gov/pub/irs-pdf/i5329.pdf, page 3, column 2.

Not an accountant, but I am a certified tax prepare for AARP Foundation Tax Aide for the past several years. If @cathy63 agrees with me, then you can count on it being correct. ;-P

Thank you so much for all this. This is great news then. Don't have to worry about it now, but good for future reference.

 

[Al18]

From Ed Slott’s Blog posted https://www.irahelp.com/slottreport/roth-ira-distribution-ordering-rules-%E2%80%93-keep-it-simple recently

 

[Romer]

From Ed Slott’s Blog posted https://www.irahelp.com/slottreport/roth-ira-distribution-ordering-rules-%E2%80%93-keep-it-simple recently

That disagrees with the above. I googled and I see lots of credible sites that say 5 years after account opened and other credible sites that say 5 years after specific conversion. This seems to be an area of confusion or maybe it is just me

 

[thefist]

From Pub 590B:
https://www.irs.gov/publications/p590b#idm140201405565888

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 tax year for which a contribution was made to a Roth IRA set up for your benefit.
The payment or distribution is:
Made on or after the date you reach age 59½,
Made because you are disabled (defined earlier),
Made to a beneficiary or to your estate after your death, or
One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

 

[sengsational]

The "tIRA" convert and quickly withdraw doesn't affect the tax man any differently than just a "tIRA" withdrawal. And if you're "old", you're the target audience for spending retirement funds. So the no-consequences (documented legit) convert and withdraw scenario makes sense.

 

[Romer]

From Pub 590B:
https://www.irs.gov/publications/p590b#idm140201405565888

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 tax year for which a contribution was made to a Roth IRA set up for your benefit.
The payment or distribution is:
Made on or after the date you reach age 59½,
Made because you are disabled (defined earlier),
Made to a beneficiary or to your estate after your death, or
One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

I think this graphic from the IRS link makes it clear it is 5 years from when the account is setup, not when the specific conversion or contribution is made

 

[SecondCor521]

That disagrees with the above. I googled and I see lots of credible sites that say 5 years after account opened and other credible sites that say 5 years after specific conversion. This seems to be an area of confusion or maybe it is just me

That's because there are two different 5 year rules that work differently but both apply to IRAs. Sometimes people talk about one, sometimes they talk about others. Rarely do they talk about both, and rarely do they clarify that there are two different 5 year rules that work differently but both apply to IRAs. This tends to confuse people.

 

[oldtimer]

I think this graphic from the IRS link makes it clear it is 5 years from when the account is setup, not when the specific conversion or contribution is made

The figure clearly states the Roth IRA must be initially funded. Just opening an account without funding it will not start the 5-yr account clock. $1 will be enough funding to start the account clock.

 

[Romer]

The figure clearly states the Roth IRA must be initially funded. Just opening an account without funding it will not start the 5-yr account clock. $1 will be enough funding to start the account clock.

I think we are both in agreement. In my mind opening and initially funding are the same. Although maybe you can open an account without funding. Anytime I have opened an account there has always been a minimum deposit, but I never asked specifically about the Roth. I just funded it when I opened it 10 years ago.

What I was trying to clarify is were there is confusion if its 5 years AFTER open/initially funded or 5 years after the specific conversion was added.

So my understanding from the IRS document it is 5 years AFTER open/funded even if you are selling and withdrawing a conversion that has only been in the account for 3 years as an example.

 

[dknighd]

I think the graphic posted above makes it pretty clear.
If you have a funded Roth IRA that has existed for 5 years, and you are older than 59.5, all withdrawals are qualified, and hence tax free. I'm pretty sure the same rules apply to designated Roth 401 or 403b accounts.


I have a Roth IRA which I opened, and funded, 6 years ago. I also have a designated 403b Roth account which I opened and funded 5 years ago. I'm over 59.5.


I'm 99% sure I could roll over money into either one of those accounts today, and withdraw it tomorrow with no tax consequences. I can no longer contribute money to either account, I'm retired, but I can roll money into them.


I plan to use that to my advantage next year. Early in the year I will roll money from tax deferred to tax free (aka Roth). Not have taxes withheld. Withdraw as needed from Roth during the year. At the end of the year I will make another withdrawal from tax deferred account, and withhold enough taxes to cover the year.


Edit: I would suggest that anybody 54.5 years or younger open Roth accounts. Put some money in them. It might be handy one day to have that 5 year clock finished.

 

[FREE866]

If you have a funded Roth IRA that has existed for 5 years, and you are older than 59.5, all withdrawals are qualified, and hence tax free. I'm pretty sure the same rules apply to designated Roth 401 or 403b accounts.

I believe that is the case and thank you everyone for your comments. The way dknighd just worded it was straightforward and to the point. Why can't Schwab, Fidelity and all the other sites I went to for this information spell it out like that? They all make it so confusing
Disappointingly , even my Schwab "adviser" who I rarely utilize as I'm totally a DIY investor gave the wrong answer



I emailed my accountant the question yesterday as well. I'll see if he can confirm this.

 

[SecondCor521]

Disappointingly , even my Schwab "adviser" who I rarely utilize as I'm totally a DIY investor gave the wrong answer

Investment advisors are regularly wrong on tax stuff. Sometimes spectacularly, often in small ways.