Q. I am trying to understand the IRA-Roth conversion rules. I had the impression that the five-year conversion rule doesn’t apply when you have 59 1/2 and that the Roth account has been open for at least five years. Or do you still have to wait five years to access Roth funds without additional taxes?
– Investor
A. We know that IRA rules can be confusing.
Here’s what you need to know about yours Roth.
You are allowed to withdraw your contributions at any time, without taxes and penalties, said Marnie Hards, a certified financial planner at Aznar Financial Advisors in Morris Plains.
The rules are different for growth greater than contributions to the account, she said.
If you want to withdraw money in excess of contributions from your Roth IRA that you have had for less than five years and avoid a 10% early withdrawal penalty, you can do so in the following situations:
· Use a maximum of $ 10,000 (over a lifetime) to pay for your first home purchase.
· Use the money to pay for qualified education expenses.
· Use the funds for eligible costs related to birth or adoption.
· In case of death or disability. · Use the money to pay outstanding medical expenses or health insurance if you are not employed.
· Distribution is made in almost equal periodic payments.
But if you withdraw from a Roth IRA that you are more than five years old and have less than 59 ½, you can avoid taxes and penalties on distributions for the same reasons mentioned above, Hards said.
“If you are over 59 ½ and if you have a Roth IRA in less than five years, your earnings will be subject to income tax, but not penalties for early withdrawal if you make a distribution, ”she said. “If you are over 59 and have held the Roth IRA for more than five years, you are also avoiding income tax and distribution penalties.”
Hards said the hour for the five-year rule begins the first time any money is paid into any Roth IRA. A new five-year lesson doesn’t start every time a new contribution is made, she said.
This applies to Roth IRAs, but not to Roth 401 (k) plans. If you switch the Roth 401 (k) to the existing Roth IRA, this will start a new five-year period on the Roth 401 (k) part, she said.
So once you satisfy a five-year condition for your Roth IRA, it was permanently satisfied and future contributions or conversions -as long as they’re not from the Roth 401k-they won’t have to meet the new five-year rule.
Keep in mind that the five-year rule essentially states that five tax years must elapse from the time the first contribution to the qualifying distribution is made, Hards said.
“Given the fact that the measurement is based on tax years, this means that the new Roth IRA contribution – for example on 15 April 2016 – will continue to count as a contribution for the 2015 tax year – essentially assuming a contribution of 1 January 2015, ”she said. “This means that the first potential qualified distribution would be 2020 because five tax years have passed (2015, 2016, 2017, 2018 and 2019).”
So, technically, three years and eight months later, non-taxable distributions could be made or as early as January 1, 2020, she said.
Email your questions [email protected].
Karin Price Mueller writes Bamboozled column for NJ Advance Media and is the founder NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly e-newsletter.
