Review 5 yr Roth rule

[JG EA]

I need to see if I have this correct.
TTB says:
"There are two separate 5-year rules that apply to Roth IRAs.
• The 5-year holding period to qualify for tax-free distributions.
• The 5-year holding period to avoid the 10% early withdrawal
penalty."

It goes on the explain that the conversions from a regular IRA to a Roth have there own five year period to avoid the 10% penalty.

However this only applies if not 591/2 right?

So, if a TP contributes to a Roth when he is 55 his clock has started for no tax on earnings. Then he converts a regular IRA to a Roth at age 59. If he took out all his money at age 60 would all his distributions including earnings be tax-free?

[Gretel]

Here is my take, the 5-year rule for tax-free distributions is applicable no matter the age but the first contribution to the Roth is back dated to the first day of the year.

So, the distribution of contributions will be tax free and penalty free but the earnings will be taxes if 5 years are not over yet.

[New York Enrolled Agent]

Here is my take, the 5-year rule for tax-free distributions is applicable no matter the age but the first contribution to the Roth is back dated to the first day of the year.

So, the distribution of contributions will be tax free and penalty free but the earnings will be taxes if 5 years are not over yet.

There is always an exception (death, disability, etc) but to have a qualified distribution (i.e completely tax free) the Roth must be held for five years AND the taxpayer must be 59½.

The second 5-year rule for conversions will subject the earnings (the amount included in gross income) to the 10% penalty regardless of age if the penalty would have applied at the time of the conversion. (This assumes the distribution does not qualify for another §72(t) exception). If the taxpayer converts prior to 59½ and takes a non-qualified distribution, then the penalty would apply only on the amount included in gross income

[JG EA]

There is always an exception (death, disability, etc) but to have a qualified distribution (i.e completely tax free) the Roth must be held for five years AND the taxpayer must be 59½.

The second 5-year rule for conversions will subject the earnings (the amount included in gross income) to the 10% penalty regardless of age if the penalty would have applied at the time of the conversion. (This assumes the distribution does not qualify for another §72(t) exception). If the taxpayer converts prior to 59½ and takes a non-qualified distribution, then the penalty would apply only on the amount included in gross income

Thank you. This is the point I am missing. Can you possibly point me to something I can show my client on this? Something simple? I'm trying to read the reg pointed to in TTB but can't keep my mind on topic.

[BP.]

Can you possibly point me to something I can show my client on this? Something simple?

http://www.irs.gov/pub/irs-pdf/p590.pdf

Roth distribution flow chart on p. 63 of Pub 590.

[JG EA]

http://www.irs.gov/pub/irs-pdf/p590.pdf

Roth distribution flow chart on p. 63 of Pub 590.

Thank you. If I take the chart at face value a TP who converts before 591/2 and withdraws after 591/2 (if opened the account for 5 years) is home free.

The part under the chart talks about the separate 5 year periods for each conversion from an IRA to a Roth as far as the 10% penalty applies.

This is where I'm being dense. It still sounds like to me that if the taxpayer held the converted funds less than 5 years but in a Roth account that was a 5 year account and he is 591/2 when distributed it would not be subject to the 10% penalty.

However NYEA said:

The second 5-year rule for conversions will subject the earnings (the amount included in gross income) to the 10% penalty regardless of age if the penalty would have applied at the time of the conversion. (This assumes the distribution does not qualify for another §72(t) exception). If the taxpayer converts prior to 59½ and takes a non-qualified distribution, then the penalty would apply only on the amount included in gross income

I'm sure he is right but not finding it in words I can understand in something from the government.

[jimfrombx]

72t exception is being over 59 1/2, no 10% penalty.