Originally posted by Rapid Robert
View Post
-
No, unless you are thinking of the 10% early withdrawal penalty. -
Here's a great perspective on the financial advisor industry in general. I especially like the discussion about the "water cooler windbags" and the recognition that most of what passes for investment advice should actually be classified as entertainment. I think most of the noise & nonsense emanating from the FA industry is nothing more than "investment porn".
Last edited by JohnH; 07-16-2016, 07:24 AM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
-
5-yr rule and over age 59.5
I'm still confused by what role, if any, you are saying a five-year rule for conversions plays for a senior taxpayer. It's my understanding that once you turn 59.5, you will not pay any tax or penalty on any distribution of conversion amounts from a Roth, regardless of how recently the conversion was done.Originally posted by Burke View Post"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
-
I am not disagreeing with any of the above comments, but one concern of mine has always been the impact of withdrawals from regular IRAs on the taxability of Social Security benefits.
I have advised clients that if they expect in the lower brackets where some of their Social Security is taxable, a distribution from a taxable IRA could have an unexpected impact on their tax return. A person normally in a 15% tax bracket in this situation can pay well over 20% in additional taxes on an IRA withdrawal (obviously, significantly more if the distribution is large enough). Thus, there can be a trade-off where a retiree may want to have some funds available in a resource which, while the income is tax-sheltered, will not have an impact on their tax return if they need to purchase a car or make major home repairs.DougComment
-
What is the source of that understanding? It isn't TTB. It's not the Code or Regs. It's not IRS Pub 590-B. These (and all others) clearly say that in order for a distribution to be a "qualified" distribution," the owner must have had a Roth IRA for at least five years. If he hasn't, the excess withdrawals ... i.e. the earnings ... are taxable. The only effect age 59ยฝ has is that it eliminates the additional 10% penalty on the taxable portion of a Roth IRA distribution.Originally posted by Rapid Robert
Furthermore, in the case of conversion to a Roth IRA, the 5-year rule applies separately to each one.
Roth IRAs are trickier than they seem, and your "understanding" of them, perhaps better characterized as a "misunderstanding" is probably a very common one. All tax advisers would be wise to review the rules before advising their clients about them.Roland Slugg
"I do what I can."Comment
-
It seems these posts are discussing the TWO 5-year Roth rules at the same time.
A qualified distribution (no tax on earnings) has a 5- year clock as part of the requirements.
A conversion has a separate 5-year rule for penalty free withdrawals of CONVERTED amounts.
I think both RR and RS are correct but IMO are apparently talking about two different issuesComment
-
The original comment from Burke that I initially responded to was: "[...] IRA conversion to a ROTH, then go for it. Then no one pays any taxes on it as long as you can make the 5-yr waiting period. "Originally posted by New York Enrolled Agent View Post
I thought, therefore, that he was talking about the 5-yr conversion waiting period, as that was the context of the above quote. Maybe he was actually talking about the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit. Yes, the Roth itself must have been in existence for at least five years, but I stand by my comment that the 5-yr conversion clock no longer applies after age 59.5. You can take out any Roth conversion money, no matter how recently contributed, after age 59.5 and pay no tax or penalty on it.
I still don't understand what Roland Slugg was disagreeing with. I do not have any misunderstanding about this aspect of Roth IRAs, common or otherwise.
Pub 590-B: "A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.
1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
2. The payment or distribution is: a. Made on or after the date you reach age 59-1/2,"
Further, the flow chart in Figure 2-1 makes it crystal clear that if the Roth was established at least five years ago, and you are over 59.5, you are home free, no other rules apply."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
-
Roland Slugg wrote:
" The only effect age 59ยฝ has is that it eliminates the additional 10% penalty on the taxable portion of a Roth IRA distribution."
No, there is no longer any taxable portion after age 59.5, since everything except earnings was already taxed going in, and earnings are tax free after age 59.5, even if the conversion from Trad. IRA was only completed the day before. (as long as the 5-yr minimum age of initial Roth investment by the taxpayer is met, of course).Last edited by Rapid Robert; 07-18-2016, 08:34 PM."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
-
Does each conversion have its own 5-year period? Separate from the 5-year period associated with opening a new Roth when subsequent annual contributions to the Roth use that same initial 5-year period? Do conversions have a separate rule from contributions?Comment
-
Yes, each conversion has its own five year clock. But it only matters if under age 59.5, otherwise it has no effect.Originally posted by Lion View Post
A conversion is one way that someone under age 59.5 can get money out of a Trad. IRA penalty free. Convert it, pay the tax, wait five years, and then you can get the conversion money out penalty-free (following the ordering rules for distributions, of course)."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
-
If you are talking about the amounts converted, then that is true, as those would be the taxpayer's contributions already taxed. It is not true for any earnings withdrawn. They would be taxed if the 5-yr rule is not met. If you believe this to be otherwise, please give us a cite as I cannot find anything which supports that. The regs are extremely complicated I will admit, and it could be so much simpler.Originally posted by Rapid Robert View PostLast edited by Burke; 07-19-2016, 02:15 PM.Comment
-
True, but simpler regs mean less campaign contributions..."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
-
What you say, and previously Roland Slugg, is incorrect. The five year conversion rule has NO EFFECT on conversions OR EARNINGS once age 59.5 reached (only the one-time five-year existence of the Roth rule applies at that point).Originally posted by Burke View Post
If you like to read the regs, try ยง1.408A-6 A1-b spells out the exact same thing as the pub (following) regarding what is a qualified distribution, and Q-5 with its answer makes it clear the 10% penalty only applies to non-qualified distributions and only in some cases.
As a "cite" l'll repost what I already posted earlier in this thread, but since so many are still not clear, it bears repeating:
Pub 590-B: "A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.
1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
2. The payment or distribution is: a. Made on or after the date you reach age 59-1/2,"
That's it! Two conditions only, the five-year-age-of-Roth rule, and age 59.5. Conversion rule plays no part in determining whether a distribution is qualified, and qualified distributions are never subject to 10% penalty.
Further, the flow chart in Figure 2-1 of Pub 590-B makes it crystal clear that if the Roth was established at least five years ago, and you are over 59.5, you are home free, no other rules apply.
If people still don't get it, there's not much more I can say to help."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
-
"If people still don't get it, there's not much more I can say to help. "
OK, I lied. I do have one more thing to say.
The 5-yr conversion rule has one purpose only: to prevent a loophole that would let me people get their money out of a Trad IRA before 59.5 without penalty. It really has nothing to do with the nature of a Roth IRA.
Here's why: we know you can take money out of Trad IRA early (= pre 59.5), if you pay tax and penalty. If you take the money and convert to Roth early, you pay only tax, not penalty. However, there is essentially a 5-yr look-back rule, that says if you don't wait at least five years, then you do have to pay that penalty after all, since we want to discourage you from taking money out of a Trad IRA early. We need a special rule, since normally a non-qualified distribution of Roth contributions would be penalty-free.
Now for those who think the 5-year conversion rule applies even after 59.5, think of whether that makes any sense. If you hadn't done the conversion, there would be no penalty for taking money out of Trad IRA at age 59.5. So should the 5-yr look back rule (intended to prevent a pre-age 59.5 loophole involving Trad IRA) actually EXTEND the penalty beyond age 59.5? No.
And maybe you are thinking, well, the taxpayer got those tax-free earnings in the Roth on the converted amounts, shouldn't the penalty still apply to those? No. Even earnings in the Roth that you received one day before age 59.5 are penalty free the next day. Why would earnings on conversion contributions be treated any differently than earnings on regular contributions?
The 10% penalty has only one purpose: to discourage distributions prior to age 59.5. And that's all it does.Last edited by Rapid Robert; 07-20-2016, 12:50 PM."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
-
There are actually two parts to the 5 year rule.Originally posted by Rapid Robert View Post
The first 5-year rule applies to Roth contributions and determines whether earnings will be tax-free.
Generally, a payment made from a Roth IRA account is considered a qualified distribution if it meets both of these requirements:
1) It is made after a five-year period, beginning with the first taxable year after which a contribution to the Roth IRA occurs.
2) The payment or distribution is made on or after the account holder reaches age 59 1/2
A distribution that is not considered a qualified distribution is subject to a 10% additional tax penalty. (However, since the contribution has already been taxed, this would only apply to any earnings withdrawn.)
The second 5-year rule applies to Roth conversions and determines whether conversion principal will be penalty-free.
If an account holder wants to convert a Traditional IRA into a Roth IRA, they must wait at least five years from the first day of the tax year in which they made the conversion before they can take a qualified distribution.
Unlike the five-year rule that applies to contributions, the five-year rule that applies to a conversion is unique to each conversion.
(The age 59 1/2 rule still applies.)
Then you must consider the "ordering rules" for Roth distributions:
First: Regular contributions,
Second: Conversions - taxable first, and then non-taxable,
Third: EarningsComment
Comment