Regarding the 5-Year Tax rules, TMF Taxes writes:Complicated? You bet. I told you in our first installment on this issue that it has turned into a monster. And it gets even more complicated when you combine regular Roth IRA contributions with Roth IRA rollover accounts. I have read complaints from many of you in the Tax Strategies folder about your broker "forcing" you to open separate accounts for Roth IRA rollovers, contributions, etc. You should know that the broker is simply following an IRS recommendation officially directed to all Roth IRA trustees. And while separate accounts may cost you additional amounts for annual administrative fees, set up fees, etc., it very well may be in your best interest to set up these separate accounts unless and until you fully understand the Roth IRA distribution and penalty rules. If you feel confident that you understand the rules, and want to combine all of your Roth IRA accounts (contributions and/or rollover accounts), ask your broker for a "waiver" of the separate account requirements. Usually, the broker will comply with your wishes to maintain a single Roth IRA account once you execute this waiver (holding the broker harmless for any tax or penalties you may incur in the future). But please, BEFORE you execute this waiver, make sure that you understand exactly what you are doing, and what the impact of combining your accounts might mean to you in the form of taxes and penalties. Treat the waiver like a loaded gun: only to be handled by those with the appropriate knowledge, training, and experience.
Great series on the Roth IRA. I just found your articles and found them very informative. So let me get this straight... If I rollover my traditional IRA into a Roth IRA account AND continue to contribute to the same account (having signed a waiver, of course), the worse that will happen is that my money will be tied up for 5 years from the date of this or any subsequent rollovers?? This doesn't sound like such a bad deal to me, especially since I was planning to leave this cash alone for the next 25 years anyway. Am I missing something?
[[ If I rollover my traditional IRA into a Roth IRA account AND continue to contribute to the same account (having signed a waiver, of course), the worse that will happen is that my money will be tied up for 5 years from the date of this or any subsequent rollovers?? This doesn't sound like such a bad deal to me, especially since I was planning to leave this cash alone for the next 25 years anyway. Am I missing something?]]No...it's a little more complicated than that. Remember that when you make contributios to a separate account, you can withdraw the PRINCIPAL of those contributions at any time, without tax or penalty. As long as the earnings are not disturbed, you have no tax issues. But if you combine contributions with conversions, and then remove funds from the Roth IRA, you'll be subject to the IRS ordering rules. And this will apply to all "non-qualified" distributions (i.e., distributions made prior to age 59 1/2...and some other distributions identified in the original Roth IRA post). So not only would you potentially subject the withdrawal to income taxes, it could also be subject to penalties...again based on the ordering rules.And the problem is with the "exclusion date". As you note, the 5 year date comes into play. The law is pretty specific on how the 5 year exclusion date is pushed out when an additional conversion is made to the same account in a later year. But the law is far less clear, at least to me, if the conversion date is pushed out when a conversion amount is supplemented by annual contributions...all in the same account. But I believe that if contributions are added to conversion amounts, the 5 year period actually gets pushed out accordingly. So, I believe, that it is possible that your funds could be tied up for much longer, potentially, than the 5 year period that you note. TMF TaxesRoy
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