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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120809  
Subject: Re: Conversion Roth Date: 12/7/1998 6:21 PM
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[[A post on the XON board recently suggested that contributions (new money) should not be made
to a ROTH Conversion (converted from traditional)IRA.

The www.rothira.com site this morning seemed to suggest that new IRS rules have mitigated the
disadvantages of contributing to a Conversion Roth. Can someone clarify the issue for me?]]

Sure Dave...easy.

The guys on the XON board are wrong, and the guys on the rothira.com site are correct.

In fact, here is a re-post of an excerpt from the Roth IRA special that I'm running in the Taxes FAQ area. For your reading pleasure...

<<Let's take a few minutes to discuss the five-tax year rule. The waiting period for a qualified distribution may be shorter than five calendar years, especially if a contribution is made after the close of the tax year for which it is recognized. Remember that you have until April 15th of the following year to make a contribution for the current tax year. And, according to the law, the first year that is counted is the year for which the contribution is made, not the calendar year in which the contribution is actually made. In effect, the very earliest date that a "normal" (i.e., no special issues such as death or disability) qualified Roth IRA distribution could possibly be made would be January 1, 2003. The following example will bring this point home:

Example #3: Mike, age 57, makes a $2,000 contribution to his Roth IRA on April 15, 1999 for tax year 1998. On January 2, 2003, Mike withdraws $3,000 from his Roth IRA (when he is over age 59 ½). Of the $3,000 withdrawn, $2,000 represents the original contribution, and $1,000 represents the earnings. This entire distribution IS qualified, and is therefore not included in Mike's income since it was NOT made within the five-tax year period, and since Mike was over age 59 ½ when he took the distribution. For purposes of the five-tax year rule, 1998 counted as the first tax year (beginning on January 1, 1998), and the five-tax year period ended December 31, 2002. So even though Mike had his funds in his Roth IRA for less than 4 calendar years, he has met the five-tax year rules, and his distribution is qualified.

Under the OLD Roth IRA rules contributions and conversions had different five-tax year start times. It was because of these staggered "start" times that IRS suggested that contributions and conversions be maintained in separate Roth IRA accounts. That suggestion was made to the various financial institutions, and the institution passed that information on to their clients. But with the changes made to the Roth IRA rules by the Tax Reform Act of 1998, the need for these "separate" accounts has been made moot. It is now certainly acceptable to "co-mingle" your Roth IRA conversions and contributions, since the same five-tax year rules apply to both. So if your broker still insists that you segregate your conversion funds and contribution funds, make sure to tell him (or her) of the new law which removed the segregation restrictions. >>

Hope this helps...
TMF Taxes
Roy

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