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Hello fellow Fools,

My 67 year-old mother is considering starting a Roth IRA. Which rule hold for qualified distributions in her case: the 5 years in rule, or the age >59.5 rule?

I.e., if she contributes this year, must she wait 5 years to withdraw in order to avoid paying taxes on the earnings? Or, since she's already over age 59.5, can she withdraw penalty-free at any time no matter how short or long the contributions have been in the Roth?

I read IRS Pub. 8606 but was still unsure of the answer.

Thanks very much,

FIgirl
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>> I.e., if she contributes this year, must she wait 5 years to withdraw in order to avoid paying taxes on the earnings? Or, since she's already over age 59.5, can she withdraw penalty-free at any time no matter how short or long the contributions have been in the Roth? <<

First of all, does she have earned income? If not, it would have to be a Roth conversion from an existing IRA. If she has earned income, she could (assuming eligibility based on income) contribute up to $5000 this year (but no more than the amount of total earned income). If she doesn't have an existing traditional IRA or earned income, she can't contribute to a Roth IRA.

If she never had a Roth before now, she faces the five-year rule even over age 59 1/2. When you contribute to a Roth IRA, the gains are tax-free as long as they are taken out after age 59 1/2 or five years after the account was first opened, whichever is greater.

But if she's considering this, definitely do it -- even if just $100 or so if the custodian allows such a small deposit -- before December 31. The five year rule is based on the calendar year and not the exact day. So even if she established a Roth VERY late in 2007, the earnings would be tax-free on January 1, 2012 (the start of the fifth year after the calendar year the Roth was opened), even though it was open only a little more than four actual years.

#29
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Thanks ziggy29 for your reply.

First of all, does she have earned income?

Yes, she works part time and earns at least 18K/year (I don't know exactly how much).

If she never had a Roth before now, she faces the five-year rule even over age 59 1/2. When you contribute to a Roth IRA, the gains are tax-free as long as they are taken out after age 59 1/2 or five years after the account was first opened, whichever is greater.

Aaah. Thank you for clarifying! Bummer for my mom.

But if she's considering this, definitely do it -- even if just $100 or so if the custodian allows such a small deposit -- before December 31. The five year rule is based on the calendar year and not the exact day. So even if she established a Roth VERY late in 2007, the earnings would be tax-free on January 1, 2012 (the start of the fifth year after the calendar year the Roth was opened), even though it was open only a little more than four actual years.

Great idea! Thank you for letting me know.

Thanks for your expertise and taking the time to answer.

FIgirl
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