Roth IRA


J

jtc

I am 7 years from retirement. I have a Roth which was opened
in 1996 and has not been funded except for the initial
amount of 2000.00. The earnings are very small and now I
have decided to fund this account to the max for the next 7
years, including for the year 2004. I am 59 years old.

It is my understanding that the monies that fund the Roth
can be withdrawn at any time and just the earnings would
suffer a penalty for early withdrawal. Is this true?

Does this sound like a good thing to do? can this Roth be
left to a heir with no tax consequences? thanks
 
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A

Arthur Kamlet

jtc said:
I am 7 years from retirement. I have a Roth which was opened
in 1996 and has not been funded except for the initial
Close. Senator Roth proposed this in 1996, hacthed it in
1997, and made it part of the tax code effective January 1,
1998, where a conversion could be claimed as income in 4
equal annual installments.

If you were there at the start, as a charter member of the
Roth IRA club, all future contribution uses the same Jan 1
1998 clock.

And any contributons made after age 59 1/2 will not rsult in
income tax or penalty.
amount of 2000.00. The earnings are very small and now I
have decided to fund this account to the max for the next 7
years, including for the year 2004. I am 59 years old.

It is my understanding that the monies that fund the Roth
can be withdrawn at any time and just the earnings would
suffer a penalty for early withdrawal. Is this true?
Yes, but after age 59 1/2, no penalty.
Does this sound like a good thing to do? can this Roth be
left to a heir with no tax consequences?
Other than being counted as part of your estate?

If you want to pass this to your heirs, you just leave it in
there.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
H

Harlan Lunsford

Arthur said:
Other than being counted as part of your estate?

If you want to pass this to your heirs, you just leave it in
there.
Then the beneficiary may continue the ROTH IRA in her name
perpetually?

ChEAr$,
Harlan Lunsford
 
J

jtc

Close. Senator Roth proposed this in 1996, hacthed it in
1997, and made it part of the tax code effective January 1,
1998, where a conversion could be claimed as income in 4
equal annual installments.

If you were there at the start, as a charter member of the
Roth IRA club, all future contribution uses the same Jan 1
1998 clock.

And any contributons made after age 59 1/2 will not rsult in
income tax or penalty.
Yes, but after age 59 1/2, no penalty.
okay, let's see if I understand this...any money in the
account after 59 and 1/2 can be withdrawn with no tax
consequences? I was so sure that when I opened this account
it was 1996, and I was told that after holding it 5 years
and age 59 and 1/2 you could make the withdrawls...has the
year thing been dropped?

thanks
 
P

Phil Marti

jtc said:
okay, let's see if I understand this...any money in the
account after 59 and 1/2 can be withdrawn with no tax
consequences? I was so sure that when I opened this account
it was 1996, and I was told that after holding it 5 years
and age 59 and 1/2 you could make the withdrawls...has the
year thing been dropped?
No, but if you opened the account in 1998 (the first year
possible), the 5 year requirement has already been met.
(You only have to meet it once, not for each contribution.)
 
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A

A.G. Kalman

okay, let's see if I understand this...any money in the
account after 59 and 1/2 can be withdrawn with no tax
consequences? I was so sure that when I opened this account
it was 1996, and I was told that after holding it 5 years
and age 59 and 1/2 you could make the withdrawls...has the
year thing been dropped?
A completely tax-free distribution from a Roth requires that
it be a qualified distribution (QD). A QD is one that meets
the 5 year rule AND you have attained age 59 1/2 or are
disabled or are dead or the withdrawal is for $10,000 or
less to buy a first home. If you fail the QD test, then you
may or not pay tax and you may or may not pay the penalty.
Assuming you haven't made any conversions from an IRA to a
Roth within the last 5 years (conversions have their own
unique 5 year period) then you have already passed the 5
year test for the QD. If you are under age 59 1/2 and take
a distribution, it would not be a QD. Any taxable part of
this distribution would be subject to the 10% penalty. The
Roth has a predefined set of distribution rules when you
don't have a QD. The first dollars you take out come from
your annual contributions and are tax free. Next comes
amounts from conversions starting with the earliest
conversion and starting with that part of any conversion
that was taxed. This is also tax-free. Finally, you are left
with the earnings that are taxed. If you have a taxable
portion it would be subject to the 10% penalty unless you
can meet any of the standard exception rules.
 
A

A.G. Kalman

Harlan said:
Arthur Kamlet wrote:
Then the beneficiary may continue the ROTH IRA in her name
perpetually?
Not unless the beneficiary is the spouse and the spouse
elects to treat the inherited Roth as her/his own Roth.
Other than a spouse, a beneficiary must take required
distributions from a Roth. The minimum distribution rules
follow the traditional IRA rules as if the owner had died
before the RBD.
 
D

David Woods, EA, ChFC, CLU

okay, let's see if I understand this...any money in the
account after 59 and 1/2 can be withdrawn with no tax
consequences? I was so sure that when I opened this account
it was 1996,
Clearly it wasn't because the law that created the Roth was
not passed until the summer of 1997.
and I was told that after holding it 5 years
and age 59 and 1/2 you could make the withdrawls...has the
year thing been dropped?
No it has not.
 
D

D. Stussy

jtc said:
I am 7 years from retirement. I have a Roth which was opened
in 1996 and has not been funded except for the initial
amount of 2000.00. The earnings are very small and now I
have decided to fund this account to the max for the next 7
years, including for the year 2004. I am 59 years old.
Impossible. Roth IRAs were first available in 1998, so you
could not have opened it in 1996. The question is moot.
 
D

D. Stussy

Harlan said:
Arthur Kamlet wrote:
Then the beneficiary may continue the ROTH IRA in her name
perpetually?
Not really. If not the spouse, then they are required to
make withdraws, either as that 5-year window, or as
recomputed for their own life expectancy (if a natural
person). It could be "perpetual" in as much as the required
draw under the latter method is less than the growth per
year (i.e. it never drains - and may even grow further), and
gets passed on to yet another set of beneficiaries.
 
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M

Mike L

Arthur Kamlet wrote in
Close. Senator Roth proposed this in 1996, hacthed it in
1997, and made it part of the tax code effective January 1,
1998, where a conversion could be claimed as income in 4
equal annual installments.

If you were there at the start, as a charter member of the
Roth IRA club, all future contribution uses the same Jan 1
1998 clock.

And any contributons made after age 59 1/2 will not rsult in
income tax or penalty.
Yes, but after age 59 1/2, no penalty.
I am not a tax person, but I remember when I researched
this, to avoid the EW penalty you must be both past 59 1/2
and 5 years of conversion of those funds to Roth IRA status.
Are you saying then, that the 5 years started for everyone
1/1/98 and is no longer a problem, rather than 5 years from
the date of each IRA account coversion?
 
H

Herb Smith

okay, let's see if I understand this...any money in the
account after 59 and 1/2 can be withdrawn with no tax
consequences?
Not quite correct. After age 59-1/2 you can withdraw any
monies in the account with no PENALTY consequences. Your
contributions are tax-free, but the earnings are possibly
subject to ordinary income tax.
I was so sure that when I opened this account
it was 1996,
It was 1998
and I was told that after holding it 5 years
and age 59 and 1/2 you could make the withdrawls...has the
year thing been dropped?
You were told correctly (except you can only make
"withdrawls" in southern states). QUALIFIED DISTRIBUTIONS
require 1) the account be open for 5 tax years, and 2) you
be age 59-1/2 or older. QUALIFIED DISTRIBUTIONS are both TAX
and PENALTY-free.
 
P

Phil Marti

Mike L said:
I am not a tax person, but I remember when I researched
this, to avoid the EW penalty you must be both past 59 1/2
and 5 years of conversion of those funds to Roth IRA status.
You misinterpreted. In order to have a QUALIFIED
distribution, you must meet both the age and 5 year tests.
However, not all nonqualified distributions are subject to
penalty, and if you're over 59 1/2 there is no penalty, even
if you don't meet the 5 year rule.
 
H

Harlan Lunsford

Not really. If not the spouse, then they are required to
make withdraws, either as that 5-year window, or as
recomputed for their own life expectancy (if a natural
person). It could be "perpetual" in as much as the required
draw under the latter method is less than the growth per
year (i.e. it never drains - and may even grow further), and
gets passed on to yet another set of beneficiaries.
Thanks for expositioning (?) on my premise.

But.... if "recomputed for their own life expectancy), is
the original account continued intact? I mean continuing
with the name of the now deceased owner? I'm thinking
that's the way one local bank is handling it for a client.

ChEAr$,
Harlan Lunsford, EA n LA
Mon 28 Feb 2005
 
R

Rich Carreiro

Mike L said:
Are you saying then, that the 5 years started for everyone
1/1/98 and is no longer a problem, rather than 5 years from
the date of each IRA account coversion?
There are independent clocks going on.

The first clock starts on the first day of the first tax
year in which you made a Roth contribution or conversion.
Once that clock hits five years, it's satisfied forever.

Then there are SEPARATE clocks for every individual
conversion.

So let's say I was 30 in 1998. On 15 Jan 1998 I made a Roth
IRA contribution. On 15 Jan 2002 I made a Roth conversion.
On 15 Jan 2005 I made another Roth conversion.

In 2007 I will be able to withdraw the first conversion
without an early withdrawal penalty. In 2010 I'll be able
to withdraw the second.
 
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A

Arthur Kamlet

Mike L said:
Arthur Kamlet wrote in
I am not a tax person, but I remember when I researched
this, to avoid the EW penalty you must be both past 59 1/2
and 5 years of conversion of those funds to Roth IRA status.
Are you saying then, that the 5 years started for everyone
1/1/98 and is no longer a problem, rather than 5 years from
the date of each IRA account coversion?
There can be contributons to the Roth and also conversions
from a traditional to a Roth.

Each conversion starts its own 5 year clock.

But the first contribution starts the clock for that
contributon and all future contributons.

So if you made a contribution in 1998 and another in 2004,
the 5 year clock has been met for the 2004 contributon
already.

But if you also did a conversion in 2004, then in 2004 you
are only in the first year of the 5 year clock for that
conversion amount.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
D

D. Stussy

Mike said:
Arthur Kamlet wrote in
I am not a tax person, but I remember when I researched
this, to avoid the EW penalty you must be both past 59 1/2
and 5 years of conversion of those funds to Roth IRA status.
Are you saying then, that the 5 years started for everyone
1/1/98 and is no longer a problem, rather than 5 years from
the date of each IRA account coversion?
I hope not! For those who converted or contributed in 1998,
ONLY THEIR clocks started on 1/1/1998. Anyone who converted
or first contributed in a later year have later starting
dates. Therefore NOT "everyone" gets the 1/1/1998 start
date for their 5-year clock.
 
A

A.G. Kalman

Not quite correct. After age 59-1/2 you can withdraw any
monies in the account with no PENALTY consequences. Your
contributions are tax-free, but the earnings are possibly
subject to ordinary income tax.
It was 1998
You were told correctly (except you can only make
"withdrawls" in southern states). QUALIFIED DISTRIBUTIONS
require 1) the account be open for 5 tax years, and 2) you
be age 59-1/2 or older. QUALIFIED DISTRIBUTIONS are both TAX
and PENALTY-free.
As this thread is getting long, I wish to point out that for
purposes of what is a qualified distribution, there is a
separate 5 year period for each conversion from an IRA that
starts in the year of conversion.
 
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D

D. Stussy

Thanks for expositioning (?) on my premise.

But.... if "recomputed for their own life expectancy), is
the original account continued intact? I mean continuing
with the name of the now deceased owner? I'm thinking
that's the way one local bank is handling it for a client.
If the beneficiary is not the spouse, that is possible.
However, the trustee could retitle it into the beneficiary's
name (and add the word "inherited") just as easily.

[With a spouse beneficiary, that wouldn't make sense since
he/she can FULLY treat it as his/her own.]
 
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