Each conversion has its own five-year period. This is a comprehensive standard, in accordance with Treasury regulations. The five-year period begins each time money is deposited in a Roth IRA for the taxpayer. Under this rule, contributions include both direct contributions and converted amounts.
The final 5-year rule applies to inherited Roth IRAs. Beneficiaries of a Roth IRA can withdraw their contributions from an inherited Roth account at any time (in fact, they are required to do so). However, to withdraw earnings tax-free, the account must have been open for at least five years when the original account holder died. The Roth Individual Retirement Account (IRA) is a retirement savings instrument that allows you to make tax-free withdrawals if you follow the rules.
The 5-year Roth IRA rule states that it takes five years for them to be deposited in a Roth IRA account. This means that you can't withdraw any of the profits from your tax-free IRA contributions until five years have elapsed since January 1 of the tax year in which you first contributed to the account. Your earnings would be comprised of dividends, capital gains, interest, and any other type of return you have received on Roth IRA financial assets. There is also a separate five-year rule that only applies to those who convert other types of retirement accounts into Roth IRAs.
However, another rule negates this five-year rule for most people who convert traditional IRAs to Roth IRAs. If you've had your Roth IRA for more than five years, you can withdraw the profits from your account for any reason without paying taxes or penalties. There are exceptions to the 10% early distribution penalty that applies to both traditional IRAs and Roth IRAs. The five-year Roth IRA rule won't allow you to withdraw tax-exempt earnings from your account until five years after your first contribution, unless you meet certain conditions.
However, since there are no income limits for conversions, a common strategy is to make a non-deductible contribution to a traditional IRA and then convert it to a Roth IRA. The taxpayer's Roth IRAs and the money that flows into Roth IRAs add up to get a five-year period. That's why some advisors say that if all or part of a traditional IRA could be converted to a Roth IRA in the future, you should convert or contribute a small amount to a Roth IRA now, so that the five-year deadline begins to run. A Roth conversion is the process of repositioning your assets in a traditional IRA or a qualified employer-sponsored retirement plan (QRP), such as a 401 (k), 403 (b), or a government Roth 457 (b) IRA.
To discuss the potential benefits of Roth IRA and Roth IRA conversions with a Wells Fargo retirement professional, call 1-877-493-4727.The Roth IRA rewards those willing to accept deferred rewards because it doesn't give them an initial tax break, but rather gives them tax-free treatment of their income and earnings, as long as they keep their investments in the account. The five-year Roth IRA rule imposes a penalty on withdrawals from your account made within five years of your first contribution. Roth IRAs are also flexible and give you greater access to your money than traditional retirement accounts. There is concern that moving from one Roth IRA to another, for example by changing IRA custodians, could restart the five-year period.