Today I asked a person on the IRA team at Schwab about the 5 year rule. I have had mine for many years and rolling over additional funds from a Roth 401k Into. The answer I received blew my mind contradicting my understanding. I understood if your over 59.5, have had the original Roth over 5 years your good. She said each contribution creates a new 5 year rule for interest each contribution, but don’t worry since you would be taking out your contributions first giving time to pass until you take your interest.
I can see a Forbes article which goes with my understanding, on the Schwab site I see different explanation (both below). Looking for clarity. If Clark already has a guide, still so many things contradict each other…
We found that one out the hard way sort of, sort of different. One issue I’ve tried to submit to Clark stinks so he would bring up. If you’re a user of TurboTax and you’re contributing to a Roth IRA it doesn’t submit the proper form required to the IRS to see your contributions made, there’s a special form. When my wife got sick about six years ago I took all my contributions out which were about $10,000. We received a bill from the IRS a year later. We had to file the proper forms for all the missing years of contributions . Luckily I had the statements. My wife was able to talk to the IRS. They waived the $40 per form to file properly. I worry for others that think they can take out their contributions that use turbo tax, only to get a bill from the IRS a year later and not have back forms. Luckily I was able to find and file all the forms and get the fees waived.
I find my Form 5498 in my account where I deposited any Roth/IRA contributions each year. My understanding is that the Form 4398 is submitted by my Roth/IRA account to the IRS, not by Turbo Tax.
That kind of makes sense to me since my Roth/IRA account has verification that I actually made the deposit/transfer.
I get a 5498 each year I make any deposit or roll over. If I don’t make any deposits/rollovers, there’s no form.
I could be wrong, but that seems to be how it works for me.
Understand, in our case the IRS did not have these from Trowe. I am more concerned about the smart 20 year old who contributed $400 a month for 20 years, moved custodians one or more times, used the contributions for a down payment then received a bill a year later like I did.
I realize Clark might say that money is for retirement , always assumed for this reason no traction…
There’s no form to submit when you make Roth contributions unless you’re claiming the Savers Credit. When you withdraw from a Roth, there is a place to report it and indicate how much is taxable.
The only form I’m aware of that taxpayers file that has anything to do with money going into a Roth (other than the Savers Credit) is Form 8606, which you must fill out and submit if you make nondeductible contributions to an IRA and later convert them to Roth. There is a $50 penalty for not filing this form on time, waivable one time. So perhaps this is what you mean.
Yeah, I think that people, especially young folks, need to know to save statements regarding IRAs/Roth/401k – It’s easy to save digitally, but people aren’t informed to do that.
I heard 5 years mostly applies to conversions and to any contributions after age 55. After 5 years, the amount of the conversion can be withdrawn without penalty but any earnings must be left in the account. Also any money contributed can be taken out tax free but any earnings must be left in the account until 59.5 or 5 years whichever is later
At age 59.5 the 10% early withdrawal goes away on all IRAa.
A Roth IRA is qualified for tax free distributions when the owner is age 59.5 years old AND they have owned any Roth IRA for 5 years. The 5 year clock starts on January 1 of the tax year when the first contribution was made to your Roth IRA… That contribution can be made as late as April 15 of the following calendar year.
Moving your Roth 401k money into your Roth IRA, the money takes on the age of the IRA.
Converting tax deferred money from a Traditional IRA to a Roth IRA, each conversion has its own 5 year clock that must be met before any gains from that conversion can be distributed tax free.
You pay tax on the tax deferred money at conversion.
The penalty is waived because of the age 59.5 rule.
All that is left is gains earned by the converted money that could be taxed if distributed within 5 years of the conversion.
Money is distributed from a Roth IRA in an ordered sequence:
First to be distributed is contribution amounts.
Second to be distributed is conversion amounts.
Last to be distributed is gains.
Form 5498 is used to report money moving into an iRA.
Form 1099R is used to report distributions from an IRA.
I assume if your rolling over monies from a Roth 401K into an existing 5 year old Roth IRA all monies are distributable immediately after the conversion (not saying this should be your first action ). I am guessing also the monies from the Roth 401K would need to have been existing for 5 years?
With this in mind anyone who has an employer matching Roth 401K should open an account at least 5 years before retirement. I always thought this would be a great Christmas gift for someone (opening an account for them), although nothing to play with until they are older
Well said. I couldn’t remember the exact order but a Fidelity rep told me the same thing about 10 years ago. So the 10% penalty only applies to 59 1/2?
If you contribute / convert at age 58 and withdraw at 62, you’re subject only to ordinary income taxes and not the 10% penalty or am I mistaken?
“So the 10% penalty only applies to 59 1/2?”
As soon as the IRA owner is age 59-1/2 the 10% Early Distribution Penalty does not apply.
Note there are several exceptions to the 10% early distribution penalty that can be exercised before reaching age 59-1/2.
“*If you contribute / convert at age 58 and withdraw at 62, you’re subject only to ordinary income taxes and not the 10% penalty or am I mistaken?”
Contributions and Conversions to a Roth IRA are taxed at the time of contribution or conversion. Withdrawals of conversions within the conversion 5 year window may have to pay tax on any gains earned by the conversion amount. Each conversion has it’s own 5 year window.
