AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner (CFP) and have performed fee only investment management and financial planning services for the past 11 years.
Question Hello Sir, thank you for your help. I understand a ROTH IRA must be open for a five year period before earnings can be taken out tax free. Does that mean I could open an Roth IRA, fund it with a few hundred dollars and after five years earnings on the initial deposit as well as any future deposits no matter when they find their way into the account are tax free? I am considering opening a new Roth now to get the clock ticking and later, maybe a year or two from now, when it is more tax advantageous, convert my tradional IRA into the Roth. I just don't want the money tied up for another five years after I do the conversion in 2010 or 2011 and that's why I think I should open the account now. Hope this makes some sense....Thanks again! John
Answer Hi. Below is a summary of the withdrawal rules applicable to Roth IRA's. Bottom line is you can always withdraw your contributions to a Roth IRA with no tax implications. If you are over age 59 1/2, earnings withdrawn before 5 years have lapsed are taxable unless one of the exceptions apply. If you are under age 59 1/2, earnings are taxable and also subject to a 10% tax penalty regardless of whether or not the account has been opened for 5 years. I hope this helps.
Regular Contributions:
* Can be withdrawn at any time with no tax and no penalty.
Taxable Portion of a Conversion: (Applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions)
* If withdrawn before the first day of the fifth year after the year of the conversion: no tax, but will be subject to 10% early withdrawal penalty if you're under age 59½ unless an exception applies.
* Beginning on the first day of the fifth year after the year of the conversion can be withdrawn at any time with no tax and no penalty.
*Special rules apply to withdrawals of amounts converted in 2010.
Nontaxable Portion of Any Rollover: (Applies only after the taxable portion of the same conversion has been withdrawn)
* Can be withdrawn at any time with no tax and no penalty.
Earnings: (Applies only after all amounts other than earnings have been withdrawn)
* If withdrawn before the first day of the fifth year after the year you first established a Roth IRA, taxable as ordinary income; also subject to the 10% early withdrawal penalty if you're under age 59½ unless an exception applies.
* Beginning on the first day of the fifth year after the year you first established a Roth IRA, can be withdrawn with no tax and no penalty if you're over age 59½ or otherwise meet the requirements for a qualified distribution (death, disability, first-time homeowner). Otherwise, if under age 59 1/2, withdrawals of earnings continue to be taxable as ordinary income and, unless an exception applies, subject to the 10% early withdrawal penalty.
