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MarkC625765
Contributor ⭐
March 15, 2024

Roth IRA 5-Year Rule

  • March 15, 2024
  • 4 replies
  • 4351 views

I currently have a ROTH IRA account with major Financial Institution A.  I opened and funded this ROTH IRA account in 1998, so I have satisfied the ROTH IRA 5-Year Rules concerning tax-free withdrawals of earnings.  I am thinking of moving this ROTH IRA account to major Financial Institution B.  Will the ROTH IRA 5-year rule clock start over at zero for the new ROTH IRA account?

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    4 replies

    GailL1
    GailL1
    Community Champion ⭐⭐⭐
    March 15, 2024

    Not as long as you do a TRANFER from one institution to the other - 

    When you do an IRA transfer, you're effectively moving your money between two similar/like accounts, so from a ROTH IRA account into another. For instance, you may decide to move your IRA from Firm A to an IRA account with Firm B. In this case, the account type doesn't change but the financial institution that holds your account does.

    Roth IRAs can be transferred to a new custodian tax- and penalty-free if you follow IRS rules. A direct transfer between two custodians—or financial institutions—is the safest way to move Roth IRA funds from one retirement account to another. A transfer must be deposited in the new account within 60 days.

     

    In this regards, you are doing an institution to institution TRANSFER and you will not even touch the funds at all.  The receiving institution, once you have submitted the paperwork to them, handles the transfer of a ROTH IRA account to another ROTH IRA account at their institution.

     

    This is different than a “rollover”. 

    Investopedia- IRA TRANSFER:  Definition, How it works

    IT‘S ALWAYS SOMETHING . . . . .. . . . Roseanne Roseannadanna
      Drair
      Drair
      Contributor ⭐
      June 26, 2024

      No, you're just changing the account custodian. The 5 year rule would apply if you're still working and therefore had earned income AND deposited it in an entirely new Roth IRA account. And why anybody would do that I cannot say, because it wouldn't make any sense. 

       

        T
        Tonster521
        Community Champion ⭐
        June 29, 2024

        @Drair I agree with you and Gail 1 that a Direct Transfer from Trustee to Trustee is not a taxable distribution. Please note that there are two sets of rules regarding the 5 year time requirement. The first addresses Roth contributions. The 5 year time requirement starts when one makes the first Roth contribution. It does not reset with subsequent Roth contributions to the initial Roth account or any additional Roth accounts that one may elect to open. You may have as many Roth accounts as want or strategy requires. The second addresses Roth conversions which resets with each conversion. I am providing an easy to read and understand article from Kiplinger https://www.kiplinger.com/taxes/five-year-rule-on-roth-ira-contributions-and-payouts-kiplinger-tax-letter You can read the exact tax provisions at IRS Publication 590 - B which is includes the provisions for Traditional and Roth IRAs. It also includes the exceptions when taking a distribution from a Roth prior to age 59.5 and 5 years. The Publication is lengthy and may be confusing for some of the readers. So, take a look at the Kiplinger article. I found it helpful. 

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