Roth IRA 5-Year Rule

[MarkC625765]

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?

[Drair]

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. 

[Tonster521]

@Drair With regard to funding multiple Roth and/or Traditional IRAs, you may find better rates of return by shopping around. Generally, a self directed IRA with a discount broker may provide all you need to create an appropriate retirement plan. However, some folks may use brick and mortar banks, savings & loans, credit unions, etc. for the insurance (FDIC and NCUA) protection ($250,000). Some may find attractive rates of return with similar online institutions. For CD investors, these institutions offer non-callable CDs that are offered for up to 5 years. Most brokerage firms offer CDs, but many have call features after one (1) year. So, there are many reasons for having multiple IRA accounts. You may find better CD rates at banks if you are new money. Years ago, they offered a toaster, electric craving knife, etc. Today, they offer a better interest rate. For example, 25 basis points (.25% or .0025) for $100,000 is $250.00. Another strategy is diversification. If you are investing in CDs at a brick and mortar Bank and want to invest in mutual funds, ETFs, or stocks, you will need another IRA account since Banks do not offer such investments. Hope this helps.

[Tonster521]

@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-l... 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. 

[GailL1]

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