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Roth conversion subject to five-year rule?

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Dear Tax Talk,
I converted a traditional IRA to a Roth IRA in December of 2012, when I was 81. In 2013, I took two distributions ($300,000 and $500,000) which were reported as code “T” on my tax documents from the financial firm. Was I subject to any provision of the five-year rule? Does my age exempt me from the 10 percent penalty? If not, what portion of the $800,000 should have been taxed? Thanks.
— Robyn

Dear Robyn,
Since you are older than 59 1/2 you did not have to pay the 10 percent additional tax on your distributions.

The code “T” on your Form 1099-R, Distribution From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., refers to “Roth Distribution, exception applies,” so the IRS was made aware of your particular situation.

Roth IRAs have been around since the 1997 Taxpayer Relief Act was enacted, and many people take advantage of the tax benefits that these retirement vehicles provide. Contributions are made with “after-tax” dollars, which means you do not get a tax deduction when you make your contributions. The investments grow tax-free, and if you follow all the rules, the distributions are generally not taxable.

You never need to include in your income “qualified distributions” or distributions that are a return of your regular contributions from your Roth IRA.

Qualified Roth IRA distributions are made:

  • After the five-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit.
  • When you are at least 59 1/2 years old.
  • If you become disabled.
  • To a beneficiary or to your estate after your death.
  • For first-home exceptions.

If a distribution is not “qualified,” the 10 percent additional tax kicks in, unless you meet one of the exceptions. The exception that applies to you is that you are at least 59 1/2 years old. There are other exceptions included in the list, but all you need is the fact that you were older than age 59 1/2 when you took the distribution.

Thanks for the great question and all the best to you.

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