Several ? on 401K + TIRA to Roth

We are in our 60's so please bear with me. We both have TIRAs with TIAA. My wife will retire in June and wants to convert her current 401K to a Roth and transfer it to TIAA. We both want to end up with Roths at TIAA. we understand the tax implications and the trustee to trustee mechanics. We will pay the taxes due via another source. Our questions are:
1. Does the Roth 5 year wait period to withdraw end on the first day of the sixth year or five years after the Roth is opened. e.g. we open it on
7/1/09. Can we start withdrawing on 1/1/14 or 7/1/14.

2. If we do partial conversions in 2009 and 2010, is the entire Roth eligible to withdraw after 5 years or is it prorated based on the amount of each conversion amount?

Hope this makes sense ... thank you

"Beginning on the first day of the fifth year after the year of the conversion can be withdrawn at any time with no tax and no penalty."

From Fairmark: http://www.fairmark.com/rothira/distrib.htm

IVyrae,


Your only problem is having a ROTH IRA open for 5 years.

But is that really a problem? You will have paid income tax on the money in your ROTH IRA. And at age 59.5 years, the 10% penalty goes away. Also, distributions from a ROTH IRA come out in a Ordered fashion, first your annual contributions, then conversion contributions, and lastly gains. What you are left with is the potential for income tax on gains that are distributed from the ROTH IRA during that 5 year period.

And as Blixet and the folks at fairmark have said, that 5 year period can be as little as 2 years 8 months and 17 days.... Making a 2008 contribution to a ROTH IRA on April 15, 2009 will have started that 5 year clock on January 1, 2008. Your 5 year clock runs out on January 1, 2012, fifth year.

Generally each Conversion has it's own 5 year clock. This 5 year clock is there to keep someone from doing a Conversion from a TIRA to a ROTH IRA today then tomorrow taking a penalty free distribution. In your situation being over age 59.5, the penalty is already eliminated. Your ROTH 5 year period owning period is for taxing of gains.

thanks for the feedback.
If I understand this correctly and using this example:

If we convert $50K from a TIRA to a Roth on April 1,2009 and pay the tax due from our regular savings acct at a local bank, we can effectively withdraw $10K on April 15,2009 without penalty or tax (we are over 591/2).

The amount converted comes out of the Roth first without the 5 year stipulation, while any gains (we hope we'll have some) are subject to the 5 year wait.

Am I correct ?

thanks for the feedback.
If I understand this correctly and using this example:

If we convert $50K from a TIRA to a Roth on April 1,2009 and pay the tax due from our regular savings acct at a local bank, we can effectively withdraw $10K on April 15,2009 without penalty or tax (we are over 591/2).

That is correct. However the IRA custodian may have some fees/charges when you have a short turn around. If you know you are needing the $10,000 in a few weeks Why not keep that amount out of the Conversion?


The amount converted comes out of the Roth first without the 5 year stipulation, while any gains (we hope we'll have some) are subject to the 5 year wait.


Yes, you are correct for your situation. You have already paid the income tax at the time of Conversion. Being older than 59.5, the 10% penalty does not apply to any distributions. Taking out gains in the first "5 years" of owning the ROTH IRA, the gains could be subject to income tax. After the "5 year" period, all distributions would be exempt from income tax.

Right now, today, you could open a ROTH IRA with a 2008 minimum contribution (you have until April 15, 2009 to make that 2008 contribution) and have that 5 year clock in motion starting from January 1, 2008.

Starting your ROTH IRA with a Conversion anytime in 2009, would start the ROTH 5 year clock on January 1, 2009.