Advanced Underwriting Consultants

Question of the Day – May 4

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client inherited a Roth IRA from his late wife.  The client rolled over the money to his own IRA.  Does his five year holding period start from the time of the rollover?

Answer: No, he gets credit back to the time his late wife made her initial contribution.  The reason the holding period is important is to determine whether any Roth distributions will be qualifying or non-qualifying.

Unlike a traditional IRA, qualifying distributions from a Roth are income tax-free.

A qualifying distribution occurs when an individual takes a distribution following a five year period beginning with the taxable year in which that individual first made a contribution to any Roth IRA in the taxpayer’s own name and one of the following is met:

(1) the distribution is on or after the owner attains age 59-1/2,

(2) the distribution is made to a beneficiary after the death of the owner,

(3) the distribution is on account of the owner’s disability, or

(4) the distribution is a qualified first-time homebuyer distribution.

The ability of the taxpayer to access Roth money on a tax free basis with qualifying distributions is what makes Roth IRAs so attractive.

All other Roth IRA distributions are non-qualifying.  Non-qualifying Roth IRA withdrawals are made according to the following ordering sequence: (1) aggregate annual contributions, (2) conversion amounts, (3) earnings on annual contributions and conversion amounts.

The surviving spouse beneficiary of a Roth IRA gets credit for the deceased spouse’s Roth holding period for the purpose of calculating the five year period.  See Treas. Reg. §1.408A-6, A-7.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.