ForumsSolo 401kWhat is the 5-year rule for a series of Roth conversions?

Forums Solo 401k What is the 5-year rule for a series of Roth conversions?

  • What is the 5-year rule for a series of Roth conversions?

    4 Replies
  • Top SubjectSolo 401k,Real Estate Investments
    Top ForumsSolo 401k, Real Estate Investments

    Warren Elliott
    Top SubjectSolo 401k,Real Estate Investments

    September 9, 2021 at 12:26 pm

    Is it true that each Roth conversion has its own five-year holding period? For example, when would the five-year holding period start given a series of Roth conversions performed within a Solo 401K – e.g., I performed Roth conversions (moving Solo 401K funds from “pre-tax” to Roth) on the following dates:
    9/12/2019
    10/9/2019
    1/2/2020
    1/30/2020
    3/26/2020
    7/7/2020
    1/12/2021

    Warren Elliott
  • Mark Nolan

    Top SubjectSolo 401k,Rollover Funds into Solo 401k
    Top ForumsSolo 401k, Rollover Funds into Solo 401k

    Mark Nolan

    Mark Nolan

    Top SubjectSolo 401k,Rollover Funds into Solo 401k

    September 10, 2021 at 6:02 am

    There is only one 5 year clock for the solo 401k. The 5 year clock stars the first year the Roth solo 401k is funded, whether by a conversion or by making an annual contribution to the Roth solo 401k designate account.

    For example, if you made the Roth solo 401k contribution for 2020 in 2021 by your business tax return plus timely filed business tax return extension. The 5 year clock starts in the year for which the Roth solo 401k contribution was made (e.g. 2020 Roth solo 401k contributions made in 2021 start clock on 1/1/2020).

    NOTE THAT THE IRS.GOV FAQ ALSO STATES THAT THE CLOCK BEGINS ON THE “first day of your taxable year for which you first made designated Roth contribution”…so again you use the year “for which” the contribution was made

    Retirement Plans FAQs on Designated Roth Accounts | Internal Revenue Service (irs.gov)

  • Top SubjectSolo 401k,Real Estate Investments
    Top ForumsSolo 401k, Real Estate Investments

    Warren Elliott
    Top SubjectSolo 401k,Real Estate Investments

    September 10, 2021 at 7:48 am

    OK. Thanks much for the response.

    For this post, my question is specifically regarding Roth conversions, not contributions.

    I have been reading online that the 5-year rule applies differently to Roth conversions and that each Roth conversation is subject to its own 5-year rule.

    I searched irs.gov again and I think I finally found the confirmation:

    “Distributions of conversion and certain rollover contributions within 5-year period.

    If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or roll over an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You must generally pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). ***A separate 5-year period applies to each conversion and rollover*** (my emphasis).”

    Here’s the link (see 2.Roth IRAs – Additional Tax on Early Distributions) :

    https://www.irs.gov/publications/p590b#en_US_2020_publink1000231065

    Can you advise?

    PS: I am asking because this greatly affects my distribution strategy. My assets are co-mingled and would be very difficult to attribute to specific conversions. So I may have to wait for the latest dated conversion to meet the 5-year rule in order to distribute safely.

    Warren Elliott

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