Roth Conversions and 2020 RMDs: Today’s Slott Report Mailbag

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: 
@theslottreport

Question:

In December of 2018 I did my first partial Roth IRA conversion into a new Roth IRA. I’m older than 59 ½.

In December of 2019 I did my second partial Roth IRA conversion into the same Roth IRA opened in December of 2018. The traditional and Roth IRA’s are held at the same company, so the conversions are easy. Does the 5-year waiting period apply to each conversion, or just the first one?

Answer:

We get a lot of questions about the five-year rule for Roth IRA distributions! What makes this area so confusing is that there are, in fact, two different five-year rules that may come into play.

The first five-year rule applies to converted funds. If you are under age 59 ½ you must wait five years to access without penalty any converted funds that were taxable at the time of the conversion. This five- year rule does restart for each conversion.

The good news for you is that this five-year rule will not apply to you because you are over age 59 ½. You do not need to worry about the 10% penalty on converted funds when you take distributions from your Roth IRA.

However, there is a second five-year rule that will affect you. To have a qualified, or tax-free, distribution of earnings from a Roth IRA you must meet an overall five-year holding period, even if you are over age 59 ½. This five-year period begins with your first conversion (or Roth contribution) and does not restart with subsequent conversions. If your 2018 conversion was your first foray into a Roth IRA, then your overall five-year period for tax-free distributions of earnings from all of your Roth IRAs would have begun on January 1, 2018.

Question:

In mid-February, 2020, I rolled money out of my IRA, wrote a check and sent it to my annuity agent who opened up an annuity with an insurance company.  On May 20th, I rolled additional money out of my IRA, wrote out another check to add to my existing annuity, but it never got cashed…and I didn’t resend it as I had just heard of the one-rollover-per-12-month rule.

Can I roll this 2nd distribution back into my IRA since I heard the one rollover requirement every 12 months will not apply in 2020?  (Note: neither rollover was for an RMD as I am not of age yet.)

Many thanks.

Answer:

In Notice 2020-51, the IRS waives the once-per-year rule for 2020 RMDs that are repaid to the same IRA from which they were distributed. These repayments must be done by August 31.

Unfortunately for your situation, this relief only applies to RMDs and not to other IRA distributions. Because you rolled over the February IRA distribution, the once-per-year rule prevents you from rolling over a second IRA distribution within the same 365-day period.

Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:

Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:

Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:

Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.