By Andy Ives, CFP®, AIF®
An initial ROTH conversion was completed in 2018 for tax year 2018. A second conversion was completed in 2019 for tax year 2019. There was no ROTH IRA account prior to 2018 and the account owner is over 59 ½. The 5-year holding period will be satisfied on 1/1/2023. Does each ROTH conversion transaction have a separate 5-year clock to determine whether earnings are tax free or is it just the initial transaction? Thank you in advance for your assistance.
For those under the age of 59 ½, yes, each Roth conversion has its own 5-year clock. However, the account holder you are inquiring about is already over 59 ½. As such (and since this is his very first Roth IRA account), he only has to concern himself with the 5-year clock on the 2018 conversion. Since a person who is over 59 ½ already has full access to his traditional IRA before a conversion, he will still have full access to the account immediately after the conversion. It is the tax on the earnings that we are concerned about. On 1/1/2023, he will have satisfied the 5-year clock for tax-free earnings on the 2018 conversion. Also on 1/1/2023, he will have satisfied a second requirement – what I call the “5-year forever” Roth clock – which means the 2019 conversion clock becomes irrelevant. Going forward, his Roth IRA will provide immediate tax- and penalty-free earnings for the rest of his life, regardless of how or when new Roth money is added to it. There will be no more clocks to worry about.
I understand that you can make up to a $100,000 withdrawal from my IRA for a qualified charity. Does the withdrawal for the charity have to be a once-per-year event, or can it be monthly, quarterly, etc., so long as the total does not exceed $100,000?
Yes, qualified charitable distributions (QCDs) are capped at $100,000 annually, per person. You must be at least age 70 ½ to do a QCD, and the payment must be directly transferred to the eligible charity. (Don’t make the mistake of withdrawing the money yourself.) QCDs can be done as often as you wish – there is no limit on the number of QCDs, only on the total amount. If you do go over the $100,000 limit, the overage will not be excluded from income and cannot be carried forward to the next year.