April 16, 2023 • 53 mins
Since so many listeners are still writing Suze with questions about the Five Year Rule in relation to ROTHs, we’re replaying this Suze School from February 2022, about the rule. Suze starts with a detailed explanation and then asks us questions to make sure we learned the lessons.
This is an episode you’ll want to listen to over again, so you can avoid penalties and feel secure in how your money grows.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Music (00:03):
Music In.
Robert (00:30):
April 16th 2023. Hi, everybody. This is Suze's producer Robert
and welcome to the Women and Money podcast and Everyone's
smart enough to listen. I have a couple of things
to tell you before we get into the heart of
today's podcast. The first one is that Suze's under the weather,
she has a serious cold which she caught at Easter
(00:51):
so to be safe, we are going to rest her
voice for today.
The second thing that I want to tell you about
is that this Thursday, April 20th, we're going to do
a new Suze School podcast and then KT will join
the show next Sunday, April 23rd. And we'll do Ask
KT and Suze Anyhing on that day. Now, we're doing
(01:12):
this little switch up so that you have information and
time to make your I Bond decisions before May.
All right, for today's Suze school, we are revisiting a
lesson from February 6th 2022. About the five year rule
for Roths you see so many of you are still
(01:33):
writing Suze with questions about the five year rule, but
Suze felt it was time to bring this particular lesson
back to the top of your feed. And she asked
me to tell you to get out your Suze notebooks
and pay attention. All right, here we go.
Suze (01:49):
First of all, I just want to talk about Roth
I R A's retirement accounts for a second.
I have told you forever that I really believe from
the bottom of my heart that a Roth retirement account
is the absolute best retirement account out there. Bar none.
(02:10):
And many of you always say to me, no, Suze,
I'm in a high tax bracket. I'd rather invest in
a traditional IRA or retirement account. Get a tax write
off now and then later on in life, I'll be
in a lower tax bracket and take my money out
then
(02:30):
A Roth retirement account is a retirement account that is
funded with after tax money. You've already paid taxes on it.
A traditional retirement account is a retirement account that you
have never paid taxes on the money that you put in.
It's pre taxed and how that comes to play later
(02:54):
on in life is in two ways. Number one,
let's say you're 65 years of age or older
and now you're on Medicare,
the money that you take out from a traditional retirement
account
will count towards income and probably increase your Medicare B premiums.
(03:19):
Social Security. You're now taking social security,
possibly the income that you take out from a traditional
retirement account will make it so that your Social Security
becomes taxable.
And last, but not least when you die, it's not
if you're going to die, it's when...
(03:40):
any money that you leave to your beneficiaries in a
traditional retirement account, when they take it out,
then they will pay ordinary income tax on it. And
maybe they are in a huge tax bracket because they're
making a lot of money at that point in time,
a Roth IRA or any Roth retirement account, if you
(04:04):
follow the five year rules, everybody, and that's included for
inherited Roth retirement accounts,
avoid the increase in Medicare B premiums to you. Avoid
your income going up. And so therefore your Social Security
may not increase in taxes or be taxed at all.
(04:27):
And your beneficiaries get to inherit it again. As long
as they know the five year rule. Absolutely tax free.
I think those are big deals. But to make the
Roth retirement accounts really be as beneficial as they are
meant to be. You have to understand the five year rule.
(04:51):
So what is the five year rule? It's very simple.
You just have to open up a Roth retirement account
and if you open it up and it is opened
for at least five tax years, and I'll explain tax
(05:11):
years later on
if it is open for at least five tax years,
then you have met the five year rule.
Just that simple and therefore later on in retirement or
whenever you are over 59 and a half, even though you
(05:33):
are working
any money you withdraw from this Roth IRA will be withdrawn,
tax free and penalty free.
So you need to understand that's simply what the five
year rule says.
So let's begin.
(05:55):
There are two different types of Roth retirement accounts. There
are individual ones, ones that you open up on your
own
and then there are ones that you open up with
your employer. A Roth 401k, a Roth 403b, a Roth
(06:17):
TSP right now, I'm only going to be talking about
individual Roths. I'll get to 401ks etcetera in a little bit.
When you're talking about an individual Roth. There are two
(06:38):
different types as well.
There is a contributory Roth and a converted Roth. Then
I want you to write those two words down.
A contributory Roth and a converted wrath.
(06:58):
And the five year rule works differently, if you have
a contributory Roth versus a converted Roth.
What is a contributory Roth?
A contributory Roth is very simple. You open up a
Roth IRA
(07:19):
and every year or whenever you want, you contribute to it,
you don't have to contribute to it more than once.
You can open up a contributory Roth put in $100
and never contribute to it again. Ok. But you contributed
to it with money, you have already paid taxes on
(07:41):
A converted Roth is a Roth where you first opened
a traditional IRA.
A traditional IRA again is money that you have never
paid taxes on.
And now you want to convert it to a Roth.
(08:02):
And when you convert it to a Roth, at that point,
you will owe income tax in that year on any
money that you converted.
Now, there is another kind of converted Roth IRA.
And many of you out there have what's known as
(08:24):
a back door Roth IRA.
And to make it very simple, a backdoor Roth IRA
is when you don't qualify incomewise for a contributory Roth IRA.
So you open up a traditional IRA and you fund
it with money that is not tax deductible. You don't
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take a deduction for it. So it's called a nondeductible
IRA and then you convert it to a Roth and
you are allowed to convert it because there are no
income limitations on conversions.
So all of you that have a back door Roth IRA,
(09:09):
you need to know that, that IRA is also considered
a converted Roth IRA. So you need to understand the
difference between a contributory Roth IRA and a converted Roth IRA.
Next, I want you to write down the words contribution
(09:35):
and the word earnings,
Contributions
are made up of money that you contributed to your
Roth IRA. You're contributing to it with after tax money,
Earnings, the earnings are the money that the contributions make.
(09:59):
So you open up a Roth IRA, you invest that
money in either stocks, exchange traded funds, mutual funds, whatever
you want to invest in
and that money earns money. So your contribution earns money,
those are known as earnings. So it's important that you
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understand that the five year rule works differently with contributions
versus earnings. So you have to know those two words. Now,
before I go on, everything that I am talking about
during this entire section pertains to contributory Roth IRAs only.
(10:48):
I am not talking about converted Roths during this section.
I'll let you know when I switch to converted Roths.
The next two words, I want you to write down
are penalties and income taxes.
Now, what you have got to understand is that regardless
(11:14):
of your age, regardless of how long the Roth IRA
has been opened,
penalties and income taxes can never ever ever apply to contributions.
Why is that
Because with a Roth IRA, the rule is
(11:41):
that regardless of how long the Roth has been open,
you can withdraw your original contributions that you put in
without taxes or penalties regardless of your age.
How long the money has been in there, how long
the account has been open. That money is yours. Why?
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Because a contribution for a contributory Roth is money you've
already paid taxes on. So they're never going to penalize
you or tax you on money, you've already paid taxes on.
So the five year rule does not apply to your contributions.
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Now, let's go on to earnings. When I talk about penalties,
penalties only apply to earnings if you are not at
least 59 and a half years of age, when you withdraw
the money,
(12:53):
If you are 59 and a half years of age or older,
when you withdraw your earnings from this account,
then the penalties do not apply because why? You're already
59 and a half or older
Penalties only apply to age. That's it.
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If you are under 59 and a half years of age
and withdraw earnings, you will owe a 10% tax penalty
And it does not matter if it's been in there
longer than five years, less than five years, you will always,
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if you are under the age of 59 and a half,
you will always owe a 10% penalty
on that money. Now, listen to me, obviously, if you
take money out for a first time home or certain
things like that for educational purposes, health purposes, there are
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caveats to the penalty rule, the 10% federal tax penalty
even if you are younger than 59 and a half. But
in general,
you need to know that penalties for a contributory Roth
pertain to age
Income tax, you will always owe income tax on your earnings.
(14:30):
If the Roth IRA has not been opened for at
least five years. So again, income tax and penalties only
apply to the growth of your contributory Roth never to your contributions.
(14:52):
So again, I'll just give you an example. You're 35
years of age, you opened up a Roth this year
and you put in $6000 which is the max and
three months later that $6000 is worth 8000. Let's just
(15:13):
say that's true.
You can take out anything that you originally contributed $6000
in this case without taxes or penalties whatsoever, because penalties
and taxes will never apply to your original contributions. So
(15:34):
the five year rule is not for your contributions, it
only applies to earnings. So
you put in $6000 it's now worth 8000. That extra
$2000 is your earnings.
(15:54):
If you take that out before the Roth IRA has
been opened for five tax years,
you not only will owe ordinary income tax on that money,
the $2000 but you will also owe a 10% federal
tax penalty because you were not at least 59 and a
(16:18):
half years of age when you withdrew it.
Just that simple.
Now, why do I keep saying tax years?
Because a tax year starts January 1st 2022. January 1st 2021.
(16:41):
January 1st 2020 it starts January 1st of the year.
A calendar year is usually one year from when you
yourself started something. So let me give you an example.
You open up
(17:03):
a Roth IRA, December 31st of 2021
because it's a tax year,
even though you opened it up on the last day
of 2021
it is deemed that, that Roth IRA was opened from
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January 1st of 2021. That's a tax year.
A calendar year would be, you opened it up December 31st, 2021.
1 year would be December 31st 2022. Do you understand
(17:45):
the difference? Because it's a big deal in understanding how
long your Roth IRA really needs to be opened
to qualify for the five year tax rule. One last
thing before we start your quizzes
(18:06):
all Roth IRAs the IRS aggregates. What does that mean?
You opened up a Roth IRA 10 years ago and
you only were able to put in $100. Now, you're
making money and you haven't contributed to it for all
(18:27):
these 10 years. Now, you're working and you're able to contribute.
So you open up another Roth IRA somewhere else at
a different brokerage firm.
Now you start contributing to it because you had originally
opened up a Roth IRA 10 years ago, your new
(18:50):
Roth IRA is aggregated with your old one.
The new one then has already met the five year
tax rule.
So that is why the sooner, you can open up
a Roth IRA even if you can't afford to contribute
to it. That is when the five year tax rule
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clock begins.
So you can have as many Roth IRAs as you want. Obviously,
the maximum that you can contribute per year
is in 2022 $6000 if you are under 50 $7,000 you
(19:35):
are 50 or older. So let's say you open up
five or six Roth IRAs at different places this year,
the maximum that you can put in is $1000 in
each one or however much you want to put in
each Roth IRA, but total
$6000 altogether.
(20:00):
Now,
you have to know that conversions don't work that way.
Roth IRAs, everything is aggregated conversions, which I'll get to
in a second again. Do not work that way.
All right. So do you think that you are ready
(20:22):
now for your quizzie? Now, I'm gonna try to help
you to understand what to look for in these questions. So,
here we go. You are 40 years of age
and you have contributed...
Listen to the word contributed. Remember what I told you
(20:43):
about contributions, $18,000 over the past three years into your
Roth IRA.
And now it's worth $20,000 and you want to withdraw
$10,000 to buy a car.
(21:05):
So you're 40 you're under 59 and a half. You have
contributed $18,000. You have $2000 of earnings
and you want to withdraw $10,000 to buy a car.
Will you have to pay a penalty and taxes to
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take that money out? Think carefully. A yes. B no.
Which one?
The answer is no. And the reason is why?
$10,000 is less than the $18,000 that you contributed. And
(21:50):
what did I say to all of you? Your contributions
are never taxed or penalized no matter what.
So you can take out your $10,000 in this case
without taxes or penalties. Now, you may say to me, Suze,
(22:11):
how do they know that that $10,000 is part of
my contributions and none of it is part of earnings.
When you take money out of a contributory Roth first, it,
there's a rule called first in first out. So first
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your contributions come out.
Then if you do have any conversions in there, your
conversions come out
and next comes your earnings. So the IRS keeps track
of all of that for you. Hopefully, your brokerage firm
does as well. So you don't have to worry about it.
(22:54):
You just need to know the rules. All right. Next question,
you are 60 and you have contributed 21,000 over the
past three years. Why 21? Because the maximum
that you can contribute per year when you are 50
or older is $7000 a year. So this person contributed
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the max and they contributed 21,000 over the past three
years into their Roth.
And now that 21,000 is worth 25,000.
So $21,000 of contributions, $4000 of earnings.
(23:41):
And this person wants to withdraw all of it to
buy a car.
Well, they have to pay a penalty on any of
that money.
Are you thinking about it? Now, notice I said, well,
they have to pay a penalty. I did not ask
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you if they have to pay taxes and a penalty.
I asked you if they have to pay a penalty
on any of that money. They are withdrawing all $25,000
at once and they are 60
A. Yes. B no. Think about it, everybody.
(24:23):
The answer is no. Why is the answer no?
Because did I not say to you penalties never ever
apply on any of the money
if you are 59 and a half years of age or
older when you withdraw money from your Roth IRA.
(24:48):
So in this case, this person withdrew $4000 of earnings,
but they're over the age of 59 and a half. So
penalties
never apply to you. Tax penalties if you are 59 and
a half years of age or older. However,
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what happens in regards to income tax?
Will this person have to pay income tax on their earnings?
A yes or B no.
What are you to look for in this question? This
Roth IRA has only been opened for three years.
(25:34):
They have $4000 of earnings. They are now withdrawing the earnings.
Are they going to have to pay taxes on those earnings?
The answer is yes. Why? Because this Roth IRA was
not opened for five tax years at this point in time.
(25:58):
That is why you have to understand the difference between
penalties and taxes. Are you starting to understand that? Now,
I'm gonna get a little bit more complicated.
You make a contribution to your Roth IRA on April
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15th of 2022.
Remember you have until April 15th or whatever the tax
day is for that year to make a contribution to
last year's Roth IRA. So you are making a contribution
on April 15th of 2022 for year 2021 Roth IRA.
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In what year will the five year holding period be up?
Remember what I said to you about tax years versus
calendar years.
So you are making a contribution in 2022. But for
(27:08):
the 2021 Roth IRA
is your five year tax year up in A) 2025
B) 2026 or C) 2027?
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Think about it.
The answer is a 2025. Why? Because even though it
was made April 15th of 2022. It was made for
a Roth in 2021.
(27:50):
And what did I tell you? It starts the tax year,
January 1st of 2021. So January 1st 2021 is one year,
2022 is two years. 2023 is three years. 2024 is
four years. 2025 is five years. Now, what's interesting about
(28:17):
that
is because the five year holding period is based on
tax years and not calendar years.
Even though you made the contribution. April 15th of 2022
the five year period is up in January 1st 2025.
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That's three years and eight months of a holding period.
That's less than five calendar years, big time, one year
and four months less.
So tax years make a big difference. So you need
to understand that.
(29:02):
Let's ask again in a little different way. So I
know you really get it. You are 62 years of
age and you have three different contributory Roth IRAs. One
you open and funded five tax years ago, 13 tax
years ago and 12 tax years ago. And all three
(29:28):
have done exceptionally well and made money
and you want to withdraw everything in all three Roths
to pay off the mortgage on your home.
How many of these Roth IRAs can you withdraw all
(29:48):
your contributions plus earnings without taxes or penalties?
A) one B) two or C) all three?
Now, remember what I said about Roth IRAs being aggregated
(30:08):
even though this person or you have three, Roth IRAs,
o ne of them was opened five tax years ago.
So what does that do to the other two that
were not opened five tax years ago?
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The answer is C all three. And why is that?
Because number one, you are 62 years of age when
you are withdrawing everything from this. So remember I told
you penalties never apply once you are 59 and a half
(30:51):
years of age or older, that 10% federal tax penalty.
Why are you not paying income tax on your earnings?
Because all three Roth IRAs even though they were opened
at different times because you opened up 15 tax years
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ago or more,
all three are deemed to be opened up five years ago.
So that's why it's important again that you open up
a Roth IRA as soon as you can to start
the five year tax clock going
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Next, you are 52 years of age and have three
different contributory. Roth IRAs one. So you have three different
ones now. One, you opened and funded five years ago,
13 years ago
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and 12 years ago, all three have done exceptionally well again,
made money and you want to withdraw everything in all
three Roths. How many of these Roth IRAs can you
withdraw all your contributions plus earnings without
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penalties or taxes?
A) all of these or B) none of these?
Remember what I told you about penalties.
The answer is B you cannot withdraw all of these
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without taxes and penalties,
especially because you are not 59 and a half years of age.
So therefore, your earnings not only will get a 10% penalty,
but they will also be taxed as ordinary income as well.
If you just wanted to take out your contributions, you
(33:01):
can do that at any time without penalties or taxes,
regardless of how long the accounts have been open.
Now, I want to go on. So I think you're
now understanding how contributory rots work and how the penalties
and taxes work.
(33:23):
Let's go to converted Roth IRAs because those are very
different
when you convert money from a traditional IRA to a
Roth IRA.
Every time you do so
you start a new holding period. So unlike a contributory
(33:48):
Roth that once you establish it, that is the starting
date from all the Roths you contribute to or you
start with after tax money from that point on
with a converted Roth. Every time you convert from a
traditional retirement account
(34:10):
to a Roth retirement account. So you're going from a
traditional IRA to a Roth IRA, you start a new
time clock, it has nothing to do with the Roths
that you already have. And by the way, this includes
(34:31):
a backdoor Roth IRA as well. That is a big deal.
So if you convert from a traditional IRA to a
Roth this year,
you start a new time clock this year. if you
do another traditional IRA to a Roth next year, the
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time clock starts all over again. It's brand new for
that year. Also, you have to know that conversions have
to be made by December 31st of the year, you
are converting.
So if you convert December 31st 2021
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the clock then starts January 1st 2021.
So that's important for you to know as well. Here's
what's fabulous, however, when you convert a traditional IRA to
a Roth IRA, you obviously will pay taxes on any
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money that you convert
that year.
So you will convert money from a traditional whatever amount
you want to a Roth, you will owe taxes on
that money. Typically, the taxes are not due until April
15th of the year after you converted.
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So now that money has to stay in there for
five tax years for you to have met the five
year rule. What does that allow you to do? It
allows you now to take out the original amount of
money that you converted
without any taxes or penalties, regardless of your age.
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That's important. Let's say that you're in your thirties and
you really want to be able to access that money.
Let's just say you do, right or wrong, to start
a new business.
So, here you are, you have $10,000 in a traditional
IRA and you're really not in that high of a
(36:54):
tax bracket. You're not really making any money.
If you convert that $10,000 to a Roth IRA
five tax years later, you can withdraw, even though you're
not 59 and a half years of age, you can withdraw
the amount that you converted and paid taxes on without
(37:17):
any taxes or penalties at that point in time. Why
is that? Because you pay taxes on it
So you can get that money in five tax years.
Just that simple. That's how a converted Roth works. However,
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the earnings still have to stay in there
until you are 59 and a half years of age to
avoid the penalty
and income tax on that money.
However, listen to me closely. Now again,
(38:01):
you converted
and you have this money in that you have just
paid taxes on
and now it's three years later, maybe four years later,
whatever it is, you have not had the money in
there for five tax years and you decide that you
want to withdraw some of the money that you originally converted.
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If you do that, you are going to pay a 10%
penalty on that money.
Why are you not gonna pay taxes on it? Because
you already have, but you will pay a 10% penalty. Now,
for those of you who did a backdoor Roth IRA,
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I'm sure many of you are confused right now because
you're like, wait a minute, I funded my traditional IRA
with after tax money, which is why it's called a
nondeductible IRA. And then I converted it.
So, Suze
does that money still have to stay in there for
(39:10):
at least five years before I can touch it?
And the answer to that is yes, it does.
So that money has to meet the five year rule
because if you take it out before those five years,
you will pay a 10% federal tax penalty unless you
(39:34):
are 59 and a half years of age or older.
So again, that is how conversions work, whether you are
converting from a traditional IRA that you never pay taxes on,
and now you're converting it to a Roth or you
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have a back door Roth IRA where you put money
into a traditional IRA, it was nondeductible. And now you
are converting it to a Roth IRA.
So, do you understand that? Well, let's see.
You are 25 years of age and you have a
(40:16):
traditional IRA that you really want to convert to a Roth.
As you know, if you convert, you're gonna have to
pay taxes on the amount you convert. So your quiz is,
how long does the money you converted? Have to sit
in that converted Roth IRA until you can withdraw the
(40:40):
amount you originally converted without tax and penalty.
You're only 25 years of age. Think about it, everybody
Answer
B)
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you can't do this.
Which one?
The answer is A
and the reason is, like I said, regardless of your age,
when you convert, as long as it has sat there
for five tax years, you can withdraw your original converted
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amount without taxes or penalties because you already paid taxes
on it.
Next. You are now 60.
You don't have a Roth IRA. You haven't opened one
up yet
and you just converted your traditional IRA to a Roth IRA.
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And now let's say you converted $60,000 and you just
decide you want to do that for some reason. You know,
I probably would never tell you to do that. But anyway,
now two years later that $60,000 has grown to $70,000
(42:08):
and you want to take out all $70,000
will you have to take a penalty? A 10% penalty
on the money? The $70,000 that you just withdrew.
(42:29):
A) yes. B) no.
Remember what I told you about penalties.
The answer is B) no, you do not have to
pay a penalty because why you are 59 and a half
years of age or older.
(42:51):
All right. Will, you have to pay income tax on
the earnings?
A) yes. B) no.
But you have $10,000 of earnings on a Roth converted account,
(43:15):
right? That you opened two years ago. Think about it.
Will, you have to pay income tax.
A) yes. B) no? The answer is yes, because the
account has not been open for five tax years. So
(43:36):
the earnings will be taxed as ordinary income.
So you always have to remember when you convert
from a traditional to a Roth, a new time clock starts.
Do you understand?
So it's really important that you get that converted Roths
(44:00):
start a new time clock no matter what contributory Roth
IRAs are aggregated all together.
Now, let's touch on employer sponsored plans. Roth 401ks, Roth 403bs, TSPS.
(44:22):
An employer Roth plan also has to meet the five
year rule.
So it's important when you have, let's say a Roth
401k
and you have worked for an employer for eight years.
And now you are leaving that employer to go to
(44:43):
another employer.
If you start a Roth 401k with your new employer,
and you roll your old 401k over to your new
Roth 401k with your new employer, your time years comes
(45:04):
with it.
So your new Roth 401k will be deemed to be
eight years old. So you have already then met the
five year rule
if you have a Roth 401k and you are now
rolling that over to a Roth IRA that has been
(45:27):
opened
for at least five tax years.
When you roll a 401k, Roth,
you lose your time period from the 401k. But since
you had a Roth opened already,
now your Roth 401k that you roll over already has
(45:51):
been deemed to meet the five year time clock. If
you do not have a Roth IRA that you already opened,
when you roll over a Roth 401k to a Roth IRA,
that's brand new. The five year clock begins, then that's
(46:13):
why it's important, especially if you have an employer Roth
retirement account,
that you start a Roth IRA, whether it's for a
dollar $100 it doesn't matter. So you have the five
year clock started so that if you ever want to
(46:35):
do a Roth IRA rollover from a Roth 401k, a
403b or a TSP, into a Roth IRA.
Your clock, your five year time clock has already been met.
So
you have a Roth 401k with an old employer that
(47:00):
you opened up five years ago and now you started
a new job. If you roll over your old 401k
to your new employer's Roth 401k does the time clock
on the five year rule start all over again?
(47:22):
Answer
A) yes. B) no,
The answer is B) no, because your Roth 401k with
your old employer, the time clock goes with it when
you transfer to a Roth 401k with a new employer.
(47:46):
All right. Next question. If I roll my Roth 401k
that I've had for more than five years over to
a Roth IRA that I will open up at that
time
has the five year rule been met? Think about what
I just told you
(48:07):
A) is yes, B) is no
Answer is no because Roth 401ks,
the time clock does not apply to Roth IRAs. S
o if you already don't have a Roth IRA that
met the five year rule or is meeting it, the
(48:30):
time clock for you starts all over again. That is
why you need to open up a Roth today.
Now, I just have to say this before I wrap up,
you have converted Roths. You can take a 401k Roth
and put it in to a Roth IRA. You don't
(48:51):
have to put all these different accounts into separate Roth
IRAs You don't need a converted Roth. You don't need
a contributory Roth. All you need is one Roth IRA
that you can contribute to.
You can convert two and you can roll over your
(49:13):
401k Roth two. So you only need to open up
one Roth IRA and the sooner you do it, the better.
I just briefly want to talk about inherited Roth IRAs.
Now when you have a Roth retirement account and the
(49:33):
owner dies, obviously, there is no withdrawal penalties for the
beneficiaries when they take distributions from it on any level.
But I said penalties,
because remember, earnings and contributions are always penalty free when
(49:55):
you die and your beneficiaries withdraw the money
even if they have not been in there for five years.
However,
the question is, will the earnings be tax free?
The earnings for the earnings to be tax free
(50:18):
that Roth has got to have been open for five
tax years before death occurred. So, don't go rushing to
take out everything at once until you know, if the
account that you just inherited the Roth account that you inherited,
(50:38):
how long has it been open for?
So if it has been open for five tax years,
you can take any amount you want out
without taxes or penalties. If it has not been open
for at least five tax years,
then what the earnings if you take them out will
(51:01):
be taxed to you as ordinary income. Again, no penalties
will ever apply to money that you withdraw. So what
you might want to do is if that is the case,
know how much is contributions and only withdraw contributions,
(51:23):
then when the account has met the five year rule,
then you take out your earnings.
What you have to know however is when it comes
to an inherited Roth IRA,
the rules are very, very different if you are a spouse,
a sole beneficiary of that Roth IRA versus a non
(51:47):
spouse like kids and things like that. So it's really
important that you consult a tax advisor
when you inherit a Roth IRA to figure out what
is the best way to take money. How much can
you take all of those things? So you stay out
really of a situation that can get you in trouble.
(52:12):
All right, everybody. We are almost at an hour. But
I hope that you found this Suze School really, really beneficial. Again,
it's a podcast, you can listen to it over and
over again and
I think it will help you big time in the future. Remember,
(52:34):
all I want for you is to be safe, strong
and secure.
Music (52:44):
Music Out.
Music In.
Robert (00:30):
April 16th 2023. Hi, everybody. This is Suze's producer Robert
and welcome to the Women and Money podcast and Everyone's
smart enough to listen. I have a couple of things
to tell you before we get into the heart of
today's podcast. The first one is that Suze's under the weather,
she has a serious cold which she caught at Easter
(00:51):
so to be safe, we are going to rest her
voice for today.
The second thing that I want to tell you about
is that this Thursday, April 20th, we're going to do
a new Suze School podcast and then KT will join
the show next Sunday, April 23rd. And we'll do Ask
KT and Suze Anyhing on that day. Now, we're doing
(01:12):
this little switch up so that you have information and
time to make your I Bond decisions before May.
All right, for today's Suze school, we are revisiting a
lesson from February 6th 2022. About the five year rule
for Roths you see so many of you are still
(01:33):
writing Suze with questions about the five year rule, but
Suze felt it was time to bring this particular lesson
back to the top of your feed. And she asked
me to tell you to get out your Suze notebooks
and pay attention. All right, here we go.
Suze (01:49):
First of all, I just want to talk about Roth
I R A's retirement accounts for a second.
I have told you forever that I really believe from
the bottom of my heart that a Roth retirement account
is the absolute best retirement account out there. Bar none.
(02:10):
And many of you always say to me, no, Suze,
I'm in a high tax bracket. I'd rather invest in
a traditional IRA or retirement account. Get a tax write
off now and then later on in life, I'll be
in a lower tax bracket and take my money out
then
(02:30):
A Roth retirement account is a retirement account that is
funded with after tax money. You've already paid taxes on it.
A traditional retirement account is a retirement account that you
have never paid taxes on the money that you put in.
It's pre taxed and how that comes to play later
(02:54):
on in life is in two ways. Number one,
let's say you're 65 years of age or older
and now you're on Medicare,
the money that you take out from a traditional retirement
account
will count towards income and probably increase your Medicare B premiums.
(03:19):
Social Security. You're now taking social security,
possibly the income that you take out from a traditional
retirement account will make it so that your Social Security
becomes taxable.
And last, but not least when you die, it's not
if you're going to die, it's when...
(03:40):
any money that you leave to your beneficiaries in a
traditional retirement account, when they take it out,
then they will pay ordinary income tax on it. And
maybe they are in a huge tax bracket because they're
making a lot of money at that point in time,
a Roth IRA or any Roth retirement account, if you
(04:04):
follow the five year rules, everybody, and that's included for
inherited Roth retirement accounts,
avoid the increase in Medicare B premiums to you. Avoid
your income going up. And so therefore your Social Security
may not increase in taxes or be taxed at all.
(04:27):
And your beneficiaries get to inherit it again. As long
as they know the five year rule. Absolutely tax free.
I think those are big deals. But to make the
Roth retirement accounts really be as beneficial as they are
meant to be. You have to understand the five year rule.
(04:51):
So what is the five year rule? It's very simple.
You just have to open up a Roth retirement account
and if you open it up and it is opened
for at least five tax years, and I'll explain tax
(05:11):
years later on
if it is open for at least five tax years,
then you have met the five year rule.
Just that simple and therefore later on in retirement or
whenever you are over 59 and a half, even though you
(05:33):
are working
any money you withdraw from this Roth IRA will be withdrawn,
tax free and penalty free.
So you need to understand that's simply what the five
year rule says.
So let's begin.
(05:55):
There are two different types of Roth retirement accounts. There
are individual ones, ones that you open up on your
own
and then there are ones that you open up with
your employer. A Roth 401k, a Roth 403b, a Roth
(06:17):
TSP right now, I'm only going to be talking about
individual Roths. I'll get to 401ks etcetera in a little bit.
When you're talking about an individual Roth. There are two
(06:38):
different types as well.
There is a contributory Roth and a converted Roth. Then
I want you to write those two words down.
A contributory Roth and a converted wrath.
(06:58):
And the five year rule works differently, if you have
a contributory Roth versus a converted Roth.
What is a contributory Roth?
A contributory Roth is very simple. You open up a
Roth IRA
(07:19):
and every year or whenever you want, you contribute to it,
you don't have to contribute to it more than once.
You can open up a contributory Roth put in $100
and never contribute to it again. Ok. But you contributed
to it with money, you have already paid taxes on
(07:41):
A converted Roth is a Roth where you first opened
a traditional IRA.
A traditional IRA again is money that you have never
paid taxes on.
And now you want to convert it to a Roth.
(08:02):
And when you convert it to a Roth, at that point,
you will owe income tax in that year on any
money that you converted.
Now, there is another kind of converted Roth IRA.
And many of you out there have what's known as
(08:24):
a back door Roth IRA.
And to make it very simple, a backdoor Roth IRA
is when you don't qualify incomewise for a contributory Roth IRA.
So you open up a traditional IRA and you fund
it with money that is not tax deductible. You don't
(08:46):
take a deduction for it. So it's called a nondeductible
IRA and then you convert it to a Roth and
you are allowed to convert it because there are no
income limitations on conversions.
So all of you that have a back door Roth IRA,
(09:09):
you need to know that, that IRA is also considered
a converted Roth IRA. So you need to understand the
difference between a contributory Roth IRA and a converted Roth IRA.
Next, I want you to write down the words contribution
(09:35):
and the word earnings,
Contributions
are made up of money that you contributed to your
Roth IRA. You're contributing to it with after tax money,
Earnings, the earnings are the money that the contributions make.
(09:59):
So you open up a Roth IRA, you invest that
money in either stocks, exchange traded funds, mutual funds, whatever
you want to invest in
and that money earns money. So your contribution earns money,
those are known as earnings. So it's important that you
(10:23):
understand that the five year rule works differently with contributions
versus earnings. So you have to know those two words. Now,
before I go on, everything that I am talking about
during this entire section pertains to contributory Roth IRAs only.
(10:48):
I am not talking about converted Roths during this section.
I'll let you know when I switch to converted Roths.
The next two words, I want you to write down
are penalties and income taxes.
Now, what you have got to understand is that regardless
(11:14):
of your age, regardless of how long the Roth IRA
has been opened,
penalties and income taxes can never ever ever apply to contributions.
Why is that
Because with a Roth IRA, the rule is
(11:41):
that regardless of how long the Roth has been open,
you can withdraw your original contributions that you put in
without taxes or penalties regardless of your age.
How long the money has been in there, how long
the account has been open. That money is yours. Why?
(12:05):
Because a contribution for a contributory Roth is money you've
already paid taxes on. So they're never going to penalize
you or tax you on money, you've already paid taxes on.
So the five year rule does not apply to your contributions.
(12:32):
Now, let's go on to earnings. When I talk about penalties,
penalties only apply to earnings if you are not at
least 59 and a half years of age, when you withdraw
the money,
(12:53):
If you are 59 and a half years of age or older,
when you withdraw your earnings from this account,
then the penalties do not apply because why? You're already
59 and a half or older
Penalties only apply to age. That's it.
(13:17):
If you are under 59 and a half years of age
and withdraw earnings, you will owe a 10% tax penalty
And it does not matter if it's been in there
longer than five years, less than five years, you will always,
(13:39):
if you are under the age of 59 and a half,
you will always owe a 10% penalty
on that money. Now, listen to me, obviously, if you
take money out for a first time home or certain
things like that for educational purposes, health purposes, there are
(14:04):
caveats to the penalty rule, the 10% federal tax penalty
even if you are younger than 59 and a half. But
in general,
you need to know that penalties for a contributory Roth
pertain to age
Income tax, you will always owe income tax on your earnings.
(14:30):
If the Roth IRA has not been opened for at
least five years. So again, income tax and penalties only
apply to the growth of your contributory Roth never to your contributions.
(14:52):
So again, I'll just give you an example. You're 35
years of age, you opened up a Roth this year
and you put in $6000 which is the max and
three months later that $6000 is worth 8000. Let's just
(15:13):
say that's true.
You can take out anything that you originally contributed $6000
in this case without taxes or penalties whatsoever, because penalties
and taxes will never apply to your original contributions. So
(15:34):
the five year rule is not for your contributions, it
only applies to earnings. So
you put in $6000 it's now worth 8000. That extra
$2000 is your earnings.
(15:54):
If you take that out before the Roth IRA has
been opened for five tax years,
you not only will owe ordinary income tax on that money,
the $2000 but you will also owe a 10% federal
tax penalty because you were not at least 59 and a
(16:18):
half years of age when you withdrew it.
Just that simple.
Now, why do I keep saying tax years?
Because a tax year starts January 1st 2022. January 1st 2021.
(16:41):
January 1st 2020 it starts January 1st of the year.
A calendar year is usually one year from when you
yourself started something. So let me give you an example.
You open up
(17:03):
a Roth IRA, December 31st of 2021
because it's a tax year,
even though you opened it up on the last day
of 2021
it is deemed that, that Roth IRA was opened from
(17:24):
January 1st of 2021. That's a tax year.
A calendar year would be, you opened it up December 31st, 2021.
1 year would be December 31st 2022. Do you understand
(17:45):
the difference? Because it's a big deal in understanding how
long your Roth IRA really needs to be opened
to qualify for the five year tax rule. One last
thing before we start your quizzes
(18:06):
all Roth IRAs the IRS aggregates. What does that mean?
You opened up a Roth IRA 10 years ago and
you only were able to put in $100. Now, you're
making money and you haven't contributed to it for all
(18:27):
these 10 years. Now, you're working and you're able to contribute.
So you open up another Roth IRA somewhere else at
a different brokerage firm.
Now you start contributing to it because you had originally
opened up a Roth IRA 10 years ago, your new
(18:50):
Roth IRA is aggregated with your old one.
The new one then has already met the five year
tax rule.
So that is why the sooner, you can open up
a Roth IRA even if you can't afford to contribute
to it. That is when the five year tax rule
(19:14):
clock begins.
So you can have as many Roth IRAs as you want. Obviously,
the maximum that you can contribute per year
is in 2022 $6000 if you are under 50 $7,000 you
(19:35):
are 50 or older. So let's say you open up
five or six Roth IRAs at different places this year,
the maximum that you can put in is $1000 in
each one or however much you want to put in
each Roth IRA, but total
$6000 altogether.
(20:00):
Now,
you have to know that conversions don't work that way.
Roth IRAs, everything is aggregated conversions, which I'll get to
in a second again. Do not work that way.
All right. So do you think that you are ready
(20:22):
now for your quizzie? Now, I'm gonna try to help
you to understand what to look for in these questions. So,
here we go. You are 40 years of age
and you have contributed...
Listen to the word contributed. Remember what I told you
(20:43):
about contributions, $18,000 over the past three years into your
Roth IRA.
And now it's worth $20,000 and you want to withdraw
$10,000 to buy a car.
(21:05):
So you're 40 you're under 59 and a half. You have
contributed $18,000. You have $2000 of earnings
and you want to withdraw $10,000 to buy a car.
Will you have to pay a penalty and taxes to
(21:25):
take that money out? Think carefully. A yes. B no.
Which one?
The answer is no. And the reason is why?
$10,000 is less than the $18,000 that you contributed. And
(21:50):
what did I say to all of you? Your contributions
are never taxed or penalized no matter what.
So you can take out your $10,000 in this case
without taxes or penalties. Now, you may say to me, Suze,
(22:11):
how do they know that that $10,000 is part of
my contributions and none of it is part of earnings.
When you take money out of a contributory Roth first, it,
there's a rule called first in first out. So first
(22:32):
your contributions come out.
Then if you do have any conversions in there, your
conversions come out
and next comes your earnings. So the IRS keeps track
of all of that for you. Hopefully, your brokerage firm
does as well. So you don't have to worry about it.
(22:54):
You just need to know the rules. All right. Next question,
you are 60 and you have contributed 21,000 over the
past three years. Why 21? Because the maximum
that you can contribute per year when you are 50
or older is $7000 a year. So this person contributed
(23:17):
the max and they contributed 21,000 over the past three
years into their Roth.
And now that 21,000 is worth 25,000.
So $21,000 of contributions, $4000 of earnings.
(23:41):
And this person wants to withdraw all of it to
buy a car.
Well, they have to pay a penalty on any of
that money.
Are you thinking about it? Now, notice I said, well,
they have to pay a penalty. I did not ask
(24:02):
you if they have to pay taxes and a penalty.
I asked you if they have to pay a penalty
on any of that money. They are withdrawing all $25,000
at once and they are 60
A. Yes. B no. Think about it, everybody.
(24:23):
The answer is no. Why is the answer no?
Because did I not say to you penalties never ever
apply on any of the money
if you are 59 and a half years of age or
older when you withdraw money from your Roth IRA.
(24:48):
So in this case, this person withdrew $4000 of earnings,
but they're over the age of 59 and a half. So
penalties
never apply to you. Tax penalties if you are 59 and
a half years of age or older. However,
(25:10):
what happens in regards to income tax?
Will this person have to pay income tax on their earnings?
A yes or B no.
What are you to look for in this question? This
Roth IRA has only been opened for three years.
(25:34):
They have $4000 of earnings. They are now withdrawing the earnings.
Are they going to have to pay taxes on those earnings?
The answer is yes. Why? Because this Roth IRA was
not opened for five tax years at this point in time.
(25:58):
That is why you have to understand the difference between
penalties and taxes. Are you starting to understand that? Now,
I'm gonna get a little bit more complicated.
You make a contribution to your Roth IRA on April
(26:19):
15th of 2022.
Remember you have until April 15th or whatever the tax
day is for that year to make a contribution to
last year's Roth IRA. So you are making a contribution
on April 15th of 2022 for year 2021 Roth IRA.
(26:47):
In what year will the five year holding period be up?
Remember what I said to you about tax years versus
calendar years.
So you are making a contribution in 2022. But for
(27:08):
the 2021 Roth IRA
is your five year tax year up in A) 2025
B) 2026 or C) 2027?
(27:28):
Think about it.
The answer is a 2025. Why? Because even though it
was made April 15th of 2022. It was made for
a Roth in 2021.
(27:50):
And what did I tell you? It starts the tax year,
January 1st of 2021. So January 1st 2021 is one year,
2022 is two years. 2023 is three years. 2024 is
four years. 2025 is five years. Now, what's interesting about
(28:17):
that
is because the five year holding period is based on
tax years and not calendar years.
Even though you made the contribution. April 15th of 2022
the five year period is up in January 1st 2025.
(28:40):
That's three years and eight months of a holding period.
That's less than five calendar years, big time, one year
and four months less.
So tax years make a big difference. So you need
to understand that.
(29:02):
Let's ask again in a little different way. So I
know you really get it. You are 62 years of
age and you have three different contributory Roth IRAs. One
you open and funded five tax years ago, 13 tax
years ago and 12 tax years ago. And all three
(29:28):
have done exceptionally well and made money
and you want to withdraw everything in all three Roths
to pay off the mortgage on your home.
How many of these Roth IRAs can you withdraw all
(29:48):
your contributions plus earnings without taxes or penalties?
A) one B) two or C) all three?
Now, remember what I said about Roth IRAs being aggregated
(30:08):
even though this person or you have three, Roth IRAs,
o ne of them was opened five tax years ago.
So what does that do to the other two that
were not opened five tax years ago?
(30:29):
The answer is C all three. And why is that?
Because number one, you are 62 years of age when
you are withdrawing everything from this. So remember I told
you penalties never apply once you are 59 and a half
(30:51):
years of age or older, that 10% federal tax penalty.
Why are you not paying income tax on your earnings?
Because all three Roth IRAs even though they were opened
at different times because you opened up 15 tax years
(31:11):
ago or more,
all three are deemed to be opened up five years ago.
So that's why it's important again that you open up
a Roth IRA as soon as you can to start
the five year tax clock going
(31:33):
Next, you are 52 years of age and have three
different contributory. Roth IRAs one. So you have three different
ones now. One, you opened and funded five years ago,
13 years ago
(31:54):
and 12 years ago, all three have done exceptionally well again,
made money and you want to withdraw everything in all
three Roths. How many of these Roth IRAs can you
withdraw all your contributions plus earnings without
(32:18):
penalties or taxes?
A) all of these or B) none of these?
Remember what I told you about penalties.
The answer is B you cannot withdraw all of these
(32:39):
without taxes and penalties,
especially because you are not 59 and a half years of age.
So therefore, your earnings not only will get a 10% penalty,
but they will also be taxed as ordinary income as well.
If you just wanted to take out your contributions, you
(33:01):
can do that at any time without penalties or taxes,
regardless of how long the accounts have been open.
Now, I want to go on. So I think you're
now understanding how contributory rots work and how the penalties
and taxes work.
(33:23):
Let's go to converted Roth IRAs because those are very
different
when you convert money from a traditional IRA to a
Roth IRA.
Every time you do so
you start a new holding period. So unlike a contributory
(33:48):
Roth that once you establish it, that is the starting
date from all the Roths you contribute to or you
start with after tax money from that point on
with a converted Roth. Every time you convert from a
traditional retirement account
(34:10):
to a Roth retirement account. So you're going from a
traditional IRA to a Roth IRA, you start a new
time clock, it has nothing to do with the Roths
that you already have. And by the way, this includes
(34:31):
a backdoor Roth IRA as well. That is a big deal.
So if you convert from a traditional IRA to a
Roth this year,
you start a new time clock this year. if you
do another traditional IRA to a Roth next year, the
(34:55):
time clock starts all over again. It's brand new for
that year. Also, you have to know that conversions have
to be made by December 31st of the year, you
are converting.
So if you convert December 31st 2021
(35:19):
the clock then starts January 1st 2021.
So that's important for you to know as well. Here's
what's fabulous, however, when you convert a traditional IRA to
a Roth IRA, you obviously will pay taxes on any
(35:42):
money that you convert
that year.
So you will convert money from a traditional whatever amount
you want to a Roth, you will owe taxes on
that money. Typically, the taxes are not due until April
15th of the year after you converted.
(36:04):
So now that money has to stay in there for
five tax years for you to have met the five
year rule. What does that allow you to do? It
allows you now to take out the original amount of
money that you converted
without any taxes or penalties, regardless of your age.
(36:31):
That's important. Let's say that you're in your thirties and
you really want to be able to access that money.
Let's just say you do, right or wrong, to start
a new business.
So, here you are, you have $10,000 in a traditional
IRA and you're really not in that high of a
(36:54):
tax bracket. You're not really making any money.
If you convert that $10,000 to a Roth IRA
five tax years later, you can withdraw, even though you're
not 59 and a half years of age, you can withdraw
the amount that you converted and paid taxes on without
(37:17):
any taxes or penalties at that point in time. Why
is that? Because you pay taxes on it
So you can get that money in five tax years.
Just that simple. That's how a converted Roth works. However,
(37:39):
the earnings still have to stay in there
until you are 59 and a half years of age to
avoid the penalty
and income tax on that money.
However, listen to me closely. Now again,
(38:01):
you converted
and you have this money in that you have just
paid taxes on
and now it's three years later, maybe four years later,
whatever it is, you have not had the money in
there for five tax years and you decide that you
want to withdraw some of the money that you originally converted.
(38:26):
If you do that, you are going to pay a 10%
penalty on that money.
Why are you not gonna pay taxes on it? Because
you already have, but you will pay a 10% penalty. Now,
for those of you who did a backdoor Roth IRA,
(38:49):
I'm sure many of you are confused right now because
you're like, wait a minute, I funded my traditional IRA
with after tax money, which is why it's called a
nondeductible IRA. And then I converted it.
So, Suze
does that money still have to stay in there for
(39:10):
at least five years before I can touch it?
And the answer to that is yes, it does.
So that money has to meet the five year rule
because if you take it out before those five years,
you will pay a 10% federal tax penalty unless you
(39:34):
are 59 and a half years of age or older.
So again, that is how conversions work, whether you are
converting from a traditional IRA that you never pay taxes on,
and now you're converting it to a Roth or you
(39:54):
have a back door Roth IRA where you put money
into a traditional IRA, it was nondeductible. And now you
are converting it to a Roth IRA.
So, do you understand that? Well, let's see.
You are 25 years of age and you have a
(40:16):
traditional IRA that you really want to convert to a Roth.
As you know, if you convert, you're gonna have to
pay taxes on the amount you convert. So your quiz is,
how long does the money you converted? Have to sit
in that converted Roth IRA until you can withdraw the
(40:40):
amount you originally converted without tax and penalty.
You're only 25 years of age. Think about it, everybody
Answer
B)
(41:02):
you can't do this.
Which one?
The answer is A
and the reason is, like I said, regardless of your age,
when you convert, as long as it has sat there
for five tax years, you can withdraw your original converted
(41:25):
amount without taxes or penalties because you already paid taxes
on it.
Next. You are now 60.
You don't have a Roth IRA. You haven't opened one
up yet
and you just converted your traditional IRA to a Roth IRA.
(41:47):
And now let's say you converted $60,000 and you just
decide you want to do that for some reason. You know,
I probably would never tell you to do that. But anyway,
now two years later that $60,000 has grown to $70,000
(42:08):
and you want to take out all $70,000
will you have to take a penalty? A 10% penalty
on the money? The $70,000 that you just withdrew.
(42:29):
A) yes. B) no.
Remember what I told you about penalties.
The answer is B) no, you do not have to
pay a penalty because why you are 59 and a half
years of age or older.
(42:51):
All right. Will, you have to pay income tax on
the earnings?
A) yes. B) no.
But you have $10,000 of earnings on a Roth converted account,
(43:15):
right? That you opened two years ago. Think about it.
Will, you have to pay income tax.
A) yes. B) no? The answer is yes, because the
account has not been open for five tax years. So
(43:36):
the earnings will be taxed as ordinary income.
So you always have to remember when you convert
from a traditional to a Roth, a new time clock starts.
Do you understand?
So it's really important that you get that converted Roths
(44:00):
start a new time clock no matter what contributory Roth
IRAs are aggregated all together.
Now, let's touch on employer sponsored plans. Roth 401ks, Roth 403bs, TSPS.
(44:22):
An employer Roth plan also has to meet the five
year rule.
So it's important when you have, let's say a Roth
401k
and you have worked for an employer for eight years.
And now you are leaving that employer to go to
(44:43):
another employer.
If you start a Roth 401k with your new employer,
and you roll your old 401k over to your new
Roth 401k with your new employer, your time years comes
(45:04):
with it.
So your new Roth 401k will be deemed to be
eight years old. So you have already then met the
five year rule
if you have a Roth 401k and you are now
rolling that over to a Roth IRA that has been
(45:27):
opened
for at least five tax years.
When you roll a 401k, Roth,
you lose your time period from the 401k. But since
you had a Roth opened already,
now your Roth 401k that you roll over already has
(45:51):
been deemed to meet the five year time clock. If
you do not have a Roth IRA that you already opened,
when you roll over a Roth 401k to a Roth IRA,
that's brand new. The five year clock begins, then that's
(46:13):
why it's important, especially if you have an employer Roth
retirement account,
that you start a Roth IRA, whether it's for a
dollar $100 it doesn't matter. So you have the five
year clock started so that if you ever want to
(46:35):
do a Roth IRA rollover from a Roth 401k, a
403b or a TSP, into a Roth IRA.
Your clock, your five year time clock has already been met.
So
you have a Roth 401k with an old employer that
(47:00):
you opened up five years ago and now you started
a new job. If you roll over your old 401k
to your new employer's Roth 401k does the time clock
on the five year rule start all over again?
(47:22):
Answer
A) yes. B) no,
The answer is B) no, because your Roth 401k with
your old employer, the time clock goes with it when
you transfer to a Roth 401k with a new employer.
(47:46):
All right. Next question. If I roll my Roth 401k
that I've had for more than five years over to
a Roth IRA that I will open up at that
time
has the five year rule been met? Think about what
I just told you
(48:07):
A) is yes, B) is no
Answer is no because Roth 401ks,
the time clock does not apply to Roth IRAs. S
o if you already don't have a Roth IRA that
met the five year rule or is meeting it, the
(48:30):
time clock for you starts all over again. That is
why you need to open up a Roth today.
Now, I just have to say this before I wrap up,
you have converted Roths. You can take a 401k Roth
and put it in to a Roth IRA. You don't
(48:51):
have to put all these different accounts into separate Roth
IRAs You don't need a converted Roth. You don't need
a contributory Roth. All you need is one Roth IRA
that you can contribute to.
You can convert two and you can roll over your
(49:13):
401k Roth two. So you only need to open up
one Roth IRA and the sooner you do it, the better.
I just briefly want to talk about inherited Roth IRAs.
Now when you have a Roth retirement account and the
(49:33):
owner dies, obviously, there is no withdrawal penalties for the
beneficiaries when they take distributions from it on any level.
But I said penalties,
because remember, earnings and contributions are always penalty free when
(49:55):
you die and your beneficiaries withdraw the money
even if they have not been in there for five years.
However,
the question is, will the earnings be tax free?
The earnings for the earnings to be tax free
(50:18):
that Roth has got to have been open for five
tax years before death occurred. So, don't go rushing to
take out everything at once until you know, if the
account that you just inherited the Roth account that you inherited,
(50:38):
how long has it been open for?
So if it has been open for five tax years,
you can take any amount you want out
without taxes or penalties. If it has not been open
for at least five tax years,
then what the earnings if you take them out will
(51:01):
be taxed to you as ordinary income. Again, no penalties
will ever apply to money that you withdraw. So what
you might want to do is if that is the case,
know how much is contributions and only withdraw contributions,
(51:23):
then when the account has met the five year rule,
then you take out your earnings.
What you have to know however is when it comes
to an inherited Roth IRA,
the rules are very, very different if you are a spouse,
a sole beneficiary of that Roth IRA versus a non
(51:47):
spouse like kids and things like that. So it's really
important that you consult a tax advisor
when you inherit a Roth IRA to figure out what
is the best way to take money. How much can
you take all of those things? So you stay out
really of a situation that can get you in trouble.
(52:12):
All right, everybody. We are almost at an hour. But
I hope that you found this Suze School really, really beneficial. Again,
it's a podcast, you can listen to it over and
over again and
I think it will help you big time in the future. Remember,
(52:34):
all I want for you is to be safe, strong
and secure.
Music (52:44):
Music Out.
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