"What about my other questions from my previous email?"
This forum format does not lend itself to consolidated answers, unfortunately. I have a regular life (more or less) and was not online as you posted your questions.
@mjc4maureen wrote:
Great answers. I never know there are many 5 years clocks running. Now I know. Thanks.
And please correct me if I don't understand you right. My Roth account was opened since 2005. As I retired in 2015, after that, every year I did Roth conversion. Say, I died in 2022 and the last Roth conversion I did was in 2022. My beneficiaries must pay income tax for withdrawing the earning of the Roth Conversion portion which occurs between 2018 and 2022 and pay no 10% penalty.
No, you misunderstood. Each conversion has a 5 year clock, and you have a personal lifetime 5 year clock. Based on this new (to me) information, you have already fulfilled your personal 5 year clock (in 2010).
Yes, Fidelity does keep track of the conversions, but the earnings from each conversion are not kept separate. You have three types of funds in your account, contributions, conversions, and earnings. All earnings are counted together.
Because each conversion has its own 5 year clock, an account holder will pay the 10% penalty for early withdrawal if they withdraw that particular conversion money before its own 5 year clock is up, unless the person is exempt from the 10% penalty. (Income tax is never owed when a conversion is withdrawn because the tax was paid at the time of the conversion.) You are exempt from the 10% early withdrawal penalty if you are over age 59-1/2, and your beneficiaries are exempt from the 10% penalty because all beneficiaries are exempt from the penalty.
===>>>Bottom line is, because you opened your Roth in 2005, all withdrawals by your beneficiaries will be tax free no matter when you pass away or how long it was since the last conversion. (It would have helped to know the 2005 date sooner.)
(The separate 5 year clock for each conversion only penalizes people younger than age 59-1/2 who misuse the Roth IRA by converting money and then withdrawing it. Without that rule, you could dodge the 10% penalty on early withdrawal of a traditional IRA by converting to a Roth and then withdrawing from the Roth. There is no 10% penalty for beneficiaries.)
