If that is true, that is what discouraged me. One never knows when they will be called by their maker and I did not want to burden the beneficiary of the Roth with having to concern themselves with it.

—Katrina

A.: Hi Katrina,

Thanks for reading the columns and asking the question. Referring to “… I have been told that I have to put the extra distributions in a regular IRA if monies are coming from a 401(k) to do this and then they can be transferred to a Roth…”

I do not think that transferring funds to a traditional IRA first is required by the tax code or IRS procedures, but there is often a difference between what the IRS allows and what provisions are included in plan documents. For instance, the IRS allows “in-plan” conversions whereby 401(k) funds may be converted to a Roth 401(k) account inside the plan, but many plans do not permit such conversions. If the plan does not allow a direct conversion to a Roth IRA, then yes, the funds would need to go into a traditional IRA first and then be converted from there.

On “… that the RMD monies that have been added to the Roth have to be in the account for five years to remain untaxable.” That can be true but not always.

Since you are taking RMD, it is clear you are over age 59 ½. Above age 59 ½, when you convert, the converted money is taxed and is available to you or heirs tax-free from that point. In addition, all other contributions you may have made into a Roth IRA and all other conversions you have made into a Roth IRA prior to the conversion of funds from the 401(k) are also accessible tax-free. If you were not yet 59 ½, all of your contributions would be available tax-free but a five-year rule particular to conversions to Roth IRAs would apply.

What you may be hearing about is another five-year rule. This one applies to earnings rather than pre-59 ½ conversions. If it has been more than five tax years since you opened your first Roth IRA account, even if that Roth IRA no longer exists, the rule does not apply and earnings in the account (amount above all contributions and conversions) is tax-free. If you were under 59 ½, both taxes and a 10% penalty apply to distributed earnings unless you qualified for an exception.

When inherited, if you die more than five years after opening your very first Roth IRA, all funds will be available tax-free to your heirs. If you die within five years of opening your very first Roth IRA (not five years from date of your death), the beneficiaries could take any or all contributions and conversions out tax-free immediately. If they then took out earnings, those distributions could be taxed if removed from the account during that five-year window. No 10% penalty would apply regardless of their ages when they take distributions because death of the owner is one of the penalty exceptions. Once it had been five years since you opened your first Roth IRA, everything could be withdrawn tax-free.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line. 

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.