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Learning the rules of the Roth, and non-Roth, IRAs


© St. Petersburg Times, published February 20, 2000

Q. I know the tax-free earnings of a Roth IRA must stay in the account for at least five years and you must be at least 591/2-years-old to withdraw them without penalty. But can't I invest my Roth IRA in a two-year CD as long as when it matures I roll it over (or do a trustee-to-trustee transfer) to another Roth IRA CD?

When I got my first Roth IRA last year, the bank said I needed to do a five-year CD. Now rates are moving up and I have a low interest rate locked in for five years. I would like to invest in another IRA this year, but I don't want to lock up my money for five years. In reading Publication 590, I think it tells me I can roll over a Roth IRA. However, because the bank last year told me it needed to be a five-year CD, I want to be sure.

A. Your bank gave you bad information.

"What kind of bank is this?" asked IRA expert Ed Slott, who publishes a newsletter Ed Slott's IRA Advisor. "The Roth five-year rule has nothing to do with where and for how long you invest your Roth IRA money. That's ridiculous!"

With a Roth, you can withdraw your contributions any time, but you must wait at least five years to take out the interest tax-free. That does not mean you are stuck with one investment for five years. With any kind of IRA -- Roth or regular -- you can do trustee-to-trustee transfers as often as you wish. If you take possession of the money and deposit it in a new account, you are limited to one rollover per year.

If your money stays at the same institution, there is no concern at all. For example, if you had bought a one-year CD, then renewed it for another one-year term at the same bank, that would not be considered a rollover.

Q. My wife and I made non-deductible IRA contributions for several years and filled out Form 8606 to report them. These contributions have since been combined with other IRA and 401(k) rollover money. Can these original contributions be re-established so we don't have to pay more taxes on this money? How can they be reported? Could these contributions be considered in the first year of withdrawing money?

A. For tax purposes, the IRS looks at your IRA as a single account even though you do not have it invested that way. That means it does not matter which account holds your original non-deductible dollars and which account you tap for your withdrawals.

If you are not sure how much you have made in non-deductible IRA contributions, look up the last Form 8606 you filed. It will give you the grand total, which is the tax "basis" for your IRA. Presumably your wife filed separate forms and can consult them to determine her IRA basis.

It would be nice if the IRS would allow you to withdraw your basis first. Instead, it will consider every IRA withdrawal you take to be partly taxable and partly tax-free. When you start making IRA withdrawals, you must file Form 8606 with your return to calculate the tax-free amount, then reduce your basis by that amount.

Q. If my IRAs are in a family of funds, will I minimize taxes by having the amount to be distributed in their money market fund or must a certain percentage be taken from each fund? After beginning my distributions, will I be able to convert some of the traditional IRAs to Roths if my provider allows it?

A. Because the IRS looks at your IRA accounts as a whole, it does not matter which account and which fund you tap for your distributions. Your tax liability is the same whether the money comes from a money market fund or some other investment.

You can convert from a regular to a Roth after beginning distributions. However, the amount you are required to withdraw in a particular year cannot be converted.

Online money map

If you like keeping up with the latest tax law wrinkles affecting IRAs, the Roth IRA site ( is one you will want to visit. It contains news about proposed changes in the tax laws and rulings from the IRS.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to by e-mail.

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