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Five-Year Holding Period

Q: My client has had an annual contribution Roth IRA for six years, and is now planning to convert his pre-tax IRA to a Roth IRA. Is the five-year holding period satisfied because of the annual contribution Roth IRA?

A: No. Only Roth IRAs due to conversions share the five-year holding period. Any withdrawals your client makes in the first give years of establishing the account will come from principal first (no tax consequence). The withdrawals from principal will be subject to a 10% penalty tax unless another exception applies (such as age 59½). Any withdrawals of earnings from the conversion account will be taxable until this five-year holding period has elapsed, and the client has attained age 59½.