If an IRA is left to pass through a will, then there is no designated beneficiary for the account and it cannot be used in the stretch IRA strategy. Slott pointed out that it’s roughly the same state of affairs caused by naming an estate on the account’s beneficiary forms.
1.0 Roth 5-Year Rule Confusion
There are actually two different five-year rules governing Roth IRAs: one for penalty-free distributions, the other for tax-free distributions.
The first rule for penalty-free distributions only applies to Roth IRA conversions and the 10 percent early withdrawal penalty. The penalty applies if the current account owner is under 59 and one-half years old and is trying to withdraw funds from a Roth IRA that were converted from a traditional IRA within the last five years. This rule was instituted to prevent account holders from using Roth conversions to avoid the 10 percent early withdrawal penalty from their traditional IRAs.
“You have to wait it out,” said Brenner. “If you have a client that does multiple conversions, the five-year rule starts anew for each conversion. You could have multiple five-year waiting periods if they’ve done multiple conversions, but if the client is 59 and one half, you don’t have to worry about this.”
The second rule, for income-tax-free distributions from a Roth account, covers a five-year period from the moment a client’s first Roth IRA is established. It never restarts for additional Roth IRA contributions or conversions from a traditional IRA to a Roth account. After holding a Roth account for five years, even with a balance of just one dollar, the account owner can take tax-free distributions from the account.