Freeman's Blog


January 19th, 2017 by

Roth IRA Five Year Rule

The Roth IRA Five Year Rule has two separate five-year holding requirements that may affect your taxes. The first rule determines whether a withdrawal of your increases will be tax-free. The second rule determines whether a withdrawal of converted principal will be penalty-free.


You can withdraw contributions to a Roth IRA at any time without tax liabilities or penalties. This is because contributions are made with after-tax dollars. However, with the Roth IRA Five Year Rule, to qualify for a tax-free and penalty-free withdrawal of earned interest, the distribution must take place after age 59½ (with exceptions for death, disability, and up to $10,000 for a first-time home purchase).

The five-year holding period for monies earned begins on January 1 of the tax year for which you made your first contribution (regular or rollover). For example, if your first Roth IRA contribution was designated for tax year 2016, your five-year holding period will be January 1, 2016 to December 31, 2020. You have only one five-year holding period for determining whether distributions from any Roth IRA you own are qualified tax-free distributions. Inherited Roth IRAs are subject to different rules.

Converted Principal

When you convert assets in a traditional IRA to a Roth IRA, the amount you convert (except for any after-tax contributions you’ve made) is subject to income tax in the year of the conversion. If you withdraw any portion of the converted amount within five years, you may have to pay the 10% early-distribution penalty on that money, unless you’ve reached age 59½ or qualify for an exemption. This five-year holding period starts on January1 of the year you convert assets to a Roth IRA. If you have more than one conversion, each will have its own separate five-year holding period for this purpose. The Roth IRA Five Year Rule also applies to assets rolled over from a qualified (tax deferred) retirement plan such as a traditional 401(k) to a Roth IRA.

These guidelines may be helpful, but Roth distribution rules are complex. Be sure to consult your tax professional before taking any specific action that might have tax consequences.

Freeman Owen, Jr -Retirement Specialist

A retirement specialist can help how to manage your retirement money.  Consult with a professional and be certain the timing is right for you.  Let’s talk.

Meet me for a FREE retirement strategy consultation at my office at 1-833-313-7233. 


January 11th, 2017 by

A popular corporate strategy known as “de-risking” involves buying out employee pensions. By shrinking the size of a pension plan, the company can reduce the associated costs and limit the impact of future retirement obligations on current financial performance.

About half of workers with pensions can now choose to take their money in a lump sum at the time they retire.1 Moreover, 47% of corporate pension plans surveyed by benefits consultant Aon Hewitt planned on making lump-sum offers to vested former employees in 2015 or had done so in recent years.2

What’s good for a corporation’s bottom line may or may not be in the best interests of plan participants and their families. For most workers, there are clear mathematical and psychological advantages to keeping the pension.3 Even so, the lump sum could provide financial flexibility that could benefit some individuals.

Pension Plan Offer

Crunch the Numbers

A lump-sum payout transfers the management from the pension plan sponsor to the participant. Individuals who opt for a lump sum must then manage that money and determine for themselves how much change they want to make with their retirement plan.

The lump-sum amount is the discounted present value of an employee’s future pension, set by an IRS formula based on current bond interest rates and average life expectancies. Often the amount is not enough to replace the pension income given up, unless you can tolerate exposure to volatility in market changes and you’re able to achieve decent results over time.4

A pension’s lifetime income may be more valuable for women than for men because women tend to live longer, but gender is not considered when calculating lump sums. In their buyout offers, companies may not include the value of subsidies for early retirement or spousal benefits, the latter of which could be a major disadvantage for married couples.5

Window of Opportunity

A lump-sum payment might make sense for a person in poor health or someone with little cash in the bank for emergencies. Someone who is able to live comfortably on other sources of retirement income might also benefit from a buyout offer, especially if the money is rolled into a traditional IRA. Pension payments end when the plan participant (or a surviving spouse) dies, but the dollars held in an IRA could be preserved and passed down to heirs.

Pension payments (monthly or lump sum) are taxed in the year in which they are received, and cashing out a pension before age 59½ may trigger a 10% federal tax penalty. Rolling the lump sum into an IRA enables a worker to postpone taxes until withdrawals are taken later in retirement. IRA distributions are also taxed as ordinary income, and withdrawals taken prior to age 59½ may be subject to the 10% federal tax penalty, with certain exceptions. Annual minimum distributions are required starting in the year the account owner reaches age 70½.

It’s also important to consider the health of the company’s pension. The “funded status” is a measure of pension plan dollars and cents must be reported annually. Most pensions are backstopped by the Pension Benefit Guaranty Corporation, but retirees could lose a portion of the “promised” benefits if their plan fails.6

The prospect of a large check might be tempting, but cashing in a pension could have costly repercussions for your retirement. It’s important to have a long-term perspective and an understanding of the trade-offs when a lump-sum option is on the table.

1–4, 6), July 24, 2015
5) The Wall Street Journal, June 5, 2015

Freeman Owen, Jr -Retirement Specialist

Your retirement plan is within your control. Knowing when to do what is essential to keeping your money safe. I can help you make the right decisions for your retirement plan.  Let’s talk.

Meet me for a FREE retirement strategy consultation at my office at 1-833-313-7233.