Have I Found a Tax Loop Hole?

[Guest IraSue]

Facts:

Roth IRA holder is over age 59-1/2

Roth IRA opened with contribution on 5/15/1999

Took total distribution of entire Roth IRA balance on 6/22/06

Rolled over total amount of 6/22/06 distribution to new Roth IRA on 7/30/06

Took total distribution of entire Roth IRA balance on 1/25/07

Is the 1/25/07 Roth IRA distribution qualified?

Pub 590 and other guidance states the five-year clock starts the year for which a Roth IRA contribution is made. It does not say it starts the year the Roth IRA contribution is made, so it appears to be a loophole in which a person can open a Roth IRA, however small, take a distribution after five years, even closing the Roth IRA, and this preserves that taxpayer's qualified status for all subsequent Roth IRA distributions.

What am I missing? Any help is appreciated.

Thank you.

[txdd]

I think you are correct unless there was a later IRA conversion involved. A conversion starts a new 5 year clock with respect to the conversion amount.

I wouldn't call it a loophole though. The main advantage of a Roth IRA is long term accumulation of tax free earnings. Taking it all out after only 5 or so years really shortchanges the investor.

[Guest IraSue]

Thank you. I used the term "loop hole" to get some attention. I had posted the same question earlier but didn't get any replies. I thought I might get some opinions if I used that phrase.

I agree with you. The tax free advantage has to last more than five years or you're not really gaining much. I stumbled upon this situation and something about it didn't seem right. In thinking about it for a couple of days now, I don't think it's as big of a deal as I first thought. I will report this person's distribution as qualified.

Thank you so much for taking time to answer me. I really appreciate it!