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Don’t go ‘out of order’ with Roth

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in Small Business Tax

Q. Can you transfer funds from a Roth to a grandchild within the first five years? H.K., Oakland, N.J.

A. Yes, there is no restriction on such a transfer. As far as taxes go, distributions of Roth account earnings made within five years of creating a Roth are generally subject to federal income tax at ordinary income rates, even if the distributions are made after age 59½. However, under the special IRS “ordering rules,” Roth payouts are taxes as first coming from contributions, then from conversions and finally from earnings. Therefore, there’s a good chance that the transfer will be mostly or even completely tax-free.

Tip: Unless the grandchild needs the money, you could name him or her as a Roth IRA beneficiary to benefit from continued tax deferral.

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