Roth individual retirement accounts limit who can contribute based on your modified adjusted gross income. Until 2010, Roths also restricted who could convert money into a Roth IRA. But, when the Internal Revenue Service lifted the latter restriction, it essentially allowed anyone to get their annual IRA contribution into a Roth IRA.
No Time Limits
The IRS has no time limit on how long the money must stay in your traditional IRA before you convert the money to a Roth IRA, nor is there any requirement that your Roth IRA be open for a certain amount of time before you roll over money into it. For example, you could open a Roth IRA today and submit a conversion request to move money from your traditional IRA in the same day. Or, you could contribute money to a traditional IRA and then immediately convert those dollars to a Roth IRA.
Making nondeductible contributions to a traditional IRA and then immediately converting to a Roth IRA is a popular tactic for people whose modified adjusted gross income exceeds the limits to contribute directly to a Roth IRA. For example, in 2013 you can't contribute directly to a Roth IRA if you're married and your MAGI exceeds $188,000. But, you could make a nondeductible contribution to a traditional IRA and then convert it immediately to a Roth IRA, so the money ends up in the Roth IRA anyway.
If you're not converting your entire account, you can't pick and choose which parts of your traditional IRA you want to convert. For example, say you have a traditional IRA worth $195,000 that you haven't made any nondeductible contributions to before. If you make a $5,000 nondeductible contribution and then decide you want to convert, 97.5 percent of the conversion will be taxable income because your conversion is proportional to the $195,000 of the account that is taxable and the $5,000 that isn't.
As you get close to retirement, the five-year requirement becomes more significant. To take a qualified withdrawal from a Roth IRA, you must be 59 1/2, permanently disabled or using up to $10,000 for a first home. Plus, five years must pass between January 1 of the year you made your first contribution -- or conversion -- to the account and your withdrawal. For example, say you open your Roth IRA when you're 58. You won't be able to take qualified withdrawals until you reach age 63. You won't owe early withdrawal penalties on earnings once you've reached 59 1/2, but if you take out the money before you reach age 63, you'll pay tax on the earnings.