Roth Conversions
If I have a client who is 63 and wants to start doing conversions for the next 7-9 years from her traditional IRA but might need money out of here, how does the IRS 10% penalty work? Do they have to wait 5 years from the initial conversion date before they can start taking tax-free distributions or 5 years from when the last conversion was done?
Permalink Submitted by Robert Meyer on Thu, 2015-04-23 20:56
My understanding is that the five year rule for conversions only applies to those under age 59.5. However, the five year rule holding period for Roth IRAs still applies. So, if they have had a Roth IRA (or ever had a Roth IRA) for more than 5 years, they could theoretically convert from the TIRA to a Roth IRA and take tax/penalty free distributions immediately from the Roth IRA. I think the logic here is that if you are younger than 59.5 and convert to a Roth, taking distributions from the Roth IRA with no penalty would essentially be circumventing the 10% all together. Hence the five year rule for conversions prior to age 59.5.
Permalink Submitted by Alan - IRA critic on Thu, 2015-04-23 23:57
That is correct, but the conversions could be distributed penalty free right away even if the conversions were the first Roth contributions made. The year of the first Roth contribution only applies to the earnings in the Roth becoming tax free, but until that time the earnings come out last.