All Roth withdrawals follow the “ordering rules” outlined in Pub 590 B, p 33. Conversions are distributed after all regular contributions, and conversions are distributed FIFO, so the 10% recapture tax only applies to conversions done in the past 5 years, and only to the taxable portion of each year’s conversions. If you paid taxes on the full amount of a conversion, then the 10% recapture tax will apply to the full amount of that conversion if withdrawn within 5 years. If you expect to have to withdraw conversion money within 5 years (unless you reach 59.5 first)  then there is little value in converting because you will owe the same tax and penalty that you would owe if you withdrew from the TIRA directly, except the tax would probably be due a little sooner and the penalty a little later. This 5 year holding period was designed to prevent a taxpayer from avoiding the 10% penalty by converting and then withdrawing the conversion from the Roth. Further, real estate holdings in an IRA are not liquid although you also need to hold enough cash in the IRA to pay prop taxes, insurance, repair bills, and loan payments since you cannot pay these expenses from your non IRA funds. When your IRA is billed for these expenses, it is not reported as a distribution, and or course rents paid to the IRA are not considered contributions. Your self directed IRA custodian should be able to assist you in properly dealing with real estate in your IRA, since any prohibited transaction will cause your IRA to be deemed distributed. For example, if you moved into one of these homes, that constitutes a prohibited transaction.

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