Penalties owed on withdrawals from a Roth conversion balance that was converted after age 59 1/2??

Submitted by Larry Smith on Tue, 2020-10-27 20:56

Scenario: Client opens Roth IRA account 4/11/2019 at age 72, then does a Roth conversion into this same account November 2020 at age 74. Must they wait until 1/1/2025 (the 5 year rule) to withdraw any portion of their converted money penalty-free? Or, having made their conversion after age 59 1/2, could they withdraw penalty-free when needed with no wait period? Please include an explanation of the specific rule details underlying the answer. Thank you very much.



Submitted by Alan - IRA critic on Tue, 2020-10-27 21:08

  • The latter. There are two 5 year rules, the first determining when the Roth accounts are qualified (along with reaching 59.5), and the second applying to Roth conversions that have not been held 5 years, however this second conversion holding period stops at 59.5 since this holding period is basically an early distribution penalty and those end at 59.5. This is all in the tax code under Sec 408A with respect to Roth IRAs.
  • Therefore, for this client, if the 2019 contribution was his FIRST Roth contribution, his Roth accounts will not be qualified until 2024. However, there is NO conversion 5 year holding requirement since he has passed age 59.5. Therefore, client can withdraw all Roth conversions without tax, penalty or any waiting period. However, any gains on his contributions or conversions will be taxable if withdrawn prior to 2024. SInce gains come out last, client can withdraw all regular and conversion contributions without tax or penalty (Roth IRA ordering rules) before reaching the Roth earnings.

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