Roth Conversion 5-Year Clock

Submitted by Joseph Carbone on Tue, 2023-04-11 16:04

If you are converting assets from a TIRA to a Roth IRA account after age 59.5, there is a 5-year clock for each conversion to be able to withdraw earnings tax-free; obviously, no 10% penalty to worry about. Each conversion has a 5-year period to start withdrawing tax-free earnings, with regular contribution Roth account 5-year start date having no bearing on the conversion 5-year periods.

I also thought that a Roth IRA regular contribution has nothing to do with the conversion 5-year rule, but I am reading contrary replies on this forum.

Thanks,

Joe



Submitted by Alan - IRA critic on Tue, 2023-04-11 16:22

  • You are getting the two 5 year holding periods confused. Earnings in a Roth IRA are taxable if withdrawn before the Roth is qualified (5 years from the first contribution year, being either a regular or conversion contribution, and age 59.5). Once the Roth IRA is qualified, all distributions are tax and penalty free.
  • There is also a 5 year holding period for the taxable portion of conversions to be withdrawn without penalty. This has nothing to do with earnings being taxable, only the 10% penalty on the amount converted if withdrawn in the first 5 years. All conversion holding periods end at 59.5, therefore conversion holding periods can be ignored after 59.5. That includes conversions done both before and after 59.5
  • Regular Roth contributions can be withdrawn anytime without tax or penalty, and they come out first.
  • The following link provides a chart that should be helpful:
  • User:TedSwippet/KAWill Roth Table – Bogleheads


Submitted by Joseph Carbone on Tue, 2023-04-11 16:46

Based on the Bogleheads chart, if they’re making a conversion over age 59.5 and it’s their first Roth account, which would be less than 5 years since opening their first Roth IRA, they would need to wait 5 years for earnings to be tax-free, correct?



Submitted by Alan - IRA critic on Tue, 2023-04-11 19:06

Yes, that is correct. But they are starting with no earnings, so the balance will be mostly the conversion contribution. As long as they withdraw no more than the conversion amount, the distribution will be tax and penalty free. If they withdraw more than the converted amount, then earnings are being distributed and subject to tax, but no penalty.



Submitted by alan smithee on Mon, 2023-12-11 07:33

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