When can all Roth money be withdrawn tax-free?
When I turned 59 1/2, and each year thereafter, I converted some traditional IRA money into one of my ROTH IRA accounts. Does the five-year holding period (required to avoid a penalty on the early distribution of Roth earnings) end for ALL Roth earnings five years after after my first conversion … or does the five year required holding period apply separately to each year’s new conversion? Thank you.
Permalink Submitted by Alan Spross on Thu, 2012-05-03 19:43
Once you reached 59.5, there was no longer any holding period for your Roth conversions. The penalty is just an early distribution penalty and all such penalties cease at 59.5. So if you converted at 57.5, you actually had a 2 year holding period for that conversion. All conversions done at 59.5 or later can be distributed the next day without any tax or penalty as there is NO holding period.
The earnings are subject to different rules, since for earnings the issue is income tax. Earnings on conversions are no different than earnings on regular contributions and your Roth IRA becomes “qualified” upon reaching 59.5 AND meeting a 5 year holding period from the first year you contributed to a Roth. If you first Roth contribution of any type was prior to 2008, your Roth is fully qualified and you could withdraw the entire balance tax and penalty free.
Now let’s assume your first Roth contribution was a conversion you did at age 59.5. Your Roth will not be qualified until the 5th calendar year after that, but until that year any earnings you have would be distributed last. Your conversions could come out tax and penalty free during this period and your Roth would not have much in earnings anyway. Once you met the 5 year holding period your Roth would be qualified and earnings would also be tax free.
So now you can forget about any penalty and amounts converted each year. As for earnings becoming tax free, that depends on when your first Roth contribution was made.