Roth conversion and 5 year rule

Submitted by John Stevens on Wed, 2017-03-15 21:58

In 2013 my 54 year old client client converted her IRA to a Roth and paid the taxes back in 2013 same year she opened the accounts. Traditional to move to Roth IRA. Now she wants to pull money and says because she paid taxes she should be able to get that amount but not the growth portion. I believe if she was over 59 1/2 she could get the whole amount right? But what amount is she able to take of original principle since she is only 58 today and it has been less than 5 years since said conversion.

She converted 40k and the account is now worth 61k. She wants to pull 40k?

Thank you to all the smart people who support this site. Love the Ed Slott group.



Submitted by Alan - IRA critic on Wed, 2017-03-15 22:21

  • Her Roth is qualified at the later of 59.5 and 5 years. So if the 2013 conversion was her first Roth contribution of any kind, the 5 years is not completed until 1/1/2018. On that date, if she is still not quite 59.5, her Roth is not yet qualified. Until it is, all distributions must follow the IRS ordering rules.
  • If she made regular contributions at anytime, these amounts come out first tax and penalty free.
  • Conversions then come out from oldest first. Each conversion has it’s own 5 year holding period with respect to the 10% penalty, but all such periods end at 59.5. She could therefore withdraw the 2013 conversion without penalty before the end of this ONLY if she also turns 59.5 by the time of the distribution. Not sure exactly what date she becomes 59.5.
  • So right now she is obviously not yet 59.5 nor has the 2013 conversion been held 5 years. While the Roth distribution up to 40,000 is tax free, it is subject to the 10% penalty. Amounts withdrawn over 40,000 are subject to both tax and penalty.
  • She avoids the penalty if she can wait until 59.5 to take the distribution. Also, note that she may possibly qualify for a different penalty exception now, for example if she had high unreimbursed medical expenses to pay anytime this year.

Add new comment

Log in or register to post comments