5-Year Rule on Roth Conversions
How does the 5-year rule on Roth conversions work? Let’s say a client completes 1 roth conversion per year for 10 years. Does each of those conversions have its own 5-year “lock-up” period? Or only the first year’s conversion?
Permalink Submitted by Alan - IRA critic on Thu, 2025-01-16 17:24
There are two 5 year holding periods, one for determining when the Roth is qualified (along with being 59.5), and the other for each conversion to avoid the 10% penalty if withdrawn in 5 years.
If the first Roth contribution is a conversion, that year begins the 5 year holding period for determining when the Roth is qualified.
That conversion must also be held 5 years to avoid the 10% penalty, and conversions done in later years also each have their own 5 year holding period, all of which end at 59.5 if that comes sooner than the 5 years. In your question then, each year’s conversion must be held 5 years to avoid the penalty, but conversions are only distributed after the balance of any regular Roth contributions.