Does later Roth conversion affect taxability of old earnings?
Say, I have contributed 100k to a Roth over the many (>5) years, and it earned $300k on top and I turned 59 1/2 in year 1. Now I can take any amount (up to the entire $400k) tax-free & penalty-free.
What if, in year 2, I were to make a taxable conversion of $200k of my Trad IRA to Roth –
1. Would it decrease how much of my Roth I could distribute tax-free & penalty-free in the next 5 years because of the “conversion’s 5 yr” period?
2. Would that mean that my $300k of earnings became subject to penalty just because I made the Trad to Roth conversion?
Thank you,
M
Permalink Submitted by David Mertz on Sun, 2022-02-13 17:37
After age 59½ the conversion 5-year rule no longer applies.
Permalink Submitted by Maria KU on Mon, 2022-02-14 01:12
I understand about it being penalty-free, but:Are you saying that as long as I’m > 59 1/2, and opened my Roth IRA > 5 yrs ago, then if I have conversion done just 2 years ago, I could withdraw the whole thing, including never-taxed earnings on the 2-yrs-ago conversion, tax-free?Is the distribution of earnings on the 2-yr-ago conversion a qualified distribution b/c the acct was open > 5 yrs, even though the underlying conversion (on which these earnings accrued), took place only 2 yrs ago?Thank you for the clarification.
Permalink Submitted by Alan - IRA critic on Mon, 2022-02-14 02:17
That’s correct. Once your Roth IRA is qualified (5 years and age 59.5), the entire balance can be distributed without tax or penalty. But since the 5 year holding period cannot start with an excess contribution, you need to be sure that you made at least one contribution prior to 2018 that is not an excess contribution. You can also make future regular Roth contributions if you have earned income or you can convert. All of these contributions are available to distribute tax and penalty free.
Permalink Submitted by David Mertz on Mon, 2022-02-14 12:29
The only purpose of the conversion 5-year rule is to determine whether or not a distribution of taxably converted funds is subject to a 10% penalty when the distribution is made before age 59½.