DQOTD: Roth Conversion 5-Year Rules???

[Midpack]

For some reason I am finding it confusing. There seem to be quite a few articles online that summarize the 5-year rule for Roth contributions, without noting there's a different rule for conversions (and inherited IRAs)?

I am (well) over 59-1/2. My Roth IRA is entirely conversions from a TIRA, no contributions. My first conversion was Dec 2019. I have made 4 quarterly conversions in 2020 and 2021. I plan to do quarterly conversions thru 2024 and then stop at age 70.

Unlike the 5-year rule for contributions, for Roth conversions I gather each conversion is subject to a new 5 year period. However, I also gather I can aggregate quarterly conversions as all in that year (e.g. 2020) and I don't have to have four 5 year periods from 2020, just one for each year (my read from IRA 590b). [If not, I won't do quarterly anymore] I don't plan to take any distributions before I've satisfied the 5 year rule.

So if I do conversions from 2019 thru 2024 and then stop (at age 70). If numbers help, let's say $50K in 2019 and $100K each year from 2020 thru 2024.

• In Jan 2024, I can take my first qualified $50K distribution (+gains pro-rated? or losses).
• In Jan 2025, remaining 2019 (if I took less than $50K) plus 2020 ($100K).
• In Jan 2026, remaining plus 2021 ($100K).
• In Jan 2027, remaining plus 2022 ($100K).
• In Jan 2028, remaining plus 2023 ($100K).
• In Jan 2029, remaining plus 2024 ($100K). IOW, all remaining has met the Roth conversion 5-year rule every year thereafter, 2030...

Am I reading it right, or am I still confused?

2. Roth conversions
There's also a separate five-year rule that applies only to those who convert other types of retirement accounts into Roth IRAs. Here, the idea of the rule is to prevent people from using Roth conversions to get penalty-free access to their traditional retirement accounts.

This five-year rule also starts the clock on Jan. 1 of the year in which you do the conversion. As a result, those who convert late in the year only have to wait a bit longer than four years before taking withdrawals.

However, this five-year rule is different in that it applies separately to each Roth conversion you do. Each new conversion starts its own five-year clock, and you'll need to account for multiple conversions to make sure you don't take out too much money too soon.

Note that the five-year rule applies equally to Roth conversions for both pre-tax and after-tax funds in a traditional IRA. That means, if you're using the backdoor Roth IRA strategy every year, your "Roth contributions" are really conversions, and you can't withdraw them for five years without penalty.

 

[corn18]

This is my goto table. Has it been 5 years since you opened your first Roth (of any kind)? If so, all distributions are qualified and penalty and tax free.

ORDER OF DISTRIBUTIONS
Regular contributions
Taxable portion of first conversion
Nontaxable portion of first conversion
Each subsequent conversion, in order, with the taxable portion coming out first for each conversion
Earnings (any increase in value occurring inside the Roth IRA)

TAXES AND PENALTIES

UNDER AGE 59.5*
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET*
Contributions: Tax-No; Penalty-No*
Conversions: Tax-No; Penalty-Yes (Taxable Portion)*
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)*
Earnings: Tax-Yes; Penalty-Yes*

UNDER AGE 59.5*
FIVE YEAR CONVERSION HOLDING PERIOD MET*
Contributions: Tax-No; Penalty-No*
Conversions: Tax-No; Penalty-No (Taxable Portion)*
Conversions: Tax-No; Penalty-No (Nontaxable Portion)*
Earnings: Tax-Yes; Penalty-Yes*

OVER AGE 59.5*
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA*
Contributions: Tax-No ;Penalty-No*
Conversions: Tax-No; Penalty-No (Taxable Portion)*
Conversions: Tax-No; Penalty-No (Nontaxable Portion)*
Earnings: Tax-Yes; Penalty-No*

OVER AGE 59.5*
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA*
All Distributions Are Qualified*
No Taxes*
No Penalties*

 

[Midpack]

^^ I thought "first opening Roth IRA" had a different meaning with contributions vs conversions? With contributions the whole Roth IRA is qualified after 5 years. With conversions the whole Roth IRA isn't qualified until 5 years after the last conversion (year)? If I'm wrong (again) that would make it easier.

 

[2017ish]

Midpack,

The fact that you are older than 59.5 is key here. This older article from Kitces is the best explanation I've seen on the two 5 year clocks for Roth withdrawls. https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/ The last half gets into the issue you raise.

 

[corn18]

^^ I thought "first opening Roth IRA" had a different meaning with contributions vs conversions? With contributions the whole Roth IRA is qualified after 5 years. With conversions the whole Roth IRA isn't qualified until 5 years after the last conversion (year)? If I'm wrong (again) that would make it easier.

It is easier. Once you hit 59 1/2, conversions have no separate 5 year rule. If you hit 59 1/2 and your first Roth (any Roth) was opened more than 5 years ago, you can do anything you want. You can convert $100k (paying taxes on the conversion), have it earn $50k the next week and pull it all out tax free.

 

[finnski1]

It is easier. Once you hit 59 1/2, conversions have no separate 5 year rule. If you hit 59 1/2 and your first Roth (any Roth) was opened more than 5 years ago, you can do anything you want. You can convert $100k (paying taxes on the conversion), have it earn $50k the next week and pull it all out tax free.

That's how I understand it and have used it.

 

[Dash man]

Here’s a chart from irs.gov that may help.

 

[Midpack]

So there’s a different 5 year rule between contributions and conversions until age 59-1/2, but the conversion 5 year rule is moot after age 59-1/2 and only the contribution 5-year rule applies. That’s what I missed. So we’re golden starting in 2024, that’s a relief.

Thanks all!

In addition, it's notable that because distributions are deemed to come from principal first and earnings second, even withdrawals from a Roth contribution within the 5-year time window will not necessarily trigger any income taxation, unless the total distributions exceed all prior contributions. However, it's also important to bear in mind that even if the withdrawal is principal and not subject to ordinary income taxation, if it is a conversion amount within the 5-year time window, the withdrawal may be subject to early withdrawal penalties even if it is not otherwise taxable. On the other hand, as noted earlier, if the individual is otherwise exempt from the early withdrawal penalty (e.g., by being over age 59 1/2), the withdrawal of conversion principal is penalty-free (over 59 1/2) and tax-free (as it was already taxed at conversion). Thus, for those who are already over age 59 1/2 (or totally disabled), the Roth conversion 5-year rule is essentially a moot point, and only the 5-year rule for contributions remains relevant.

 

[JoeWras]

Yeah, don't fret. This is a common misunderstanding. I literally have to read every thread about it here and on bogleheads to remind me that once you are over 59.5 AND you have that first 5 yr. timer complete, you are golden.

I think the confusion comes about because of all the youngsters who can't keep their hand out of the cookie jar and try to tap into the Roth early. Then all the conversion by conversion timers come into play. There's a lot of talk of tapping into Roths and they make a lot of noise which bleeds into those of us past 59.5.

 

[jollystomper]

This is a good discussion for me. I also started my first Roth IRA in 2019 and the bulk of its contents are conversions from my tIRA. I also understood being over 59.5 that once January 2024 came around any withdrawals were penalty free; this discussion is a good reinforcement of that.

 

[corn18]

This is a good discussion for me. I also started my first Roth IRA in 2019 and the bulk of its contents are conversions from my tIRA. I also understood being over 59.5 that once January 2024 came around any withdrawals were penalty free; this discussion is a good reinforcement of that.

It is very important to read the rules exactly. In your situation:

OVER AGE 59.5*
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA*
Contributions: Tax-No ;Penalty-No*
Conversions: Tax-No; Penalty-No (Taxable Portion)*
Conversions: Tax-No; Penalty-No (Nontaxable Portion)*
Earnings: Tax-Yes; Penalty-No*

So you can withdraw all conversions penalty free now. Only the earnings are taxed. And earnings after conversion come out last. So you can withdraw all of it except earnings after conversion with no tax or penalty at any time after 59.5 even if your oldest Roth of any kind is less than 5 years old.

 

[jollystomper]

It is very important to read the rules exactly. In your situation:

OVER AGE 59.5*
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA*
Contributions: Tax-No ;Penalty-No*
Conversions: Tax-No; Penalty-No (Taxable Portion)*
Conversions: Tax-No; Penalty-No (Nontaxable Portion)*
Earnings: Tax-Yes; Penalty-No*

So you can withdraw all conversions penalty free now. Only the earnings are taxed. And earnings after conversion come out last. So you can withdraw all of it except earnings after conversion with no tax or penalty at any time after 59.5 even if your oldest Roth of any kind is less than 5 years old.

Ah, I see. Thanks!

 

[Midpack]

Yeah, don't fret. This is a common misunderstanding. I literally have to read every thread about it here and on bogleheads to remind me that once you are over 59.5 AND you have that first 5 yr. timer complete, you are golden.

I think the confusion comes about because of all the youngsters who can't keep their hand out of the cookie jar and try to tap into the Roth early. Then all the conversion by conversion timers come into play. There's a lot of talk of tapping into Roths and they make a lot of noise which bleeds into those of us past 59.5.

It all makes more sense to me know, thanks.

Most of the articles I see fail to address the whole picture and leave out their base assumptions, and make it sound simpler than it is.

 

[JoeWras]

What about rolling a Roth 401k into an existing IRA?

I think Midpack got the DQOTD answered.

So I have DQOTD #2, which is heavily related.

So, I have a 2018 Roth IRA. That's good, my clock is ticking. In 2021 I did a 401k conversion to Roth*. So now I have a Roth element in my 401k with a 2021 date.

Can I roll this into the Roth IRA without causing pain and heartburn with timers? For this unique situation, I'm again confused. I read all kinds of conflicting info.

* - This was a "Dumb Joe" moment. I accidentally contributed to my 401k with after tax dollars in my last years of work. I didn't notice it until last year. I decided to clean them up (along with their earnings) and put them in a Roth. It ended up being a lame kilo-backdoor conversion.

 

[corn18]

I think Midpack got the DQOTD answered.

So I have DQOTD #2, which is heavily related.

So, I have a 2018 Roth IRA. That's good, my clock is ticking. In 2021 I did a 401k conversion to Roth*. So now I have a Roth element in my 401k with a 2021 date.

Can I roll this into the Roth IRA without causing pain and heartburn with timers? For this unique situation, I'm again confused. I read all kinds of conflicting info.

* - This was a "Dumb Joe" moment. I accidentally contributed to my 401k with after tax dollars in my last years of work. I didn't notice it until last year. I decided to clean them up (along with their earnings) and put them in a Roth. It ended up being a lame kilo-backdoor conversion.

You made after tax contributions to your 401k or you made after tax contributions to your Roth 401k? This is very different.

 

[JoeWras]

You made after tax contributions to your 401k or you made after tax contributions to your Roth 401k? This is very different.

I didn't have a Roth 401k. I made accidental after tax conversions to my regular 401k. The company/trustee changed the rules and I wasn't paying attention. Previously, they would cut off 401k contributions if over the 401k limit. After some changes, it turns out anything over the limit went into the 401k in an "after tax" sub-account. I thought I had to take action to make that occur, but it turns out it was the default behavior.

Fast forward a few years, and I found the tab for sub-accounts and noticed this. Of course it had gains too. My MC has generous rules on the 401k that allow a lot things to be done post separation. So, I did an in-plan conversion of that subaccount (after-tax plus earnings) to a new Roth 401k sub-account.

I can let this ride. I would, however, like to convert that Roth 401k into an existing 2018 Roth IRA (for investment flexibility and consolidation), but I don't want to screw up any timers.

 

[corn18]

I didn't have a Roth 401k. I made accidental after tax conversions to my regular 401k. The company/trustee changed the rules and I wasn't paying attention. Previously, they would cut off 401k contributions if over the 401k limit. After some changes, it turns out anything over the limit went into the 401k in an "after tax" sub-account. I thought I had to take action to make that occur, but it turns out it was the default behavior.

Fast forward a few years, and I found the tab for sub-accounts and noticed this. Of course it had gains too. My MC has generous rules on the 401k that allow a lot things to be done post separation. So, I did an in-plan conversion of that subaccount (after-tax plus earnings) to a new Roth 401k sub-account.

I can let this ride. I would, however, like to convert that Roth 401k into an existing 2018 Roth IRA (for investment flexibility and consolidation), but I don't want to screw up any timers.

Ok, so they put your after tax contributions in a Roth 401k. Now you need to do an in-service rollover to your Roth IRA. The new rollover will retain its own clock, so its age will be based on the year you made the conversion to 401k Roth.

Make sure you keep accurate records of how much of the conversion from after tax 401k to Roth 401k was contributions, how much was earnings before the conversion and how much is earnings after the conversion to 401k. This all gets treated differently.

You can commingle all of this in one Roth IRA. That's what I do.

 

[JoeWras]

Ok, so they put your after tax contributions in a Roth 401k. Now you need to do an in-service rollover to your Roth IRA. The new rollover will retain its own clock, so its age will be based on the year you made the conversion to 401k Roth.

Make sure you keep accurate records of how much of the conversion from after tax 401k to Roth 401k was contributions, how much was earnings before the conversion and how much is earnings after the conversion to 401k. This all gets treated differently.

You can commingle all of this in one Roth IRA. That's what I do.

Uh, but what if I am over 59.5?

 

[oldtimer]

Uh, but what if I am over 59.5?

As I understand it, being over 59.5 allows immediate access to the rollover if you have completed the 5-yr Roth account clock.

 

[corn18]

Uh, but what if I am over 59.5?

How old is your oldest Roth IRA (not 401k Roth)?

 

[JoeWras]

How old is your oldest Roth IRA (not 401k Roth)?

2018.

 

[corn18]

2018.

Ok, so this rule applies:

OVER AGE 59.5*
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA*
Contributions: Tax-No ;Penalty-No*
Conversions: Tax-No; Penalty-No (Taxable Portion)*
Conversions: Tax-No; Penalty-No (Nontaxable Portion)*
Earnings: Tax-Yes; Penalty-No*

Go ahead and roll the 401k Roth to your Roth IRA. The earnings in the 401k Roth after you did the conversion count as earnings in the Roth IRA. Not a big deal. You can withdraw any and all contributions and conversions tax and penalty free. Since the earnings come out last, just keep them in there until 2023 when they will also be tax and penalty free.