Good article to clear up 5 year rule on conversions

Thanks, that is a good explanation, so I could use the converted amount if needed since I am over 60 and not face any taxes. Taxes would apply only to earnings. I was thinking I couldn't withdraw any for 5 years without getting hit with taxes. I don't plan on withdrawing from my Roth for quite a while, but good to understand the rules if I get a large unexpected expense and don't want to break an income (Tax Bracket/IRMAA) threshold with an unplanned IRA withdrawal.
 
VanWinkle said:
I see posts concerning the confusion on the 5 year rule for conversion withdrawals. I have found several articles that make it clear and I am linking one of them here. Many here have it figured out, but for some of the new people in the forum, this may help.

https://www.marottaonmoney.com/at-65-does-the-5-year-roth-rule-matter/VW
Click to expand...

I thought I had it finally figured out, but this article now confused me. Before quoting from the article, here's my understanding:

If you open the account and make the first contribution in 2019 and then convert in each subsequent tax year up through the present, even being older than 59 1/2 you can't withdraw the conversions without tax or penalty until January 1, 2024 (after the end of 5 tax years).

The article has the following (with a conversion instead of a contribution for the 2019 tax year):

"Age 65
Converted $20,000 in 2022, 2021, 2020, and 2019 for a total conversion basis of $100,000
Has $10,000 of earnings in 2023
If the first conversion in 2019 was your first ever Roth contribution, then that would mean that your Roth IRA is not yet at least five years old. This would mean if you withdrew your entire conversion basis of $100,000, it would be free of tax because withdrawals from basis are always free of tax and free of penalty because you meet an exception to the early distribution penalty. The exception you meet is that you are older than age 59 1/2." (Emphasis added)

Many articles I've read say that the 5-year period applies to each individual conversion -- have I misread the linked article or is it wrong?
 
This table helped me understand the rules.

Capture Roth.PNG
 
stevemac said:
I thought I had it finally figured out, but this article now confused me. Before quoting from the article, here's my understanding:

If you open the account and make the first contribution in 2019 and then convert in each subsequent tax year up through the present, even being older than 59 1/2 you can't withdraw the conversions without tax or penalty until January 1, 2024 (after the end of 5 tax years).

The article has the following (with a conversion instead of a contribution for the 2019 tax year):

"Age 65
Converted $20,000 in 2022, 2021, 2020, and 2019 for a total conversion basis of $100,000
Has $10,000 of earnings in 2023
If the first conversion in 2019 was your first ever Roth contribution, then that would mean that your Roth IRA is not yet at least five years old. This would mean if you withdrew your entire conversion basis of $100,000, it would be free of tax because withdrawals from basis are always free of tax and free of penalty because you meet an exception to the early distribution penalty. The exception you meet is that you are older than age 59 1/2." (Emphasis added)

Many articles I've read say that the 5-year period applies to each individual conversion -- have I misread the linked article or is it wrong?
Click to expand...
Bogleheads has a good wiki on Roth IRAs and a table with contributions, earnings and ages showing when taxable and a penalty applies. I refer to that when I get confused on the Roth rules.
 
daver said:
This table helped me understand the rules.

View attachment 44894
Click to expand...

Thanks, but this seems to compound my problem. I'm over 59 1/2, so the second table applies. And it says if I'm within the first 5 years of my Roth being opened, there are no taxes or penalties for Conversions, whether originally taxed or untaxed. Yet here is some contrary guidance:


"Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once."

Answer A-5(c) in the above Treasury Regulation says, in part:
"The 5-taxable-year period described in this A-5 for purposes of determining whether section 72(t) applies to a distribution allocable to a conversion contribution is separately determined for each conversion contribution..." (Emphasis added.)

That Regulation seems at odds with the Bogleheads table (see also
[URL="https://www.your-roth-ira.com/roth-ira-5-year-waiting-period.html"]https://www.your-roth-ira.com/roth-ira-5-year-waiting-period.html)
The key quote:
"5 Year Waiting Period for Conversions
One thing to keep in mind is that the Roth IRA 5 year waiting period applies to each Roth IRA conversion independently. ...
For example, let's say it's 2011, and you're 58 years old with $100,000 in your Roth IRA. It's also worth noting that you opened your account ten years previously. ...
Since you're older than age 59 ½, and you've met the requirements of the Roth IRA 5 year waiting period, you should be able to withdraw the entire $150,000 tax-free and penalty-free. Right?
Wrong.
If withdrawn, the conversion funds are subject taxes and penalties because your 2011 conversion has yet to meet the Roth IRA 5 year waiting period requirement."

Where can I find the directive from the IRS which says that so long as a 5-year period has expired and I'm older than 50 1/2, all conversions are tax and penalty free?

Thanks.
 
stevemac said:
Where can I find the directive from the IRS which says that so long as a 5-year period has expired and I'm older than 50 1/2, all conversions are tax and penalty free?
Click to expand...

You can find it in IRS Publication 590. Here are links to two relevant sections where this is stated explicitly:

https://www.irs.gov/publications/p590b#en_US_2021_publink100090441

https://www.irs.gov/publications/p590b#en_US_2021_publink100089553

This is referring to traditional IRAs, but it is just defining what an early distribution is. It is what the Roth section refers to for that definition.
Early Distributions
You must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax, as discussed later.

Early distributions defined. Early distributions are generally amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age 59½.

Age 59½ Rule
Generally, if you are under age 59½, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59½ are called early distributions.

The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.

A number of exceptions to this rule are discussed later under Exceptions. Also see Contributions Returned Before Due Date of Return in chapter 1 of Pub. 590-A.

After age 59½ and before age 72. After you reach age 59½, you can receive distributions without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 59½, distributions aren't required until you reach age 72. See When Must You Withdraw Assets? (Required Minimum Distributions), earlier.
Click to expand...

and


Other early distributions. Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that aren't qualified distributions.
Exceptions. You may not have to pay the 10% additional tax in the following situations.
You have reached age 59½. (emphasis added)
You are totally and permanently disabled.
You are the beneficiary of a deceased IRA owner.
You use the distribution to buy, build, or rebuild a first home.
The distributions are part of a series of substantially equal payments.
You have unreimbursed medical expenses that are more than 7.5% of your AGI (defined earlier) for the year.
You are paying medical insurance premiums during a period of unemployment.
The distributions aren't more than your qualified higher education expenses.
The distribution is due to an IRS levy of the IRA or retirement plan.
The distribution is a qualified reservist distribution.
Click to expand...


Note that the kind of distribution you are asking about is NOT a "qualified distribution" (because of the 5-year waiting period). But if you are over 59.5, the only result of that is that earnings may be taxed; there is no 10% penalty.

That is what the Kitces article that you cited is referring to. The older citation you give from the random web page (your-roth-ira.com) appears to just be flat-out wrong.
 

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Out-to-Lunch said:
You can find it in IRS Publication 590. Here are links to two relevant sections where this is stated explicitly:

https://www.irs.gov/publications/p590b#en_US_2021_publink100090441
Click to expand...

Thanks for digging those out, but what about this language there, which says tax is payable if the distribution occurs during the 5-year period?

"Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or roll over an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You must generally pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover."

Note that the kind of distribution you are asking about is NOT a "qualified distribution" (because of the 5-year waiting period). But if you are over 59.5, the only result of that is that earnings may be taxed; there is no 10% penalty.
Click to expand...

Not to be argumentative, but Publication 590 seems to say the opposite, that the distribution itself may be taxed, not just earnings. This is why I find this whole thing confusing, and I hope I don't need to access any of the Roth funds until 5 years after the particular conversion.

Again, thanks for the response.
 
Man, I read that article twice and am not sure I totally grasp it:facepalm:
Can't the government make this stuff simpler?!
 
stevemac said:
Thanks for digging those out, but what about this language there, which says tax is payable if the distribution occurs during the 5-year period?

"Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or roll over an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You must generally pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover."
Click to expand...

If you scroll down just a little bit from the part you quoted, you will see:

Exceptions. You may not have to pay the 10% additional tax in the following situations.
You have reached age 59½.
You are totally and permanently disabled.
You are the beneficiary of a deceased IRA owner.
You use the distribution to buy, build, or rebuild a first home.
The distributions are part of a series of substantially equal payments.
You have unreimbursed medical expenses that are more than 7.5% of your AGI (defined earlier) for the year.
You are paying medical insurance premiums during a period of unemployment.
The distributions aren't more than your qualified higher education expenses.
The distribution is due to an IRS levy of the IRA or retirement plan.
The distribution is a qualified reservist distribution.
Click to expand...
 
I guess this is what makes Kitches' article the correct one; thanks for the help.
 
Do people really wait until after age 54.5 to open their first Roth?

I'd think most would have opened one years before.

So once they hit 59.5 everything coming out is (federal) tax-free.
 
ncbill said:
Do people really wait until after age 54.5 to open their first Roth?

I'd think most would have opened one years before.

So once they hit 59.5 everything coming out is (federal) tax-free.
Click to expand...


I never had a Roth, but started doing Roth conversions a few years ago at age 53. My plan is to keep doing them every year till I hit 70 I guess.
 
ncbill said:
Do people really wait until after age 54.5 to open their first Roth?

I'd think most would have opened one years before.

So once they hit 59.5 everything coming out is (federal) tax-free.
Click to expand...

This was likely a bigger issue in the early years of the existence of Roth IRAs.
 
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