Roth Conversion 5 Year Rule

[a60dan]

I'm considering a Roth Conversion for 2021.

My understanding is that 1/1/2026 (5 years from 1/1/2021) I could withdraw with no penalties.

IRS Publication 590-B Figure 2-1 first question is:
Has it been at least 5 years from the beginning of the
year for which you frst set up and contributed to a
Roth IRA?

I'm struggling with that question ".... a Roth IRA" that I set up more than 5 years ago, or the Roth IRA created by a 2021 conversion.

My hunch is that if I'll need any of that converted before 2026, I'll be paying a penalty because the distribution would be unqualified.

If correct, I'm better off just taking the qualified distribution in 2021.

Is my understanding correct?

 

[SevenUp]

Don't over-complicate it - the word "a" (as in "any") is correct.

But that's just the first question. What is your answer to "Were you at least 59 1/2 years old at the time of the distribution?"

 

[a60dan]

Don't over-complicate it - the word "a" (as in "any") is correct.

But that's just the first question. What is your answer to "Were you at least 59 1/2 years old at the time of the distribution?"

I’m over 59 1/2, but have read on its.gov that the IRS treats each conversion as a new 5 year rule.

On reading again, it implies that each non-qualified distribution from the conversion (during the first 5 tax years) would penalize the earnings portion of the distribution.

I may have to run a separate 2020 return in Turbotax to see if it helps determine whether a distribution is qualified.

The “what-if” worksheet does not.

 

[Dtail]

See below for a summary of the Roth conversion rules.

Roth IRA Distribution Table

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

 

[Koolau]

When in doubt, buy the Fairmark book. https://www.amazon.com/Fairmark-Guide-Roth-Kaye-Thomas/dp/0967498104

YMMV

 

[oldtimer]

See below for a summary of the Roth conversion rules.

Roth IRA Distribution Table

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

In table format

 

[SevenUp]

I’m over 59 1/2, but have read on its.gov that the IRS treats each conversion as a new 5 year rule.

Not if one is over age 59.5 and has at least one 5 tax year old Roth IRA.

On reading again, it implies that each non-qualified distribution from the conversion (during the first 5 tax years) would penalize the earnings portion of the distribution.

Perhaps, but in your situation all your Roth distributions will be qualified, so you don't need to worry about any non-qualified distributions.