Roth conversion 5-year rule?

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jgman

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Hello,
I just opened a Roth via a conversion from a Traditional IRA. I was unaware of the 5-yr rule where the earning are taxable if withdrawn within a five year period. Is there anyway to circumvent this rule as I may need the funds sooner? What if I moved the new Roth into a Roth opened 10 years ago?
Thanks
 
jgman said:
Hello,
I just opened a Roth via a conversion from a Traditional IRA. I was unaware of the 5-yr rule where the earning are taxable if withdrawn within a five year period. Is there anyway to circumvent this rule as I may need the funds sooner? What if I moved the new Roth into a Roth opened 10 years ago?
Thanks
Click to expand...
It sounds like you have more than one physical Roth account in your name? If so, I'm pretty certain that the IRS treats ALL Roth accounts as "Your Roth". So the fact that the other Roth is 10 years old means that all of your physical Roth accounts, should you have any, share that same "age". The "age" is based on the opening date of your FIRST Roth account. You don't need to merge the physical accounts into one account. But you can, if you want.

This is also true with traditional IRA accounts.

"The 5-year rule for Roth IRAs means that at least 5 years must elapse between the beginning of the tax year of your first contribution to a Roth account and withdrawal of earnings. If fewer than 5 years have passed before you make a withdrawal of earnings, the withdrawal is considered a nonqualified distribution and may be subject to either taxes or penalties (or both)." [Bold added by me.]
www.fidelity.com

What is the Roth IRA 5-year rule and how does it work? | Fidelity

The 5-year aging rule for Roth IRAs means you may have to wait a bit to avoid unexpected taxes on withdrawals from your Roth IRA. Here's what you need to know.
www.fidelity.com
 
Last edited:
jgman said:
Hello,
I just opened a Roth via a conversion from a Traditional IRA. I was unaware of the 5-yr rule where the earning are taxable if withdrawn within a five year period. Is there anyway to circumvent this rule as I may need the funds sooner? What if I moved the new Roth into a Roth opened 10 years ago?
Thanks
Click to expand...
The five year rule only applies to new earning while in the ROTH. So it is usually not a problem.

Example - You roll over $10K from your IRA into a Roth. You have to pay tax on this $10K in the year of the rollover. Later if you suddenly need money for an emergency, you can withdraw any amount from your ROTH tax free at any time as long as it is $10K or less because the IRS assumes the first money you withdraw is from the rollover on which you already paid tax.
If the ROTH grows 10% over the year to $11K, you can still withdraw up to your original $10K with no penalty. If you continue to add rollover money in later years, this money can also be withdrawn at any time. As long as you withdraw no more than the total of your after tax contributions, you owe no penalty. Then five years after your last rollover, you can finally begin to withdraw ROTH earnings.
 
Another thing to understand is that there are ordering rules for distributions.

As another poster mentioned, all of your Roth IRA accounts are treated as one IRA by the IRS.

Distributions are treated by the IRS as coming from contributions first, conversions second, and earnings last. You don't get to pick, you have to follow this ordering. However, it is a nice ordering.

So if you contributed money to your older Roth IRA account 10 years ago, then distributed money from the "conversion" Roth IRA today, the IRS, based on the grouping and ordering rules, would treat the distribution as coming from the contributions even though it came from your second Roth account.

Once you distribute all of the contributions, then you start in on the conversions, which have, as noted, a 5 tax year delay before they can be accessed tax- and penalty-free.

I have a spreadsheet that keeps track of my contributions and conversions. Anything left in the account above and beyond that is earnings. I'll be able to make it to 59 1/2 and 5 years, at which point it all is tax- and penalty-free, and I won't need that spreadsheet or my 8606s any more.
 
Can you tell us if you are over 59.5 or not? If you are, we can skip all of the finer points. Your first Roth IRA is over 5 years old, so if you are older than 59.5, you are completely good to go (as pointed out by VanWinkle).
 
VanWinkle said:
If you're over 59 1/2 and have a Roth open for 5 years, all contributions and interest/earnings are tax free including conversions.
Click to expand...
Not true. The penalty goes away, but the tax on earnings from conversions still adheres to the 5 year rule.

All this info is readily available with a simple google search.
 
rothdisttibution.jpg
 
COcheesehead said:
Each conversion starts its own 5 year period. Fidelity explains it here.

www.fidelity.com

What is the Roth IRA 5-year rule and how does it work? | Fidelity

The 5-year aging rule for Roth IRAs means you may have to wait a bit to avoid unexpected taxes on withdrawals from your Roth IRA. Here's what you need to know.
www.fidelity.com
Click to expand...

But not if you are over 59.5 and your oldest Roth is over 5 years old. From the site that you linked:

"Once the 5-year rule has been met and the account owner is age 59½ or older, among other exceptions, they may make what's known as a qualified distribution of earnings exempt from both taxes and penalties.1"

And the footnote reads:

"1.
For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them)."


The potential confusion comes because there are two different "5 year rules." I believe that you are thinking of the wrong 5-year rule. Do you think that the chart that I posted is incorrect?
 
The Fidelity link has all the details. You can’t withdraw earning from conversions before 5 years. Note if you make a conversion on 12/28/20, then the you could withdraw earnings on 1/2/25, which is 4 years and 5 days later, due to the way the IRS counts years.
 
Spock said:
the first box is "contributed to". Contributions are different the conversions.
Click to expand...
Yes, they are. But we know that the OP opened a Roth IRA 10 years ago.

Above that chart, the IRS says: "What are qualified distributions? A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements."

Can you find some other place in 590-B that contridicts this definition of qualified distributions?
 
Al18 said:
The Fidelity link has all the details. You can’t withdraw earning from conversions before 5 years. Note if you make a conversion on 12/28/20, then the you could withdraw earnings on 1/2/25, which is 4 years and 5 days later, due to the way the IRS counts years.
Click to expand...

Before 5 years of WHAT? The Fido document is not clear whether they are referring to the 5-year holding period for conversions (for people <59.5 or with newly formed Roths), or the requirement for a >59.5 year old that their oldest Roth is at least five years old. There are two different "five year rules." Which do you think that Fido was referring to in that sentence. I believe it was the former.
 
5 years from the conversion period.

Here’s the paragraphs on conversions:
The Internal Revenue Service (IRS) requires a waiting period of 5 years before withdrawing balances converted from a traditional IRA to a Roth IRA, or you may pay a 10% early withdrawal penalty on the conversion amount in addition to the income taxes you pay in the tax year of your conversion. There are a variety of exemptions to this penalty, however, including death, disability, and turning age 59½. Also note that the 5-year waiting rule does not apply to the amount originally converted; it only applies to the earnings portion of the converted amount.

Keep in mind that Roth conversions can only be attributed to the year in which they take place (not tied to the filing deadline like contributions). If you convert at any time in 2025, the 5-year rule starts in January 2025, but you cannot convert in 2026 and attribute it to 2025.
 
Schwab is not the IRS, but it is the IRS that has left a puddle of confusion.

"After age 59½, you can withdraw converted funds without a 10% penalty. But remember, the five-year contribution rule (mentioned above) still applies—if that rule hasn't been met, taxes may apply for the earnings portion of the withdrawal.
 
COcheesehead said:
Each conversion starts its own 5 year period. Fidelity explains it here.

www.fidelity.com

What is the Roth IRA 5-year rule and how does it work? | Fidelity

The 5-year aging rule for Roth IRAs means you may have to wait a bit to avoid unexpected taxes on withdrawals from your Roth IRA. Here's what you need to know.
www.fidelity.com
Click to expand...
This is totally false. Once the Roth has been opened for 5 years AND you are 59.5 it's totally tax free.

This particular issue is arguably the most misunderstood on the internet!
 
FREE866 said:
This is totally false. Once the Roth has been opened for 5 years AND you are 59.5 it's totally tax free.

This particular issue is arguably the most misunderstood on the internet!
Click to expand...
Really?
This is right from the Fidelity article
‘Important to know: The 5-year rule is counted separately for each conversion. The same rules apply to so-called backdoor Roth IRAs.’
 
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