Roth conversion 5-year rule?

[TheWizard]

Thanks. And then the last thing, is it ok to do a new conversion into the same Roth? I would think yes, but after my big misunderstanding of capital loss rules this past year I have no great confidence that tax law has to make sense.

Example. In the Roth that I started 7 years ago with a $15,000 conversion and now has a $175,000 balance, if I do a conversion this year from some IRA into that Roth to get me to 140% of FPL, does that new conversion have any negative effect on withdrawing up to $15,000 from that Roth without tax or penalty? Like some hidden rule that says conversions reset other conversions in the same Roth account.

Edit: Thinking about it a little bit, you have already answered this by saying the IRS treats all Roths as one single Roth.

Your edit holds the answer for you...

 

[SecondCor521]

Thanks. And then the last thing, is it ok to do a new conversion into the same Roth?

Yes, it is perfectly fine to do so.

If you intend to withdraw from your Roth before 59 1/2 and 5 years since your first contribution, you will want to keep track of your contributions and conversions history so you can complete Form 8606 Part III. Once you hit 59 1/2 and 5 years since your first Roth conversion, you no longer need to keep records and no longer need to complete Form 8606 Part III.

I would think yes, but after my big misunderstanding of capital loss rules this past year I have no great confidence that tax law has to make sense.

Example. In the Roth that I started 7 years ago with a $15,000 conversion and now has a $175,000 balance, if I do a conversion this year from some IRA into that Roth to get me to 140% of FPL, does that new conversion have any negative effect on withdrawing up to $15,000 from that Roth without tax or penalty?

No negative effect. Conversions across tax years have no effect on each other.

Like some hidden rule that says conversions reset other conversions in the same Roth account.

Edit: Thinking about it a little bit, you have already answered this by saying the IRS treats all Roths as one single Roth.

 

[jgman]

I have two Roths, one that I opened 10 years ago and one that I just opened last month. If I merge the new Roth with the old Roth are all withdrawals or principle and earnings tax free? I am 61 years old.

 

[TheWizard]

I have two Roths, one that I opened 10 years ago and one that I just opened last month. If I merge the new Roth with the old Roth are all withdrawals or principle and earnings tax free? I am 61 years old.

Yes indeed, even if you don't merge the two.
Welcome to old age...

 

[jgman]

Yes indeed, even if you don't merge the two.
Welcome to old age...

Excellent and thanks!

 

[FargoI]

Regarding the **interest/growth** portion of IRA Roth conversions. If one deposits funds over a period of years into the same Roth account, how is the growth per "vintage" tracked such that at year five, for each year's conversion, the growth is no longer subject to Federal taxes?

For example: If an individual opened a Roth account at a broker (e.g. Schwab) in 2020 and in successive years converted additional funds (from IRAs/401s/403s) into the *same* Roth account, how would one know the growth factor attributed to 2021, 2022, 2023's etc.?

Begs the question - are Brokers responsible for tracking and reporting (to the account holder and /or IRS) the "growth" portion, per vintage, held within the same Roth account? If the responsibility of tracking falls exclusively upon the account holder/taxpayer, is it best practice to open separate Roth accounts for each calendar year in which one is funds Roth conversion?


Assumptions:

1. From an IRS stance, a Roth conversion is materially different from a Roth contribution.
   
   
2. In the above scenario, each conversion was for the full value of the originating account. PIT attributable to each conversion were paid directly to the IRS.
   
3. At age 60, the five-year IRS 'rule' pertaining to withdrawing one's 'contributions' from Roths kicks in. No Federal PIT on Roth withdrawals (on the contribution components/basis).
   
4. Roth withdrawals are predicated upon account holder's 'contributions' being liquidated first; then growth of investments would be used to fund withdrawals that exceed contributions.
   
   
5. Even at age 60, growth attributed to Roth conversions remains subject to taxation depending upon longevity of the account (five-year IRS rule).

It is item #5 that has me perplexed in terms of tracking and reporting to the IRS. Thank you in advance sharing your knowledge and experience.

 

[orbops]

Assumptions:

5. Even at age 60, growth attributed to Roth conversions remains subject to taxation depending upon longevity of the account (five-year IRS rule).
It is item #5 that has me perplexed in terms of tracking and reporting to the IRS. Thank you in advance sharing your knowledge and experience.

My understanding is that it's all based on order of precedence. All contributions would be withdrawal first, then comes conversions (the original amount for each conversion), then comes earnings. Essentially, any distribution that came from the conversion would be subject to the 5 year rule, and any earnings that came from the conversion would also be subject to the 5 year rule.

Note - I'm still trying to find out from the IRS if the 5 year conversion rule applies after one turns 59 1/2. I personally believe the 5 year conversion rule is not applicable for those over 59 1/2.

 

[FargoI]

My understanding is that it's all based on order of precedence. All contributions would be withdrawal first, then comes conversions (the original amount for each conversion), then comes earnings. Essentially, any distribution that came from the conversion would be subject to the 5 year rule, and any earnings that came from the conversion would also be subject to the 5 year rule.

Note - I'm still trying to find out from the IRS if the 5 year conversion rule applies after one turns 59 1/2. I personally believe the 5 year conversion rule is not applicable for those over 59 1/2.

I find it remarkable, and frustrating that our government creates rules and regulations that are so difficult to understand even well-educated individuals have to scrounge for accurate answers. Credit to the SSA, information on their web site has become "customer friendly."

 

[N02L84ER]

Here is an example as I understand the rules. Assume Roth IRA owner is age 60 in 2025.
2023 open first Roth IRA, contribute $5K
2024 convert $25K
2025 convert $30K
2026 convert $40K
Roth IRA has been open for 4 years as of January 2, 2026. The owner is over age 59.5 but the Roth has not satisfied the 5 year rule. So, the owner can withdraw and not pay any penalty or taxes on the first $100K of withdrawals. Any money withdrawn over $100K will be taxed but there will be no penalty because they are over age 59.5. After January 1, 2027, the Roth will be considered 5 years old and no taxes or penalties will be assessed.

 

[SecondCor521]

Regarding the **interest/growth** portion of IRA Roth conversions. If one deposits funds over a period of years into the same Roth account, how is the growth per "vintage" tracked such that at year five, for each year's conversion, the growth is no longer subject to Federal taxes?

It isn't.

You are misunderstanding something fundamental: Only the converted dollar amount is not subject to taxation when you meet the five year rule, not the growth thereon.

For example: If an individual opened a Roth account at a broker (e.g. Schwab) in 2020 and in successive years converted additional funds (from IRAs/401s/403s) into the *same* Roth account, how would one know the growth factor attributed to 2021, 2022, 2023's etc.?

Not applicable, because it doesn't matter.

Begs the question - are Brokers responsible for tracking and reporting (to the account holder and /or IRS) the "growth" portion, per vintage, held within the same Roth account?

Nope. Not applicable, because it doesn't matter.

If the responsibility of tracking falls exclusively upon the account holder/taxpayer, is it best practice to open separate Roth accounts for each calendar year in which one is funds Roth conversion?

No, because it doesn't matter.

Assumptions:

1. From an IRS stance, a Roth conversion is materially different from a Roth contribution.

Correct. Roth contributions are treated similarly though - the contributed dollar amount is what can be withdrawn tax- and penalty-free. The growth on the contributions (and conversions) goes into a third bucket with different rules.

1. In the above scenario, each conversion was for the full value of the originating account. PIT attributable to each conversion were paid directly to the IRS.
2. At age 60, the five-year IRS 'rule' pertaining to withdrawing one's 'contributions' from Roths kicks in. No Federal PIT on Roth withdrawals (on the contribution components/basis).

Roth contributions can be withdrawn any time without taxation, because they were made with after-tax dollars; there is no five year rule for withdrawing contributions.

Also, it's 59.5, not 60.

1. Roth withdrawals are predicated upon account holder's 'contributions' being liquidated first; then growth of investments would be used to fund withdrawals that exceed contributions.

I'm not sure what you mean here, but the IRS does apply ordering rules. When you withdraw dollars from your Roth IRA, they are deemed to come from contributions first (oldest to most recent), conversions second (oldest to most recent), then earnings last.

Even at age 60, growth attributed to Roth conversions remains subject to taxation depending upon longevity of the account (five-year IRS rule).
It is item #5 that has me perplexed in terms of tracking and reporting to the IRS. Thank you in advance sharing your knowledge and experience.

If the taxpayer opened a Roth IRA more than five years ago and reaches age 59.5, then all Roth withdrawals are completely tax and penalty free. If those two constraints are not met, then it does get more complicated and growth can be taxed (and possibly penalized; I'm not sure).

My understanding is that it's all based on order of precedence. All contributions would be withdrawal first, then comes conversions (the original amount for each conversion), then comes earnings.

Correct.

Essentially, any distribution that came from the conversion would be subject to the 5 year rule, and any earnings that came from the conversion would also be subject to the 5 year rule.

Incorrect. The conversion dollars and the growth dollars are in separate buckets and get treated distinctly.

Note - I'm still trying to find out from the IRS if the 5 year conversion rule applies after one turns 59 1/2. I personally believe the 5 year conversion rule is not applicable for those over 59 1/2.

It does not apply if the Roth is more than five years old. I believe it does apply if the Roth is less than five years old. For example, if a person opens a Roth IRA at age 57 and makes no contributions but does a Roth conversion at 58, then those conversion dollars are not available (tax- and penalty-free) at age 59 1/2. If that same person had opened their Roth at age 52 with a $1 contribution, then did that same Roth conversion at 58, then the entire Roth would be available at age 59 1/2.

 

[SecondCor521]

Here is an example as I understand the rules. Assume Roth IRA owner is age 60 in 2025.
2023 open first Roth IRA, contribute $5K
2024 convert $25K
2025 convert $30K
2026 convert $40K
Roth IRA has been open for 4 years as of January 2, 2026. The owner is over age 59.5 but the Roth has not satisfied the 5 year rule. So, the owner can withdraw and not pay any penalty or taxes on the first $100K of withdrawals. Any money withdrawn over $100K will be taxed but there will be no penalty because they are over age 59.5. After January 1, 2027, the Roth will be considered 5 years old and no taxes or penalties will be assessed.

I agree except I believe they would have to wait until 1/1/2028 to meet the five year rule. Not 100% certain though.

 

[orbops]

My understanding is that it's all based on order of precedence. All contributions would be withdrawal first, then comes conversions (the original amount for each conversion), then comes earnings.

Correct.

Essentially, any distribution that came from the conversion would be subject to the 5 year rule, and any earnings that came from the conversion would also be subject to the 5 year rule.

Incorrect. The conversion dollars and the growth dollars are in separate buckets and get treated distinctly.

Let me clarify my statement that you believe is incorrect.

Essentially, any distribution that came from the conversion would be subject to the 5 year rule, and once all conversions have been used up, any earnings that came from the conversion would also be subject to the 5 year rule.

Note - I'm still trying to find out from the IRS if the 5 year conversion rule applies after one turns 59 1/2. I personally believe the 5 year conversion rule is not applicable for those over 59 1/2.

It does not apply if the Roth is more than five years old. I believe it does apply if the Roth is less than five years old. For example, if a person opens a Roth IRA at age 57 and makes no contributions but does a Roth conversion at 58, then those conversion dollars are not available (tax- and penalty-free) at age 59 1/2. If that same person had opened their Roth at age 52 with a $1 contribution, then did that same Roth conversion at 58, then the entire Roth would be available at age 59 1/2.

 

[N02L84ER]

2028 is probably correct. I went back and forth mentally on 2027 vs 2028. For me it doesn't apply because my Roth has been open for 10+ years.

 

[cathy63]

It does not apply if the Roth is more than five years old. I believe it does apply if the Roth is less than five years old. For example, if a person opens a Roth IRA at age 57 and makes no contributions but does a Roth conversion at 58, then those conversion dollars are not available (tax- and penalty-free) at age 59 1/2.

In this specific situation, I think the entire amount would be penalty-free and only the earnings would be taxed. The rationale for that is if you need money after 59 1/2, then having converted it to Roth doesn't leave you worse off than if you'd just left it in the tIRA.

Regardless of the type of IRA, after age 59 1/2, there is no penalty on withdrawals but you do have to pay tax on whatever portion of the distribution is not a recovery of basis. For a tIRA, most people have no basis so the entire withdrawal is taxable. In the case of a Roth, it's the opposite -- the only thing that's not part of the basis is the earnings, and the tax on those will be waived if you meet the 5-year holding periods. So in this example, only the earnings portion of the Roth withdrawal is taxable because the 5-year account age period is not met.

The main reason for the 5-year rule on Roth conversions is to prevent younger people from using them as a means to get around the early withdrawal penalty for tIRAs. If you have $10K in a tIRA with $0 basis at age 40 and you want to withdraw it, you'll pay tax plus a 10% penalty. The early withdrawal penalty had to carry over to Roth conversions when they were added to the previously existing Roth law (I think in 2010?) because without it people under 59 1/2 would be able to do a conversion, pay the tax, and then immediately withdraw the funds, thereby evading the penalty. Apparently Congress thought a 5 year waiting period was long enough to discourage taxpayers from doing this. People over 59 1/2 already didn't have any penalties on withdrawing from tIRAs so there was no need to add one on funds converted to Roths.

If that same person had opened their Roth at age 52 with a $1 contribution, then did that same Roth conversion at 58, then the entire Roth would be available at age 59 1/2.

This is correct.