Roth Conversion - Taxation on Earning & 5 Year Rule @age 60

[PERSonalTime]

If a person is 60 years of age, and has made a Roth conversion at age 60, can all of the funds be withdrawn in two years without paying any tax? I was wondering how does the five-year conversion rule for Roth conversions come in to play.

 

[SecondCor521]

In the simple case, a 60 year old person who opened their first Roth more than 5 years ago can withdraw anything from their Roth completely tax- and penalty-free. No need to wait any period of time.

In non-simple cases, it's not simple. ;-)

 

[G-Man]

In the simple case, a 60 year old person who opened their first Roth more than 5 years ago can withdraw anything from their Roth completely tax- and penalty-free. No need to wait any period of time.

In non-simple cases, it's not simple. ;-)

What if it's not more than 5 years? Then what?

 

[SecondCor521]

What if it's not more than 5 years? Then what?

Most people I know (including me) fall into the simple case, so I don't know the rules for the non-simple cases as well.

I was going to write in what I think the rules are for the scenario you describe, but I'm not sure what is correct and what is incorrect, so I'd rather point you to the IRS rules and/or a tax preparer who knows the rules.

There are probably a bunch of blog posts and people saying what the rules are. I'm not sure I would trust those personally.

Maybe @cathy63 knows and will chime in.

 

[G-Man]

Most people I know (including me) fall into the simple case, so I don't know the rules for the non-simple cases as well.

I was going to write in what I think the rules are for the scenario you describe, but I'm not sure what is correct and what is incorrect, so I'd rather point you to the IRS rules and/or a tax preparer who knows the rules.

There are probably a bunch of blog posts and people saying what the rules are. I'm not sure I would trust those personally.

Maybe @cathy63 knows and will chime in.

I opened my first Roth IRA last year (2022) and I'm not 60 yet. Also I have to do backdoor Roth conversions due to the income limits.

 

[Dtail]

There is a great chart on the rules which has been displayed in other threads here, but can't find it.

 

[SecondCor521]

I opened my first Roth IRA last year (2022) and I'm not 60 yet. Also I have to do backdoor Roth conversions due to the income limits.

Not the table the previous poster is alluding to, but the following is probably accurate and reasonably understandable:

https://www.bogleheads.org/wiki/Roth_IRA#Distributions

ETA: Maybe this is the table the previous poster meant? https://www.bogleheads.org/wiki/Roth_IRA#cite_note-23

 

[Dtail]

Not the table the previous poster is alluding to, but the following is probably accurate and reasonably understandable:

https://www.bogleheads.org/wiki/Roth_IRA#Distributions

ETA: Maybe this is the table the previous poster meant? https://www.bogleheads.org/wiki/Roth_IRA#cite_note-23

Yup the 2nd choice.

 

[gauss]

IRS From 8606 (pg 2) and especially the instructions for this form are the gold standard, IMHO, for calculating how "non-qualified" Roth IRA withdrawals work.

You could also play with this in tax software by using a code T distribution code in box 7 on the 1099-R. Code T implies that you have attained 59 1/2 years of age, but have not had a Roth IRA in place for at least 5 years.

You will want to read the questions that the tax software asks carefully (perhaps with reference to the form 8606 instructoin), to obtain the proper result

-gauss

 

[FREE866]

I think it's a straighforward 5 year rule:


If you made your first Roth contribution/conversion, for example, on January 1, 2020 you can take distributions completely tax free beginning January 1, 2025.


Anything taken out before January 1, 2025 will be taxed on any earnings.


Maybe someone can confirm this?

 

[SecondCor521]

I think it's a straighforward 5 year rule:


If you made your first Roth contribution/conversion, for example, on January 1, 2020 you can take distributions completely tax free beginning January 1, 2025.


Anything taken out before January 1, 2025 will be taxed on any earnings.


Maybe someone can confirm this?

Unfortunately, it's not that simple.

At the very least, contributions and conversions are treated differently in the tax code; you've listed them together.

Also, perhaps a technicality but conversions are essentially treated as done on the first of the year even if done later in the year.

Third, depending on what you mean by "distributions completely tax free", that's not true if the distribution includes earnings and you're under 59.5. It's also not true if the distribution includes a conversion less than five years old.

 

[FREE866]

Unfortunately, it's not that simple.

At the very least, contributions and conversions are treated differently in the tax code; you've listed them together.

Also, perhaps a technicality but conversions are essentially treated as done on the first of the year even if done later in the year.

Third, depending on what you mean by "distributions completely tax free", that's not true if the distribution includes earnings and you're under 59.5. It's also not true if the distribution includes a conversion less than five years old.

Interesting. I didn't know that conversions are treated as if they're done on first of the year even if done later.


I did say 5+ years and I assumed people knew you had to be 59.5 + years old.

 

[oldtimer]

Remember the withdrawal sequence for a Roth IRA. First $ withdrawn is your Contributions until all contributions are withdrawn. Then the oldest Conversion is withdrawn followed by the next oldest , etc. until all converted $ is withdrawn. Finally once all contributions and converted amounts are removed, then the Earnings inside of the Roth IRA will be the last to be withdrawn out of your Roth IRA. This sequence is true no matter what age you are.

So if the the oldest Roth IRA account is less than 5 years old, and you are older than 59.5 and you have previously withdrawn all of your contributions, then you are withdrawing the converted money with not penalty or tax. It is only if are withdrawing the last of the converted $ and start withdrawing Earnings that taxes will be owed on the earning portion of the withdrawal since you are over 59.5 and oldest Roth IRA account funding is less than 5 years.