I have had a Roth IRA and a traditional IRA for over five years and want to start converting the traditional IRA to a Roth IRA. My belief is that I could begin withdrawing the converted funds without any penalty since the Roth has been open for over five years and I am over 59 ½ years old. Do I have to wait five years before I can start withdrawing earnings from converted funds?
-John
I’m not surprised to get another question about the five-year rules for Roth IRAs, given how confusing they can be. The good news is that your understanding is correct. Since you are over age 59½ and have had a Roth IRA for more than five years, the five-year rules no longer apply to you. Whether you withdraw contributions, earnings, or funds from a conversion (including your earnings), you can do so without worrying about taxes or penalties.
A financial advisor can help you strategically plan and execute Roth conversions. Connect with your financial advisors today.
However, let’s quickly review the two five-year rules that apply to your situation and explain their purpose. It will probably help you, as well as other readers, understand the above answer even more.
The first five-year rule applies to determine whether Roth IRA contributions and earnings qualify as tax-free and penalty-free distributions. For a withdrawal to be “qualified,” it must meet two conditions (described in IRS Publication 590-B).
First, the Roth IRA must have been open for at least five years. Second, one of the following criteria must be met:
The account holder is over 59 and a half years old
The account holder is permanently disabled
Account holder using funds for a first-time home purchase (up to $10,000)
The account holder has died (and the account is transferred to the beneficiaries).
If these requirements are not met, the earnings portion of the withdrawal is subject to tax and an additional 10% penalty may apply if the account owner is under age 59½ without a qualified exception.
In your case, you meet this five-year rule because your Roth IRA has been open for more than five years (meeting condition 1) and you are over age 59½ (meeting condition 2). Importantly, once you meet the five-year rule for a Roth IRA, it applies to all future qualified distributions from that account or any other Roth IRA you own.
(And if you need additional help navigating this rule, consider working with a financial advisor.)
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This is a separate rule that applies specifically to conversions, and fortunately, it’s a little simpler. This rule dictates that you must wait five years before withdrawing converted funds without penalty. However, unlike the first five-year rule, which only needs to be followed once, this rule applies separately to each conversion. In other words, each conversion has its own five-year waiting period.
Keep in mind that this rule has nothing to do with whether you will have to pay ordinary income tax on your investment gains. Instead, it determines whether distributions from the converted balance are subject to the 10% early withdrawal penalty. Simply put, if you withdraw converted funds before five years have passed (from January 1 of the year you converted), the withdrawal is subject to the 10% early withdrawal penalty rules. That’s all.
In your case, you won’t actually have to pay the 10% early withdrawal penalty because more than five years have passed since the conversion. Additionally, this rule does not apply to people over 59 and a half years of age. (And if you need help planning a Roth conversion or planning your withdrawals, consider talking to a financial advisor.)
There are two five-year rules to consider in your situation:
The Five-Year Rule on Roth IRA Contributions: If you haven’t followed this rule, you will have to pay income tax on the earnings portion of your retirement. A 10% early withdrawal penalty may also apply.
tThe five-year rule on Roth conversions.: If you have not followed this rule, you may owe a 10% early withdrawal penalty on the distribution of the converted money.
If you are over age 59½ and contributed to your first Roth IRA more than five years ago, then you have met both parts of the qualified distribution rules. Any withdrawal you make from a Roth IRA is a qualified distribution. The five-year rule on conversions no longer matters because simply being over 59 and a half means it no longer applies to you.
Roth IRAs can be a strategic component of estate planning because they do not require minimum distributions (RMDs) during the account owner’s lifetime. Beneficiaries also inherit the funds tax-free, which can preserve wealth for future generations. By prioritizing Roth IRAs in retirement and legacy planning, you can minimize the tax burden on your estate and provide ongoing financial benefits to heirs.
A financial advisor can help you manage your Roth IRA and integrate it into a comprehensive retirement income plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors serving your area, and you can take a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Brandon Renfro, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about tax and personal finance topics. Do you have any questions you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not an employee of SmartAsset nor is he involved in SmartAsset AMP. You have been compensated for this article.Some questions submitted by readers are edited for clarity or brevity.
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