Roth conversion in retirement

[mozart522]

Not withstanding the pros and cons or conversions, I am wondering about the 5 year rule on withdrawing earnings after each conversion.  It has always been my understanding that once one is at least 59 1/2 that the 5 year rule doesn't apply as it is an exception to that rule.  However I have read in several places that is does apply to retirees over 59 1/2 and in other places that it does not.  It likely isn't an issue as the amount converted can always be taken out, but I'd still like to know which it is.

[Chahta]

Dec 18, 2023 13:25:10 GMT mozart522 said:

Not withstanding the pros and cons or conversions, I am wondering about the 5 year rule on withdrawing earnings after each conversion.  It has always been my understanding that once one is at least 59 1/2 that the 5 year rule doesn't apply as it is an exception to that rule.  However I have read in several places that is does apply to retirees over 59 1/2 and in other places that it does not.  It likely isn't an issue as the amount converted can always be taken out, but I'd still like to know which it is.

My take was once you met the 5 year rule any conversion or earnings were included as being free withdrawals. Otherwise bookeeping could be horrendous.

[fishingrod]

www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

"Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once. When withdrawals occur from conversion amounts, they are deemed to be withdrawal on a first-in, first-out basis under IRC Section 408A(d)(4)(B)(ii)(II), which effectively means the oldest conversions (most likely to have finished their 5-year requirement) are withdrawn first, and the most recent conversions are withdrawn last. (Overall, the ordering rules from Roth IRAs stipulate that withdrawals are after-tax contributions first, conversions second, and earnings third.)"

[liftlock]

Dec 18, 2023 13:25:10 GMT mozart522 said:

Not withstanding the pros and cons or conversions, I am wondering about the 5 year rule on withdrawing earnings after each conversion.  It has always been my understanding that once one is at least 59 1/2 that the 5 year rule doesn't apply as it is an exception to that rule.  However I have read in several places that is does apply to retirees over 59 1/2 and in other places that it does not.  It likely isn't an issue as the amount converted can always be taken out, but I'd still like to know which it is.

My take on this is that all Roth IRA withdrawals can be made penalty free once they are qualified.   Roth IRA withdrawals after reaching age 59 1/2 are qualified if the Roth IRA has been open for at least 5 years.  Funding a Roth IRA with a $1 will start the 5 year clock running and can be done late in the year.  If a Roth IRA is initially funded at the end of year 1, then withdrawals at anytime in year 5 or later are qualified if the taxpayer has reached age 59 1/2. 

[liftlock]

Dec 18, 2023 13:41:56 GMT fishingrod said:

www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

"Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once. When withdrawals occur from conversion amounts, they are deemed to be withdrawal on a first-in, first-out basis under IRC Section 408A(d)(4)(B)(ii)(II), which effectively means the oldest conversions (most likely to have finished their 5-year requirement) are withdrawn first, and the most recent conversions are withdrawn last. (Overall, the ordering rules from Roth IRAs stipulate that withdrawals are after-tax contributions first, conversions second, and earnings third.)"

I believe the above narrative only applies to Roth IRA withdrawals prior to reaching age 59 1/2.  At the start of the same article Kitces writes:

"For some, taking advantage of the Roth conversion 5-year rule is a way for those well under age 59 1/2 to tap their IRA funds "early" without an early withdrawal penalty. For others, the reality is that the Roth conversion 5-year rule is a moot point anyway, because they already meet another exception to the early withdrawal penalty (e.g., already being over age 59 1/2)."

[mozart522]

liftlock, Chahta, fishingrod,,

Thanks, but I'm specifically asking about the second 5 year rule that applies to each conversion from a TIRA to a Roth. If over 59 1/2 there is no 10% penalty, but are any earnings in the 5 years after conversion taxable, or does being 59 1/2 or more constitute an exception? TIA

[mozart522]

liftlock,

Thanks, posting at the same time. I trust Kitces, so the answer seems to be one one hits 59 1/2 as long as you have held any Roth for at least 5 years, there is no penalty or tax on withdrawals.

[liftlock]

Dec 18, 2023 13:54:53 GMT mozart522 said:

liftlock , Chahta , fishingrod ,,

Thanks, but I'm specifically asking about the second 5 year rule that applies to each conversion from a TIRA to a Roth. If over 59 1/2 there is no 10% penalty, but are any earnings in the 5 years after conversion taxable, or does being 59 1/2 or more constitute an exception? TIA

Once you reach age 59 1/2 the 5 year year rule for each conversion does not apply, unless the Roth IRA has not been funded for at least 5 years.  After reaching age 59 1/2, the 5 year rule is about when the Roth IRA was initially funded.

[mozart522]

Dec 18, 2023 14:06:14 GMT liftlock said:

Dec 18, 2023 13:54:53 GMT mozart522 said:

liftlock , Chahta , fishingrod ,,

Thanks, but I'm specifically asking about the second 5 year rule that applies to each conversion from a TIRA to a Roth. If over 59 1/2 there is no 10% penalty, but are any earnings in the 5 years after conversion taxable, or does being 59 1/2 or more constitute an exception? TIA

Once you reach age 59 1/2 the 5 year year rule for each conversion does not apply, unless the Roth IRA has not been funded for at least 5 years.  After reaching age 59 1/2, the 5 year rule is about when the Roth IRA was initially funded.

Thanks.

[stripermannh]

From a previous thread.

It is important to note that if your ROTH is at least 5 years old and you are 59 1/2, any earnings from subsequent contributions or conversions are considered "Qualified Distributions" and are NOT subject to taxes or early withdrawal penalties.

After reviewing the IRS website I found a very simple flow chart which helped me be more confident in what determines a qualified distribution. See Figure 2-1 under Section "ROTH IRA/What are qualifying distributions?"

www.irs.gov/publications/p590b#en_US_2021_publink100089541

[saratoga]

Stripermannh, I think your interpretation of Figure 2-1 is correct. Just to make sure, however, does the `contributed' in the following sentence include `converted'?

Has it been at least 5 years from the beginning of the year for which you first set up and contributed to a Roth IRA?

[mozart522]

Dec 21, 2023 4:36:41 GMT saratoga said:

Stripermannh, I think your interpretation of Figure 2-1 is correct. Just to make sure, however, does the `contributed' in the following sentence include `converted'?

Has it been at least 5 years from the beginning of the year for which you first set up and contributed to a Roth IRA?

No.  Contributed refers to the first 5 year rule that requires that your first Roth must be open for at least 5 years before taking earnings, and you must be 59 1/2 unless another exeption applies.  This applies regardless of age (ie over 59 1/2).  The second 5 year rule applies to conversions from TIRAs to Roth.  Each conversion sets up a new 5 year period before earnings can be taken tax and penalty free.  However, once one hits 59 1/2, all Roth withdrawals are "qualified", thus no tax or penalty.