I have had a Roth IRA and a traditional IRA for over five years and want to start converting my traditional IRA to a Roth IRA. My belief is that I can start withdrawing the converted funds without any penalty, since the Roth has been open for over five years and I am over 59 1/2 years old. Do I have to wait five years before I can start withdrawing profits from the transferred funds?
– John
I’m not surprised to get Another question about the five-year rules for Roth IRAs Given how confusing they are. The good news is that you understand immediately. Because you are over age 59 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 the transfer (including its earnings), you can do so without worrying about taxes or penalties.
A Financial advisor They can help you plan and implement Roth conversions strategically. Get in touch with your Financial Advisor Matches today.
However, let’s quickly review the two five-year rules that apply to your situation and explain their purpose. This will probably help you, as well as other readers, understand the above answer more.
The first five-year rule applies to determining whether Roth IRA contributions and earnings qualify as tax-free, penalty-free distributions. To be withdrawneligible“, you must meet two conditions (described in IRS Publication 590-B).
First, the Roth IRA must be open for at least five years. Second: One of the following criteria must be met:
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The account holder’s age is over 59 ½
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The account holder has been permanently disabled
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Account holder uses funds to purchase a home for the first time (up to $10,000)
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The account holder is deceased (with the account transferred to the beneficiaries).
If these requirements are not met, the earnings portion of the withdrawal is taxable and an additional 10% penalty may apply if the account holder is under 59 ½ without a qualifying exception.
In your case, you meet this five-year rule because your Roth IRA has been open for more than five years (satisfying Condition 1) and you are over age 59 ½ (satisfying Condition 2). Most importantly, once the five-year rule for a Roth IRA is met, it applies to all future qualified distributions from that account or any other Roth IRA you own.
(And if you need extra help navigating this rule, consider working with a file Financial advisor.)
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This is a separate rule that applies specifically to conversions, and fortunately, it’s a bit simpler. This rule states that you must wait five years before then Withdrawal of transferred funds Free from punishment. However, unlike the first five-year rule – which only needs to be met once – this rule applies separately to each transfer. In other words, each transfer has a five-year waiting period.
Keep in mind that this rule has nothing to do with whether you will owe ordinary income tax on your investment gains. Instead, it specifies whether transferred balance distributions are subject to a 10% early withdrawal penalty. Simply put, if you withdraw the transferred funds before five years have passed (since January 1 of the year you made the transfer), the withdrawal is subject to the 10% early withdrawal penalty rules. That’s it.
In your case, you won’t actually owe the 10% early withdrawal penalty because it’s been more than five years since the transfer. Also, this rule does not apply to people 59 and older. (And if you need help planning a Roth conversion or mapping your withdrawals, consider talking to one.) Financial advisor.)
There are two five-year rules to consider in your case:
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The Five-Year Rule on Roth IRA Contributions: If you don’t meet this rule, you will owe income tax on the earnings portion of the withdrawal. A 10% early withdrawal penalty may also apply.
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THe ruled for five years on Roth conversions: If you do not meet this rule, you may owe a 10% early withdrawal penalty on the distribution of the transferred funds.
If you’re over age 59 ½ and you contributed to your first Roth IRA more than five years ago, you meet both parts of the qualified distribution rules. Any withdrawal you make from a Roth IRA is a qualified distribution. The five-year rule on transfers no longer matters because just being over 59 ½ means it no longer applies to you.
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Roth IRAs can be a strategic component of estate planning because they don’t Requires minimum distributions (RMDs) during the lifetime of the account holder. Beneficiaries too You inherit the money tax-freeWhich can preserve wealth for future generations. By prioritizing Roth IRAs in retirement and inheritance planning, you can reduce the tax burden on your estate and provide ongoing financial benefits to your heirs.
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A Financial advisor It can help you manage your Roth IRA and integrate it into your overall retirement income plan. Finding a financial advisor is not difficult. Free SmartAsset tool Matches you with up to three vetted financial advisors serving your area, and you can set up a free introductory call with your matched advisors to determine which advisor you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, Start now.
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Brandon Renfro, CFP®, is a financial planning columnist for SmartAsset and answers reader questions on personal finance and tax topics. Do you have a question you want 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 and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.
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