I have had a Roth IRA and a Traditional IRA for well over five years and want to start converting the traditional IRA to the Roth IRA. My belief is that I could start 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 to withdraw the earnings on the 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 spot on. Since you are over 59 ½ and have held 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 their earnings), you can do so without worrying about taxes or penalties.
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 other readers, make even more sense of the answer above.
The first five-year rule applies to determining whether Roth IRA contributions and earnings qualify as tax-free, penalty-free distributions. For a withdrawal to be “qualified,” it must meet two conditions (which are outlined in the 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:
Account holder is over age 59 ½
Account holder is permanently disabled
Account holder using the funds for a first-time home purchase (up to $10,000)
Account holder is deceased (with the account passed to beneficiaries).
If these requirements aren’t 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 59 ½ (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 specifically applies to conversions, and thankfully, it’s a little simpler. This rule dictates that you must wait five years before withdrawing converted funds penalty-free. However, unlike the first five-year rule – which you only need to satisfy one time – 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 doesn’t have anything to do with whether you’ll owe ordinary income tax on your investment earnings. Instead, it determines whether distributions of the converted balance is subject to the 10% early withdrawal penalty. Simply stated, if you withdraw converted funds before five years have passed (since Jan. 1 of the year you performed the conversion), 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 conversion. Also, this rule doesn’t apply to people who are 59 ½ and older. (And if you need help planning a Roth conversion or mapping out your withdrawals, consider speaking with a financial advisor.)
There are two five-year rules to consider in your situation:
The five year rule on Roth IRA contributions: If you have not met this rule then you will owe income tax on the earnings portion of your withdrawal. A 10% early withdrawal penalty may also apply.
The five year rule on Roth conversions: If you have not met this rule then you may owe a 10% early withdrawal penalty on the distribution of converted money.
If you are over 59 ½ and contributed to your first Roth IRA more than five years ago then you have satisfied both parts of the qualified distribution rules. Any withdrawal you take from a Roth IRA is a qualified distribution. The five-year rule on conversions doesn’t matter anymore because simply being over 59 ½ 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 holder’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 holistic retirement income plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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 a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d 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 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.
