Dear Liz: Eight years ago I converted a number of stocks from an IRA to a Roth IRA and paid the taxes. Now I am in a position to convert the last shares but want to do it incrementally over the next four years. Does each conversion then require its own five-year waiting period or will anything in the existing Roth now qualify to be withdrawn at any time?
Answer: The IRS requires five-year holding periods before earnings can be withdrawn tax-free from Roth accounts. The five-year rule applies separately to each Roth conversion, so the partial conversions you’re contemplating will each have their own five-year holding period, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
That’s different from regular Roth accounts, where the five-year rule starts the year the account was first opened and isn’t triggered again by subsequent contributions, Luscombe says.
You might have mentioned that this particular 5 year rule doesn’t apply to people over 59 1/2!
It does, though. What doesn’t apply after 59-1/2 is the 10% penalty.
Liz,
Even though each conversion has it’s own 5 year holding period, once you’re 59.5 and have had a Roth opened for 5 years, then all earnings are tax free on any conversion and the 5 year conversion rule is no longer applicable.
The rules can be confusing, but as Mark says, the 5 year holding period applies to every conversion, regardless of age. What doesn’t apply after age 59 ½ is the 10 percent penalty. Earnings withdrawn before five years are taxed as income. However, it’s assumed that any withdrawals are principal first, so you’d have to withdraw the entire conversion amount before earnings on the conversion amount would be taxed.
Liz,
I’m sorry but I believe Mark is wrong. This is an important point and I think you need to check with another source or, better yet, multiple sources.
I understand that there is no conversion 5-year holding period for conversions after the taxpayer has reached age 59.5. This includes conversions done prior to age 59.5 as well as after the taxpayer reaches 59.5. Conversion dollars can be distributed at any time after 59.5 without tax or penalty. Period. Full stop.
If I am wrong, please cite two reliable sources besides Mark Luscombe. It’s a confusing issue and it deserves thorough research.
Thank you. I enjoy your column very much.
Here are three additional reliable sources:
https://www.fidelity.com/learning-center/personal-finance/retirement/roth-ira-5-year-rule
See “Roth conversions and the 5-year rule”
https://www.nerdwallet.com/article/investing/roth-ira-5-year-rule
See “The five-year rule and Roth conversions”
https://www.schwab.com/learn/story/what-to-know-about-five-year-rule-roths
See “Roth conversion five-year rule”
Hope that helps.
Please look at this source: https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp
See section:
“Does the Five-Year Rule Apply to Roth Conversions After Age 59½?
“Yes. Even if you’re over age 59½ when you withdraw, some of your withdrawals could get included in taxable income, thanks to the five-year rule. You won’t owe the 10% penalty in that case, but you’ll still owe tax on any withdrawals above the amount contributed.
Still, here’s a legal loophole that can get you around that tax liability, from KCM’s Carter: if you already had another Roth and five years have elapsed on its lifetime, then the IRS treats the second, newer Roth as if it too is five years of age or older. Earnings that you withdraw from that second Roth IRA will not be taxed.”
Maybe you’re familiar with “KCM’s Carter” (possibly Kornitzer Capital Management’s, Chris Carter). Last paragraph “loophole” (which I’ve seen in a couple other past searches) indicates that if you’re over 59-1/2 AND have another Roth account that’s over five years old, a second (newer) Roth is treated as if it’s over five years old as well, even if it isn’t. This is the key point for us oldsters who are still converting IRA’s to Roth IRA’s.
For context, Wolters Kluwer is the firm that tax pros turn to when they have a question. No source is infallible, but Mark has been a source for years and never steered me wrong. The author of this piece seems to be more of a personal finance generalist, and it’s not clear who his source is — there should be a first name and clear affiliation included on first reference — or whether the information is in context (it could be referring to a contributory Roth, rather than a conversion.)
For what it’s worth, Mark suggests that each partial conversion be kept in its own account and then combine them after the last five-year mark is past. That way, if you need to make a big withdrawal that could include earnings, you can do so from an account that has passed its five year mark. Hope that helps.
Hi Jack Rohrer, KCM’s Carter is addressing the “Lifetime” holding period. The “loophole” applies to all subsequent to the first Roth established. The other 5yr holding discussed is on each conversion and applies at any age. See examples explained:
https://www.lordabbett.com/en-us/individual-investor/insights/retirement-planning/quick-answers-the-five-year-rule-and-important-info-on-roth-ira-.html
Thus, we need to keep these separate from each other. Handle withdrawing as like maturing bond ladders do. Withdraw once 5yr has occurred to consolidate.
I was required to make a MDR distribution from my contribution IRA accounts in 2024 which was paid in December 2024. I am 75. I placed the proceeds (taxes paid) into a regular CD which it mature in a few days.
My question: Can I take the proceeds + interest from the CD and use it as a Roth Contribution for 2024 into my present Roth account? I am still employed and have earnings to cover the contribution and my total contribution to the regular and Roth account in 2024 would be under $7000.
I would not need to open a new Roth account and be subject to the five year requirement?
I would like to do this before the end of 2024 tax season which I have already filed a return, but the potential Roth contribution was not included. If that is not an option, could I do that for 2025?
Gary Rasmussen
Liz,
Based on U.S. Code § 408A – Roth IRAs, it says that any withdrawal made after the person is 59 1/2 is considered a qualified distribution.
https://www.law.cornell.edu/uscode/text/26/408A#d_2
From IRS Pub 590 Figure 2-1, the flowchart clearly shows that once you’re 59 1/2, it is considered a Qualified Distribution.
https://www.irs.gov/publications/p590b#en_US_2023_publink100089463
Why would Wolters Kluwer interpret the IRS Pub 590 Figure 2-1 differently?
Both those links mention the five-year waiting period. Also, keep in mind that the rules regarding conversion Roths vs. contributory Roths are somewhat different. Tax law is complex and it’s easy to take things out of context, which is why I rely on Wolters Kluwer and other expert sources.
Hi Liz, I have seen other financial advisors agree with you and Mark regarding 5 year rule for conversions after age 59.5. However, there are others online who have a different interpretation….
https://youtu.be/Uyz4Wq12Me0?si=-UpBbHszm_-wnkzV
https://youtu.be/hkAtodNyMeE?si=7ksg744B4wiVFN-f
My thought is that “others online” aren’t likely to accompany you to an IRS audit, so it’s always smart to consult a tax pro who can.
I completely agree with that “others online” will not accompany me in an IRS audit, but neither will your expert, Mark. 🙂 It’s unfortunate there isn’t a way to get a definitive answer.
Wolters Kluwer is the definitive source, and would likely be the one a good tax pro would consult if they had questions. Most of personal finance isn’t rocket science, with the exception of taxes and estate planning. In those two areas, it’s very easy for a DIYer to go wrong.