According to onearticle by Brandon Renfro, there are three 5-year rules for Roth IRAs, but he talks about the first two as they apply to the reader’s question. He explains the 5-year rule for Roth contributions and the 5-year rule for Roth conversions. I’m only interested in the second rule because I’m thinking of converting money from my 401(k) to a Roth IRA that I already have. I used to contribute to this about 20 years ago when I was working. I am now retired and I am 67 years old.
In my case, I don’t have to wait five years to withdraw money from my account after it’s converted, right? There seems to be a contradiction in the article because the writer implies that both 5 year rules do not apply to the reader, and therefore to me, since I am in the same boat so to speak.–William
William, that’s a great follow-up question to that article and I’m glad you’re asking it. As mentioned before, the 5 year rules are confusing. Understanding their purpose and intent can help you follow through when they ask. The short answer is yes, interpret the rules correctly for your situation. I’ll try to rephrase the explanation to make it clearer.
A financial advisor can help you navigate the 5-year rule and other areas of retirement planning. Get in touch with a free advisor.
You want to know if the 5-year rule for Roth conversions would prevent you from immediately accessing the converted money given your situation. Plain and simple, it won’t.
The 5-year rule for Roth conversions exists for a reason. It’s there to prevent people who are under 59 1/2 years old from circumventing the 10% early withdrawal penalty.
If someone is under 59 ½, each Roth conversion has its own five-year clock. Withdrawal of converted funds before the hour has expired may trigger a 10% early withdrawal penalty, even if fees have already been paid on conversion, unless an exception applies.
This rule closes a loophole that would otherwise allow someone to convert from an IRA to a Roth IRA, paying only income tax (but no penalty), and then withdraw the money from the Roth IRA, thereby avoiding the 10% penalty even if they are under 59 ½.
Because you’re already over 59 1/2, you’re no longer “early” (that’s a polite way of saying it, right?), so the penalty is no longer an issue. The 5-year rule for Roth conversions doesn’t affect you at all. You can withdraw converted dollars immediately after conversion without triggering any fees or penalties.
(For personalized advice, talk to a financial advisor and see how they can meet your unique financial needs.)
A notebook that says “Roth IRA Conversion.”
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You didn’t ask about this, but to clarify where I think you sense a contradiction, I’ll go ahead and write that one as well. There is a separate 5-year rule that applies to Roth IRA contributions. It takes, in part, five years to roll over after the first Roth IRA contribution. If you withdraw before then, the winnings are subject to income tax.
You have already met this rule because:
That means you’ve met both conditions for qualified Roth withdrawals. (And if you have additional questions about qualified withdrawals and Roth conversions, talk to a financial advisor.)
No, but I think the way I phrased it may have caused confusion, so let me rephrase. In the other article I said that the first rule, and also the second rule, does not apply to the reader who asked the original question. It may be simpler to say that no rule applies to:
He is over 59 ½ so the 5 year conversion rule regarding early withdrawal penalties is irrelevant.
His first Roth IRA has already met the 5-year contribution requirement. And again, he’s over 59 ½, so he can withdraw the earnings tax-free.
You are in exactly the same position, which is why the same conclusion applies to you. (And if you want more in-depth help with your retirement plan, contact a financial advisor for free.)
A couple revising the 5-year rule.
Because you are over 59 ½ and the Roth IRA has already been open for more than five years, neither rule applies to you. You can convert the money from your 401(k) to a Roth IRA (incurring income tax on the conversion) and withdraw the converted dollars immediately without triggering additional taxes or penalties.
That said, Roth conversions themselves are still taxable events. You should evaluate the decision to convert in the context of your broader retirement income and tax strategy.
As retirement decisions become more complex, working with a financial advisor can help you navigate income planning, tax strategies and long-term care considerations. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with verified financial advisors serving your area, and you can have 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.
Once you turn age 73, most tax-deferred retirement accounts require annual minimum withdrawals (RMDs). These distributions can increase your taxable income and affect your Medicare premiums or tax brackets. Planning ahead, including partial Roth conversions or coordinated withdrawals, can help manage the tax impact.
Brandon Renfro, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about personal finance and tax topics. Have a question you’d like answered? E-mail 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 SmartAsset AMP participant. He was compensated for this article.Some questions submitted by readers are edited for clarity or brevity.
