I’m 65 and Just Did a Roth IRA Conversion to Avoid RMDs. Does the 5-Year Rule Apply to Me? (2024)

Imagine that you’re 65 years old and just completed a Roth conversion during a low-tax year early in retirement to avoid future required minimum distributions (RMDs). However, not long after the conversion, you want to withdraw the money you just paid taxes on. But pursuing the withdrawal without first understanding the five-year rule for Roth IRAs could leave you paying income taxes and penalties on the money.

Would the rule apply to you in this situation? Unfortunately, the answer is the ever unsatisfying “it depends.” In fact, there are actually several five-year rules to be aware of with Roth IRAs. We’ll review two that would likely come into play and explore how they would impact your withdrawal strategy.

5-Year Rule #1: Roth Contributions

The first five-year rule, which applies to Roth IRA contributions, centers around whether withdrawals of any accumulated earnings will be taxed. This rule requires the account owners to wait at least five tax years from the time of their first contribution – whether it was made directly or via conversion – to withdraw earnings, provided they have reached age 59 ½. If you make subsequent contributions or open new Roth accounts, the clock does not restart.

For distributions of earnings to be qualified – that is, tax-free – you must satisfy the age requirement and this five-year rule. Exceptions to the age requirement exist for the death of the account owner, disabilities and first-time homebuyers. But even in the case of these exceptions, the five-year rule must be met or any earnings taken from the account will be taxable.

If you are at least 59 ½ years old but have not met the five-year rule requirement, then you will pay income taxes on any earnings that are withdrawn. Since contributions to Roth IRAs are made with after-tax dollars, you can always withdraw the value of your contributions free of taxes and penalties, but any gains generated and distributed before the five-year period ends will be taxed. The distribution would also be subject to a 10% early withdrawal penalty if you are not 59 ½ years old. (Speak with a financial advisor if you need help navigating the five-year rule for your Roth IRA.)

5-Year Rule #2: Roth Conversions

The second five-year rule relates specifically to Roth conversions and whether an early withdrawal of converted principal will be taxed. In effect, the rule only applies if you take a distribution before you turn 59 ½.

For example, assume you have a Roth IRA in place and complete a conversion when you’re 56. If you want to withdraw that converted principal two years later at age 58, the withdrawal would be subject to the 10% early distribution penalty. However, if you wait until at least age 59 ½, you won’t face the penalty even though it will be less than five years since the conversion.

While the five-year clock for the first rule starts with your initial Roth contribution, each Roth conversion you execute has its own five-year clock that starts on Jan. 1 of the year in which you complete the conversion. For example, if you do a Roth conversion in May 2024, your five-year clock would have started Jan. 1, 2024.

As a result, you need to be mindful of your conversion history when taking distributions. The IRS helps you avoid potential mistakes to an extent by requiring contributions be withdrawn first, converted balances second and investment earnings last.

Furthermore, conversion withdrawals are done on a first-in, first-out basis, so the oldest conversions get withdrawn first once direct contributions have been fully distributed. (Need more help? A financial advisor can help you better understand the withdrawal rules surrounding Roth conversions.)

Applying the 5-Year Rules

Let’s apply each rule to the hypothetical scenario above to see why this case is not as straightforward as it might have seemed initially.

We’ll start with the second rule since you’re over 59 ½ in our hypothetical example. As a result, you can withdraw all converted principal without paying a 10% penalty. The first rule is a bit trickier since its application will depend on the answers to a few questions. Specifically:

If the conversion represents the first time you’ve put money in a Roth IRA, the first five-year rule would apply. That is, while you can withdraw the converted principal tax-free and penalty-free due to your age, you would still owe taxes on any investment earnings that you wish to take out. The key question then becomes how much you intend to distribute if the account has accumulated gains since its initial funding.

Let’s look at a few potential scenarios since we’re missing some key details to give a definitive answer. In each scenario, let’s assume you have $50,000 in the account post-conversion and that the conversion was in fact the initial funding of your first Roth IRA.

Scenario 1: You completed the conversion five days ago, the account has not generated any gains and you want to withdraw the account’s entire value. Since there are no earnings to distribute and the account value is simply the value of the conversion, the first rule is irrelevant. You can withdraw the whole account whenever you like.

Scenario 2: You completed the conversion a month ago, the account has generated $2,000 in gains and you want to withdraw $25,000. In this case, the first rule is also irrelevant since you are only tapping into the principal and not the earnings. Therefore, you can withdraw $25,000 in principal and not pay any taxes or penalties.

Scenario 3: Let’s assume the same background as Scenario 2, but you instead want to withdraw all $52,000 in the account. In this case, the first five-year rule applies since you have not waited five years to withdraw your earnings. Even though you are over 59 ½ years old, you would still owe taxes on the $2,000 in gains.

Bottom Line

Application of these two five-year rules can become somewhat complex. Just remember that the first rule applies to earnings and the clock starts with your initial funding of the account. You cannot get around this rule even if you have reached age 59 ½. However, initial funding can come in the form of either a direct contribution or conversion.

The second five-year rule applies to money that’s converted into Roth assets. Although, this rule becomes moot if you’re at least 59 ½ years old, even if you withdraw converted funds less than five years after the conversion was completed.

Tips for Navigating the 5-Year Rule

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