There are two 5 year rules for Roth IRAs. It's all in here.
https://www.irs.gov/publications/p590b#en_US_2020_publink1000231065
1. To be a "qualified" distribution, the payment must be made after you reach age 59-1/2 (or certain other reasons), AND after the fifth tax year in which you first opened a Roth IRA.
If this is your first ever Roth IRA account, opened 12/31/2021, then the 5 tax-year period runs from 2021 through 2025. Your withdrawals will not be qualified until 1/1/2026.
This 5 year rule is satisfied by any Roth IRA, so if you had opened a previous Roth IRA in the past, you may have already satisfied this 5 year rule and your withdrawals would be qualified even if you withdrew them tomorrow.
2. There is a second 5 year rule for conversions. Each conversion has its own 5 year waiting period, separate from the overall 5 year waiting period for owning a Roth IRA. Again, you can withdraw your basis but not your earnings. However, if the withdrawal is otherwise qualified, the penalty for withdrawing earnings from a conversion is only the 10% penalty for early withdrawal, and that does not apply if you are over age 59-1/2.
The bottom line is that
- there is an extra tax on early withdrawals of conversions,
- each conversion has a separate 5 year clock,
- the 10% tax for early conversions does not apply if you are over age 59-1/2,
- the general 5 year rule for qualified distributions applies at any age.
Using your suggestion, let’s convert 100 shares of McDonald stock worth $26,800 on 12/31/2021, and convert 100 shares of AT&T worth $2600 on 7/1/2022. Your conversion basis is $29,400.
Let's look at 2 scenarios.
On June 30, 2025, the balance is $34,000 (assuming 5% per year) and you need to withdraw $30,000. Using the ordering rules:
- The first $26,800 is your 2021 conversion. It's within the general 5 year rule, and it's within its own 5 year conversion clock, but it's non-taxable as a withdrawal of your conversion basis and you are exempt from the 10% penalty by your age. This part is non-taxable.
- The next $2,600 is your 2022 conversion. It's within it's 5 year conversion clock and is non-qualified, but since it is your conversion basis and you are over age 59-1/2, it's not taxable and not subject to a penalty.
- The last $600 is earnings, and since the withdrawal is not qualified by the general 5 year rule, this portion is subject to regular income tax, but not the 10% penalty.
Or, suppose you want to withdraw the entire account balance on January 2, 2026, and the balance is about $35,000. Now, the entire withdrawal is qualified because you are over age 59-1/2, and you meet the general 5 year rule. Using the ordering rules:
- The first $26,800 is your 2021 conversion, and is non-taxable because it is past it's 5 year clock for conversions.
- The next $2,600 is your 2022 conversion. This is an early conversion subject to a 10% penalty, except this penalty does not apply if you are over age 59-1/2.
- The last $5,600 is earnings, and is non-taxable because the distribution is qualified.
