@setneupm wrote:
Great article!
So, I started my initial Roth IRA about 15 years ago with regular contributions. Subsequently, started additional Roth IRA after the initial one.
In January of 2019, I was 58 yrs old and during the market downturn, I converted traditional IRA funds to my Roth IRA. Since the 2019 conversion, the market has bounced back and I have substantial gains. I have not contributed any additional funds to my Roth IRA. I am currently 61 1/2 and would like to use the conversion funds and the gains from the Roth in 2023.
I have always interpreted the 5 year rule on conversions to mean that my Roth IRA gains are not accessible (without penalty) until January of 2024. Based on this article, since I am over 59 1/2, I can access all of my Roth IRA funds (as qualified distributions) without penalty at anytime.
Is this correct? Thanks!
When you withdraw from a Roth, you withdraw contributions first, then conversions second, and earnings last. You can't just decide to withdraw a conversion--the only way you can withdraw a conversion is if you have already withdrawn all the regular contributions. You must aggregate all your Roth IRA balances for this purpose.
In other words, suppose you have $20,000 in account A, which represents $10,000 of contributions and $10,000 of gains. You have $30,000 in account B, of which $20,000 is a conversion and $10,000 is gains. If you withdraw $20,000 from account B, it will still be considered to represent $10,000 of contributions and $10,000 of conversion.
Now, the short answer is that after age 59-1/2, all withdrawals from a Roth account are free from income tax and the 10% penalty for early withdrawals. The 5 year conversion rule can be ignored.
The long answer is is illustrated below.
| Type of withdrawal |
Subject to income tax |
Subject to 10% early withdrawal penalty |
| Contributions |
No |
No |
| Conversions |
No |
Yes, if less than 5 years and under age 59-1/2, no if over age 59-1/2 |
| Earnings |
Yes if under age 59-1/2, no if over age 59-1/2 |
Yes if under age 59-1/2, no if over age 59-1/2 |
The idea is that, suppose you are age 40. If you withdraw from a traditional IRA, you pay income tax plus the penalty. If you convert to a Roth at age 40, you pay income tax. If you then withdraw from the Roth at age 41, you should not be allowed to dodge the 10% penalty. The 5 year rule is present to discourage this kind of "cheating" by making it impossible to use a Roth IRA conversion to avoid the 10% penalty. But since the 10% penalty doesn't apply to a traditional IRA after age 59-1/2, it also doesn't apply to a conversion.
