I have a ROTH IRA question about the 5 year rule, can I ask Turbo Tax?

[raysurx2010]

I have a 457 and want to convert it to a ROTH IRA. I was told that for every Roth Conversion the 5 year rule apply's for each ROTH IRA created. Then I was told that was wrong, that the IRS goes by the very first time you opened a ROTH, is when the 5 year rule apply's for all subsequent ROTH accounts opened later.

[Bsch4477]

Once you open a Roth the 5 year clock starts and that same clock applies  to all subsequent contributions.  Conversions are treated differently. Each conversion has its own 5 year clock. 

[Opus 17 · Accepted solution]

There are two 5-year rules, that's why you are confused.

There is an overall 5 year rule that says that if you withdraw earnings when your account is open less than 5 years, the earnings are taxable even if you are over age 59-1/2.   (Withdrawal of contributions is never subject to income tax, and withdrawal of conversions is not subject to additional income tax because you paid that at the time of the conversion.)

Then there is a separate 5 year rule for conversions.  Each conversion has a separate 5 year clock that says that if you withdraw the converted amount in less than 5 years, AND you are under age 59-1/2, you will be assessed a 10% penalty for early withdrawal.  Even if less than 5 years since the conversion, the 10% penalty is never assessed if you are over age 59-1/2.

[raysurx2010]

Thank you so much for the reply!  

I just want to confirm I understand. 

"Even if less than 5 years since the conversion, the 10% penalty is never assessed if you are over age 59-1/2.".

So no penalty if we are 59 1/2 or older?  That sounds great.

My wife is 58, so I was going to start converting her 457 to ROTH, (Yeah I know taxes will be due, but I want her to have her money grow tax free, and once she retires, maybe at age 62 1/2 or 63.  She would be able to withdraw some of this converted ROTH money as needed without the 10% penalty, correct?  

Sorry if I sound redundant, but I just want to make sure I understand correctly. 

So as long as the person is over 59 1/2, basically the 5 year rule no longer applies for any withdrawals made to ROTH IRA's with less than 5 years of creation?

[raysurx2010]

I have one more question to confirm on this ROTH 5 year rule.

This morning I contacted my 457 plan Administrator (Nationwide Securities) They manage the State of California Calpers 457/401k retirement plans.  I told them my plan for me (age 65), was to start converting my 457 money to a ROTH.  The support person, told me that I would still have to wait 5 years before I can withdraw any of the ROTH Money I convert. 

So I tried calling the IRS 800 number (to confirm this information), they actually picked up in 20 minutes. Then I was transferred to an IRA/ROTH specialist, they picked up within 15 minutes  and then proceeded to transferred me to another Specialist, I was supposed to be on hold for another 15 to 20 minutes, and of course after waiting on hold for 25 more minutes, they hung up on me!  I should have known.  So I logged onto Turbotax and posted my original question.  Thank you to all for helping me out.  This reply was pretty fast and I highly appreciate your responses!  

[Opus 17]

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@raysurx2010 wrote:

So as long as the person is over 59 1/2, basically the 5 year rule no longer applies for any withdrawals made to ROTH IRA's with less than 5 years of creation?

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The 5 year conversion clock doesn't apply but the overall 5 year rule still applies.

If you don't have a Roth IRA now (or your spouse does not have one now, remember there are no joint accounts and each owner must follow the rules individually), then any earnings that are withdrawn within 5 years from the opening of the first Roth IRA are taxable, no matter the age.

For example, your wife is 58 and does not currently own a Roth IRA.  She opens a Roth IRA in 2025 by converting $10,000 and paying the income tax.  Withdrawals are always in the order of contributions first, conversions second, and earnings last.  Suppose that in 2028, when she is 60 and the account is less than 5 years old, she withdraws $5000.  That will all come from conversions.  There is no income tax (because that was already paid).  There is no 10% penalty, because she is over age 59-1/2.  Then suppose that in 2029, she withdraws $6000.  This represents the remaining $10,000 of the conversion, plus $1000 of earnings.  There is no income tax on the conversion and no penalty (for the same reasons) but the $1000 of earnings is subject to regular income tax because she had not passed the overall 5 year clock on IRAs.  Then in 2030, she withdraws another $1000.  This is all earnings (unless there were other contributions or conversions in the mean time).  The withdrawal is completely tax free because both 5 year rules are satisfied. 

The bank is wrong that money can't be withdrawn.  You can always withdraw funds from an IRA, the question is whether or not, or how much of it, will be taxed and in what way. 

[raysurx2010]

Thank you for your information.

[raysurx2010]

I  should have mentioned that I have 4 Roth IRA's that I opened over 5 years ago.  Meaning all 4 are over 5 year old  or older.   At 4 different banks / brokerages.  One only has about $500.00 the rest have more.

I'm 65 years old.

1. I though the ROTH IRA 5 year rule was based on your oldest ROTH IRA, not any subsequent ROTH IRA's opened after your initial ROTH IRA.  Yes you would have to be 59 1/2 to withdraw without penalty.  But subsequent ROTH IRA's would follow the original 1st IRA clock in terms of the 5 year rule.

2. Now I want to convert my 457 money to a Roth IRA.  I was told by the 457 administrators that, by doing this I would be starting a new 5 year rule on this money.  Meaning I would have to wait 5 years to withdraw without the 10% penalty.  No mention of the conversion penalty.  

These IRA's can get too deep with rules..

Appreciate everyone's input and previous reply's.

Have a good weekend.

But based on that 457 money, If I understood correctly I 

[Opus 17]

There are 2 different 5 year rules. 

Yes, the general 5 year clock for all Roth accounts only applies once.  

• As a technical note, IRA means individual retirement arrangement.  You only have one arrangement, even if you have accounts at more than one broker.  You only need to satisfy the general clock once for your individual retirement arrangement.

Each conversion has a separate 5 year clock that must be met even if the general 5 year clock is satisfied.  However, the penalty for removing converted funds is only the 10% penalty for early withdrawal, and that never applies over age 59-1/2, even if the clock is not satisfied.

• Technical note: When you do a traditional to IRA conversion, you pay the income tax on the converted amount.  If you could withdraw the converted amount without any penalty, then someone under age 59-1/2 could do a Roth conversion and immediate withdrawal, and avoid the 10% penalty for withdrawing directly from the traditional IRA.  This is why there is a separate 5 year clock on each conversion, to block people under age 59-1/2 from dodging the penalty.  That is also why the penalty does not apply over age 59-1/2 even if the 5 year clock is not satisfied.