Roth Withdrawals

[l1a1son]

I am over 59 1/2: I have 2 IRA conversions to a single Roth IRA account : in 2018 and 2020. Can I withdraw the earnings from the 2018 Roth conversion tax free? Are the earning calculated on a "basis" method?

[Opus 17 · Accepted solution]

All withdrawals are tax-free in your case.

Remember that you paid income tax on the converted amounts in 2018 and 2020.   The 5 year rule for conversions means that you pay an additional 10% penalty for early withdrawal if you withdraw in less than 5 years, but only if you are under age 59-1/2.  Because you are older, you are never subject to the additional 10% penalty, even on conversions less than 5 years old.

Roth earnings are taxable if withdrawn before age 59-1/2, or if withdrawn less than 5 years after opening your first Roth account, even if you are over age 59-1/2.  Since your earliest Roth account was at least 2018 (if not earlier) then withdrawal of earnings is also not taxable at this point. 

[NCperson]

@l1a1son further, and it doesn't matter in your case since any distribution is going to be tax free for the rest of your life, but when you distribute from a Roth IRA, the IRS assumes that all contributions are distributed first, all conversion dollars are distributed 2nd and then and only then are the earnings distributed.  

So while you asked about distributing your earnings, it may be you are technically distributing the conversion dollars because of the IRS priority order of distributions :-). 

[l1a1son]

I am caught up with the IRS guidelines :" each IRA conversion starts a new 5 year clock for tax free withdrawals: that obviously doesn't apply to principal, which has been taxed.  Is it your point that this requirement does not apply if I am older than 59 1/2?

The IRS guidelines are confusing because of the different rules based on age : even financial/tax experts have given me conflicting advice or punted.

To be clear : over 59 1/2 with a Roth that has been established for > 5 years : any IRA conversion to Roth at any time is able to be withdrawn tax free including earnings. Is this correct?

[NCperson]

@l1a1son 

<<To be clear : over 59 1/2 with a Roth that has been established for > 5 years : any IRA conversion to Roth at any time is able to be withdrawn tax free including earnings. Is this correct?>>

yes that is correct .... and if you have multiple Roth accounts that were opened at different times, as long as ONE of them was opened prior to 1/1/20 (five calendar years for 2024 tax year), then ALL of your Roth accounts satisfy the five year requirement. 

<<each IRA conversion starts a new 5 year clock for tax free withdrawals: that obviously doesn't apply to principal, which has been taxed. Is it your point that this requirement does not apply if I am older than 59 1/2?>>

It doesn't apply because you are over 59.5 years old (no 10% penalty) AND the oldest Roth account has been opened for at least 5 calendar years (otherwise, any earnings withdrawn prior to the oldest account being open for 5 calendar years would be subject to income tax. ) 

and the rules are quite confusing!!!!

[Opus 17]

@l1a1son 

The five year clock on each conversion only applies to the 10% penalty.  Since you are over age 59-1/2, that never applies.

Consider a scenario:  You are 30 years old, and you want to withdraw money from your IRA to buy a sports car.  You know you will pay income tax plus 10%.  So instead, you convert the money to a Roth, pay the income tax, then withdraw it tax-free.  If there was no special rule for conversions, this strategy would let every taxpayer skip the 10% early withdrawal penalty.  So there is a 5 year waiting period for conversions.  But since the reason for the waiting period is to prevent people from avoiding the early withdrawal penalty, and early withdrawal penalties don't apply after age 59-1/2, so the conversion rule waiting period also does not apply after age 59-1/2.