Tricky Roth IRA 5 year rule question

[Serge]

I am over 60. I opened a Roth IRA over 10 years ago. I just rolled over the Roth into another company. It has got only 2K in it and AGI is < from the $198K married contribution limit.

If I convert 5K from my traditional IRA into my Roth now in 2021 and withdraw 5K in 2022, will this amount be exempt from the 5 year rule? Will any earnings withdrawn from the 5K be exempt from the 5 years rule?

Same question with an additional contribution of 2K now in 2021. Let say that in addition to the 5K conversion avobe I contribute an additional 2K  and withdraw $6K in 2022, is anything subject to the 5 year rule or would the entire amount be treated tax free?

I am under the impression I would be tax free all around including the earnings because I held the initial Roth for over 5 years and am over 60.

[DaveF1006]

According to Publication 590-B, " if a distribution was made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit, the entire distribution is tax free." It is a qualified distribution since the IRA was created 10 years ago.

Please review publication 590-B at the following link for further details.

[ Edited 12/28/21| 04:00 PM PST]

[Opus 17]

You have satisfied the 5 year rule, you don't have to satisfy it for each separate account or contribution.

A conversion is not a contribution, no matter how much you convert in 2021, you could contribute up to $7000 of new funds (or up to your compensation from working, if less than $7000.)

But the conversion from traditional to Roth IRA will be a taxable event.

And beware the timing, it is very late in the year.  If you request a contribution or conversion in 2021 but the custodian does not process it until 2022, it will count for 2022, not 2021.  Make sure your custodian can execute the moves you are planning in the days remaining to the year. 

What is the purpose of making a Roth IRA contribution in 2021 if you are planning to withdraw it in 2022.  The withdrawal would be non-taxable but the contribution is not deductible, it sounds like a transaction with no purpose. 

[Serge]

"What is the purpose of making a Roth IRA contribution in 2021 if you are planning to withdraw it in 2022.  The withdrawal would be non-taxable but the contribution is not deductible, it sounds like a transaction with no purpose."

The purpose is to get any capital gain on invesments purchased in that year to be tax free in Roth wheras it would taxed in the traditional IRA upon  withdrawal. So the purchase of stock/bonds assets allows a tax free gain and I actually can throttle the distribution from my IRA based on my tax situation for that year . i would hold this for the whole 2022 year at least in ROTH

[FangxiaL]

Each conversion has its own 5-year period. Each contribution's 5-year holding period starts from the initial contribution. In your case, any new Roth IRA contribution has met the 5-year holding period because you set up your Roth IRA account 10 years ago. But if you convert $5,000 from Traditional IRA to Roth IRA in 2021, the 5-year period started in 2021. That conversion will satisfy the 5-year holding period starting in 2026. 

@Serge

[dmertz · Accepted solution]

After age 59½ the 5-year holding period for conversions no longer applies.  Since you've met the separate 5-year holding period for qualified distributions, your Roth IRA distributions are now tax and penalty free.

[Serge]

thks. that clear it up

[DFMu]

Thought the five year rule only applied to withdrawal of earnings (not withdrawals of converted funds) if 59.5 or older.  Am I misinformed?

[dmertz]

There are two different 5-year rules with regard to Roth IRA distributions.  One is for determining if distributions are qualified distributions and that clock begins January 1 of the year for which you first made any Roth IRA contribution.  Once you completed this 5 year period and are over age 59½, your Roth IRA distributions are free of any income tax or penalty.  The other 5-year rule is for conversions and is used to determine if a distribution of a converted amount is subject to an early-distribution penalty.  Early-distribution penalties end at age 59½, so the conversion 5-year rule is meaningless after age 59½.

@DFMu , you appear to be asking about the qualification 5-year rule.  The original question in this thread asked about the conversion 5-year rule.

[DFMu]

Thanks for your answer, but I'm still confused.  I am 67.  I opened Roth IRA account in 2021 when I converted a portion of a traditional IRA.  Am I unable to withdraw any of converted amount until 2026 without tax or penalty?  I thought the rule was to keep under 59.5 year olds from converting and withdrawing without penalty.  

[dmertz]

You appear to be misreading my reply.  As I said, after age 59½ the 5-year rule for conversions is meaningless (i.e., no longer applies).  There is no early-distribution penalty after age 59½.

At age 67, your only concern is with the 5-year rule for qualifying your Roth IRA, not the 5-year rule for conversions.  Because your first Roth IRA was established with a Roth conversion (technically a conversion contribution to your Roth IRA) in 2021, your Roth IRAs will not be qualified until 2026 at which time any earnings in your Roth IRAs become tax free.  Prior to that you can take out any amount of your converted funds without tax or penalty.  If prior to 2026 you take out any earnings, which come out only after you have taken out all of the converted funds, the earnings will be subject to income tax but not to any penalty.

[Opus 17]

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@DFMu wrote:

Thanks for your answer, but I'm still confused.  I am 67.  I opened Roth IRA account in 2021 when I converted a portion of a traditional IRA.  Am I unable to withdraw any of converted amount until 2026 without tax or penalty?  I thought the rule was to keep under 59.5 year olds from converting and withdrawing without penalty.  

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What is your exact situation?  You are adding on to an old discussion. 

Whenever you withdraw from a Roth IRA, you withdraw contributions first, conversions second, and earnings last.

For withdrawal of contributions: Never taxed.

For withdrawal of conversion amounts: Subject to a 10% penalty for early withdrawal unless the conversion was more than 5 years ago OR the taxpayer is over age 59-1/2.

For withdrawal of earnings: Taxable income plus a 10% penalty if the account holder is under age 59-1/2.  Also taxable income if the account holder's first Roth IRA was opened less than 5 years prior, even if they are over age 59-1/2, but not subject to the additional penalty.

You can withdraw the conversion amount without penalty or tax at any time, but if you withdraw the earnings (increase in value) before 2026, you will pay regular income tax.