Taxes on withdrawals of Roth conversions (including earnings) made, when over 65 years old, to an existing Roth IRA that is over 5 years old.

[rdemyan]

I am confused about taxes when taking Roth IRA distributions. Let me use a concrete example:

1) I am over 65 years old.
2) I already have a Roth IRA that is well over five years old. It has about $20K in it.
3) I have a traditional IRA that has $500K and I would like to convert to the Roth IRA over a five-year period (so, $100K per year for this hypothetical).
4) I do not plan to make any contributions to the Roth IRA in the future including this year (2026).

As I understand it, any conversions that I make into the Roth IRA can be withdrawn tax free at any time (because they are not earnings) and penalty free (because I am older than 59.5 years).

As I understand it, I am responsible for keeping track of the conversion amounts. Now, if I convert $100K in 2026 and withdraw $70K in early 2027 (before converting the planned annual amount for 2027 of $100K), then do I deduct $70K from the $100K entry in the column for year 2026 in my spreadsheet?

Now what about earnings. Are the earnings subject to any five-year rule at all? If so, how can I possible parse out what portion of an earnings withdrawal applies to a specific conversion year. So, if I withdraw $20K of earnings in 2031, do I have to know which portions of that $20K apply to which conversion years? Also, does this mean that at the end of each year, I need to enter the earnings for that year into my spreadsheet as earnings for that year? If so, how do you handle subsequent years when earnings are also being made on conversions from prior years as well as any earnings from prior years that were not withdrawn?

[rdemyan]

I should mention that my thinking for converting traditional IRA funds to a Roth IRA is because I currently live in a state that has no income tax.  However, it is likely that I will move to a state that has a relatively high income tax within about five years or so.  So, I'm thinking I should convert as much as I reasonably can while still living in the no income tax state, so that I can reduce or possibly entirely avoid paying any income taxes to the high-income tax state (in about five years or so) on withdrawals from the Roth IRA.  Does this seem like a logical and good reason to do the conversions?

[dmertz]

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@rdemyan wrote:

1) I am over 65 years old.
2) I already have a Roth IRA that is well over five years old. It has about $20K in it.

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You have met the requirements for qualified distributions from your Roth IRAs.  Any distributions that you make from any of your Roth IRAs are now completely free of any tax or penalty, including distributions of any amounts derived from Roth conversions now or in the future or from earnings.  Although it's still good practice to do so, there is no longer any real need to track contribution and conversion basis.  Because any distribution from your Roth IRAs will be a qualified distribution, the distribution will not be reportable on Form 8606.

[rdemyan]

Thank you for your response.  As mentioned, the current Roth IRA that I have is well over 5 years old.  I would like to open Roth IRA accounts with other vendors.  As I understand it, because I already have a single Roth IRA account that is over 5 years old, these new accounts (opened say in 2026) will also count as over 5 years old. Please confirm that my understanding here is correct.

But how does the new vendor  know that?  If I take a withdrawal from one of these new 2026 accounts (prior to the new accounts being open for more than 5 years) doesn't the vendor have to report that to the IRS.  Should I transfer some funds from the original Roth IRA (the one that is currently more than 5 years old) to help establish that the new IRA account with a different vendor also counts as more than 5 years old.

 Will the document that I receive from any Roth IRA vendor indicate that the distribution is a qualified distribution?  Basically, how does the IRS know that a withdrawal from Roth IRAs is a qualified withdrawal?

[dmertz]

"Please confirm that my understanding here is correct"

Correct.

"But how does the new vendor  know that?"

They don't, and it's not their responsibility to know that.  It's your responsibility to report it correctly on your tax return.  Because they know that you are over age 59½, they'll use code T rather than code Q on any Form 1099-R for a distribution from any particular Roth IRA that they do not know has met the 5-year qualification requirement.  You'll need to tell TurboTax yourself that you had a Roth IRA long enough ago to satisfy that requirement so that TurboTax will treat code T the same as code Q so that no Form 8606 Part III is prepared.  The IRS knows the year for which you first made a contribution to a Roth IRA because all contributions were reported to them on Forms 5498.