What is the 5 year rule for a roth conversion

[jefals]

Hi fanfare,

Yeah, at this point, I'm way past the "growth" phase.  Now retired, I live on social security and dividends.  So I'll be taking those dividends out.

I wish Roth IRAs had been available when I started investing back in the 70s.  They didn't come around till the 90s, when I was pretty dug into my traditional IRA's and not thinking about things like MRDs.  The MRDs I'm looking at -- now, and down the road -- are kinda shocking.  That's one of the main reasons I'm converting from the traditional IRAs to the Roth.  The other is the advantages to the kids when they get the money tax free.

Hey, when I ask for tax rules, "you're unlikely to get audited" -- USUALLY is not the kinda advice I'm looking for! 🙂

[Nan2C]

Opus!  Thanks for the details and helping us to understand the "5 Year Rule" x 2! Previously we thought that being over 59 1/2 put us in the clear - first Roth was in 1998.  Even after checking with our tax professional!

Reading your post filled in the blanks that I was intuiting! Something just wasn't clear, no matter how many times we read the IRS publication 590B.

To add another layer: As newly retired and paying attention to all the brackets that can affect taxation, including the Income Related Adjustment for Medicare payments, I am wondering if a non qualified withdrawal (within the 5 year time from a particular roth conversion (basis) is added to the MAGI from which the IRMAA is derived?

Age: over 65.

in January 2022 cashed out a roth part converted in 2017 (6500.00) and part (another 6500) was converted in 2019.  (all was originally a non deductible IRA)

income was under $120.00.  

I think I understand how this will work for this year... feel free to break it down however, for confirmation!

We are planning on doing more roth conversions going forward and want to know if we will need to consider money that hasn't been converted for 5 plus years as income AGI MAGI when figuring out how much we want to convert in a year without going into a higher bracket.

Thanks again.

[Opus 17]

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@Nan2C wrote:

To add another layer: As newly retired and paying attention to all the brackets that can affect taxation, including the Income Related Adjustment for Medicare payments, I am wondering if a non qualified withdrawal (within the 5 year time from a particular roth conversion (basis) is added to the MAGI from which the IRMAA is derived?

Age: over 65.

in January 2022 cashed out a roth part converted in 2017 (6500.00) and part (another 6500) was converted in 2019.  (all was originally a non deductible IRA)

income was under $120.00.  

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All your withdrawals are tax free over age 59-1/2.  That's the simple answer.

The medium-complex answer is that:

1. Withdrawal of contributions are never taxed.

2. Withdrawal of a non-qualified conversion (less than 5 years per conversion) is not subject to income tax, but is subject to a 10% early withdrawal penalty.

2a. But the 10% early withdrawal penalty never applies if you are over age 59-1/2.  So anyone over age 59-1/2 can ignore the separate 5 year clock for each conversion. 

3. Withdrawal of earnings is subject to income tax if the account is open less than 5 years or you are under age 59-1/2.

3a. In your case, the account is opened more than 5 years and you are over 60, so earning are never taxed.

So for your specific situation, all your Roth withdrawals are never taxed.  

A withdrawal from a Roth IRA is never a MAGI adjustment for IRMAA.

However, because a conversion from a regular IRA to a Roth IRA creates taxable income, the conversion IS income included in MAGI for IRMAA in the year you do the conversion.

So short answer, it is IRMAA income when you do the traditional to Roth conversion, but it is not IRMAA income when you withdraw from the Roth, regardless of the 5 year rule for conversions.  

[Nan2C]

Thank you for your reply.

So in our case, the 2019 non deductible conversion to a roth is ? a non qualified roth distribution we cashed out in Jan 2022?  

I am almost clear

[Opus 17]

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@Nan2C wrote:

Thank you for your reply.

So in our case, the 2019 non deductible conversion to a roth is ? a non qualified roth distribution we cashed out in Jan 2022?  

I am almost clear

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There will be no tax on your January 2022 withdrawal.  

[Nan2C]

I do understand there will be no Federal Income Tax, I am more concerned with trying to understand Qualified vs Non Qualified and how that will affect us in future years If we need to take any roth distributions including income / within 5 years of a conversion.

I don't think I asked that question clearly.  So do I understand that to mean, that after 59 1/2 all withdrawals from Roth Iras even if converted within the last 5 years are considered Qualified? (therefore- Not incurring any tax and - not affecting MAGI?)

I am a bit unclear about Qualified and non Qualified.  Does Non Qualified will affect MAGI / IRMAA?  It sounds like if we won't incur any taxes the Distribution we made would be classified as Qualified?  I am just not sure

Thank you for your patience with me!

[DaveF1006]

It depends. Let me give some basics about Roth. When you open a Roth and stays open for five years, that is referred to a five-year holding period. What this means is if you have earnings within the Roth, if you withdraw within the five-year holding period you will be taxed on the earnings. In addition to being taxed, you will suffer an early withdrawal penalty if you are under 59 1/2. This would be an example of a non-qualified distribution because the five-year holding period has not been met.

A qualified distribution from a Roth IRA is tax-free and penalty-free, provided that the five-year aging requirement has been satisfied and one of the following conditions is met:

• Over age 59½
• Death or disability
• Qualified first-time home purchase

[Opus 17]

@Nan2C 

Just keep it simple. Over the age of 59 1/2, Roth IRA withdrawal‘s do not add to your MAGI.  

What I should have made clear, and may have gotten a bit turned around on myself, is that Roth IRA withdrawals can have two characteristics. They can be qualified (or not) and they can be early (or not).   All of your withdrawals are qualified at this point, because your account is more than five years old and you are over age 59 1/2.  If you withdraw a conversion in less than 5 years, that would be early.  But the only tax issue for an early withdrawal is the 10% additional penalty, and that is automatically excluded if you are over 59 1/2.  So even though some of your withdrawals might technically be early, they are all qualified, and you will not pay any income tax or penalties on any withdrawals from any Roth IRA for the rest of your life and they don’t add to your MAGI.  

However, you also talked about doing new conversions of traditional IRA to Roth IRA, and that will raise your MAGI for the year you do the conversion.