Convert traditional IRA to Roth IRA 5 years rule

[kentyou]

I transferred from Traditional IRA to Roth IRA  in December 2021

do I must keep that money for 5 years?

in order to be tax free for capital gains Roth IRA?

[STaxLady]

@kentyou 

Thanks for the question. If I understand correctly, you did a conversion from a Traditional to a Roth IRA and you want to know how to avoid paying unnecessary taxes. I am happy to help you with that.

It is true that to achieve the most favorable tax treatment for your Roth distribution, the money that was converted needs to meet the five year rule. 

In general, for Roth IRAs, the 5-year holding period begins on the first day of the tax year for which the taxpayer first contributed or converted money into a Roth IRA and ends on the last day of the fifth consecutive year. For contributions, this is a one-time qualification, meaning that once you meet the requirement, all future contributions are considered to meet the requirement. However, this does not apply for conversions.

Each conversion from a Traditional to a Roth IRA requires a separate 5-year holding period.

The same is true for a rollover from a qualified retirement plan to a Roth IRA.

For clarification, rather than capital gains tax, taxable Roth distributions would be subject to ordinary income tax, and a 10% penalty if no exception applies.

I hope that this answers your question.

[KochuK]

Hi kenyou,

The 5 year rule determines if payout from "earning portion within the Roth IRA" account is taxable.

In general, distributions of earnings from Roth IRAs are tax free if the owner is at least 59-1/2 at time with withdrawal, and at least 5 tax years have passed since the owner first made a contribution into any Roth IRA.

So if this is your first Roth IRA, yes, the 5 year rule applies. If you funded other earlier Roth IRA 5 years ago, then you do not need to wait another 5 years to take money from this new Roth IRA (conversion Dec. 2021) for the earnings to be tax free, provided you are at least 59-1/2.

Hope the above helps.

[kentyou]

Yes this is my first Roth IRA.

I did traditional IRA conversion to Roth IRA in December 2021.

I am 68 years old bd October 1953

therefore I must wait until 1/1/2026 to withdraw and earning tax free?

what is I will convert more from Traditional IRA to Roth IRA this year in December 2022?

can I withdraw all Roth IRA after 1/1/2026 and earning tax free?

I will continue convert all Traditional IRA to Roth IRA every year from now.

thanks.

If this is your first ever Roth IRA account, opened 12/31/2021, then the 5 tax-year period runs from 2021 through 2025. Your withdrawals will not be qualified until 1/1/2026.

[KochuK]

Since you already passed 59-1/2, you can withdraw the Roth IRA contribution and/or conversion (which you paid taxes) tax-free at any time without the 10% early distribution penalty. It is the "earning" portion to wait for 5 years to be tax-free.

Please refer to  IRS Pub 590-B, page 32, Ordering Rules for Distributions - regular contribution, conversion and rollover conversion come out first tax-free.

https://www.irs.gov/pub/irs-pdf/p590b.pdf 

Hope this helps.