ROTH IRA CONVERSION

Submitted by Phillip Moore on Thu, 2020-08-20 18:30

I am 56 years old and am considering a Traditional IRA to ROTH IRA Conversion to take advantage of the low current tax rates and other advantages that I will have by having money invested in a ROTH. My question relates to when the 5 year holding period to withdraw the converted amount ends so that I avoid the 10% penalty as well as when I will be able to withdraw both the converted amount and earnings tax and penalty free. If I convert to a ROTH now at age 56, do I have to wait 5 years(until age 61) to withdraw the converted amount without penalty or does the 5 year requirement end when I am 59 1/2 which is just 3 1/2 years? I was thinking that at age 59 1/2 I could withdraw all funds(converted amount and earnings) tax and penalty free? but that would not be the case if I have to wait until age 61 to avoid the 10% early withdrawal penalty. By the way, my first ROTH Conversion was done in 2010 which I believe affects the date for penalty and tax free withdraw of earnings.



Submitted by David Mertz on Thu, 2020-08-20 19:04

The 5-year conversion clock only applies to those under age 59½.  Since you established your first Roth IRA in 2010, any distribution that you make from your Roth IRAs after reaching age 59½ will be a qualified distribution, tax and penalty free regardless of how the money came to be in the Roth IRA.



Submitted by Phillip Moore on Thu, 2020-08-20 19:25

I will be doing the ROTH Conversion when I’m under 59 1/2 so just wanted to be clear. Also, is this literally saying that under my exact scenario above, a person could convert to a ROTH IRA a day before turning 59 1/2 and the next day(at age 59 1/2) they could withdraw the converted amount AND earnings tax and penalty free and no clock apply?  



Submitted by Alan - IRA critic on Thu, 2020-08-20 19:53

  • They could withdraw the conversion tax and penalty free, but any earnings generated on the conversion or any other Roth contributions will not be tax free until the person’s Roth IRAs met the 5 year holding requirement which starts of 1/1 of the year of the first Roth contribution of any kind.  Therefore, in your example while much in earnings after only a day is highly unlikely, such earnings would only be tax free if the first Roth contribution met the 5 year requirement. Until that time, since 59.5 had been attained, any earnings withdrawn would be penalty free. 
  • In other words, there are two separate 5 year clocks, one for your Roth accounts to become qualified (earnings will be tax free), and the other for each conversion to be penalty free. This 5 year conversion holding period ends at 59.5 if 59.5 is reached before the conversion has aged 5 years.


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