Five year Rule

Submitted by Patrick Min on Thu, 2020-10-01 16:15

I’d like to get a clarification on the 5 year holding rule for Roth conversions for someone over 59.5 years old. Is the 5 year holding period applicable for EACH conversion or does the holding period start with the first conversion (or Roth contribution) and its then attributed to all future conversions or contributions?



Submitted by Alan - IRA critic on Thu, 2020-10-01 17:04

Once you reach 59.5, the 5 year conversion holding period ends for all conversions you did less than 5 years ago, and there is no holding period for conversions done after 59.5. If your Roth is qualified by the first contribution of any any having been made prior to 2016, after you reach 59.5, all your Roth accounts are fully tax and penalty free.



Submitted by Krista McBeath on Mon, 2020-10-05 20:19

My client is 58 and would like to utilize a Roth Conversion over the next few years.  She has an existing Roth IRA.  Since the 5 year rule won’t apply once she turns 59 1/2, I don’t see a reason to open a separate account for her converted Roth.  Am I correct in this?  She has plenty of funds available to her elsewhere, so she will not need to access this account until after 59 1/2.



Submitted by Alan - IRA critic on Mon, 2020-10-05 21:04

No need to open a separate account for separate conversions, even if the client is younger. For tax purposes, the IRS considers all of a person’s Roth accounts as one combined account. Of course, taxpayers need to track the basis in their Roth IRAs until their Roth is qualified. Each conversion adds to conversion basis.



Submitted by Pat Osler on Sat, 2023-10-14 18:49

I am 73, retired with a large IRA, small Roth IRA that was converted many, more than 5,  years ago, and an annuity in another IRA.To reduce future taxes and the risk of IRMA on my Medicare payments, I am considering an additional conversion in 2023, before year end.My plan is to transfer $25k from my brojer held IRA to that broker converted Roth.  Do this for simplicity and to not touch/hold funds.  Then I plan to transfer the funds to another account with a financial advisor to open a Roth annuity.I would start taking distributions from my existing IRA annuity in 2024.I would take distributions at some future date from the new Roth IRA, maybe within 2 years.Question: am I correct that I will pay taxes this year on the $25k distribution, but no penalty on any funds no matter how soon I start taking Roth IRA distributions from either account?  And all Roth distributions will be tax free no matter when taken?Related:  if I convert the existing Annuity IRA to a Roth, and I do it in a few years when the contract value is small, will the tax on the conversion be on the contract amount.  The annuity has an income rider and will continue to pay out at a large amount.  Will all those future distributions be tax free and with no penalty? Thank you so much for a timely reply – the impact to my wife and I could be large.  She has exactly the same accounts and is 72.



Submitted by Alan - IRA critic on Sat, 2023-10-14 19:58

  • Yes, correct that you will owe taxes on the amount converted, and you cannot convert until you have completed your 2023 RMD for both non Roth IRAs. But since your Roth IRA is fully qualified and tax free, all distributions taken from the Roth IRA will be tax and penalty free. If your current annuity IRA has enough fringe benefits included, the taxable amount of the conversion could exceed the cash value. The insurance company should clearly provide the amount of the annuity RMD to you so that you can complete the RMD before converting. 
  • If your wife was born in 1951, her first RMD year will be 2024, so she can convert this year without concern over RMDs. And for both of you once the funds are in the Roth, there are no more RMDs for the Roth balance.
  • It’s not clear how simple it will be to convert an IRA annuity to a Roth IRA annuity. Some companies make this overly complex in addition to the requirements to have completed your 2023 RMD for all your non Roth IRAs before converting any amount from any of them. The 2023 RMDs can be satisfied in any combination between your annuity IRA and the non annuity IRA (RMD aggregation rules). 
  • Be sure you understand all expenses and fees for any new annuities as well as surrender charges. These can be very costly.


Submitted by Pat Osler on Tue, 2023-10-17 21:54

Firse Submitted by oslerpa-gmail.com on Sat, 2023-10-14 14:49I am 73, retired with a large IRA, small Roth IRA that was converted many, more than 5,  years ago, and an annuity in another IRA.To reduce future taxes and the risk of IRMA on my Medicare payments, I am considering an additional conversion in 2023, before year end.My plan is to transfer $25k from my brojer held IRA to that broker converted Roth.  Do this for simplicity and to not touch/hold funds.  Then I plan to transfer the funds to another account with a financial advisor to open a Roth annuity.I would start taking distributions from my existing IRA annuity in 2024.I would take distributions at some future date from the new Roth IRA, maybe within 2 years.Question: am I correct that I will pay taxes this year on the $25k distribution, but no penalty on any funds no matter how soon I start taking Roth IRA distributions from either account?  And all Roth distributions will be tax free no matter when taken?Related:  if I convert the existing Annuity IRA to a Roth, and I do it in a few years when the contract value is small, will the tax on the conversion be on the contract amount.  The annuity has an income rider and will continue to pay out at a large amount.  Will all those future distributions be tax free and with no penalty? Thank you so much for a timely reply – the impact to my wife and I could be large.  She has exactly the same accounts and is 72.

new Submitted by Alan-iracritic@… on Sat, 2023-10-14 15:58

  • Yes, correct that you will owe taxes on the amount converted, and you cannot convert until you have completed your 2023 RMD for both non Roth IRAs. But since your Roth IRA is fully qualified and tax free, all distributions taken from the Roth IRA will be tax and penalty free. If your current annuity IRA has enough fringe benefits included, the taxable amount of the conversion could exceed the cash value. The insurance company should clearly provide the amount of the annuity RMD to you so that you can complete the RMD before converting. 
  • If your wife was born in 1951, her first RMD year will be 2024, so she can convert this year without concern over RMDs. And for both of you once the funds are in the Roth, there are no more RMDs for the Roth balance.
  • It’s not clear how simple it will be to convert an IRA annuity to a Roth IRA annuity. Some companies make this overly complex in addition to the requirements to have completed your 2023 RMD for all your non Roth IRAs before converting any amount from any of them. The 2023 RMDs can be satisfied in any combination between your annuity IRA and the non annuity IRA (RMD aggregation rules). 
  • Be sure you understand all expenses and fees for any new annuities as well as surrender charges. These can be very costly.

thank you so much for your thorough and very prompt response.The only thing I am uncertain about is the basis for the tax on a future conversion of the annuity IRA.  The annuity has an income rider and the distribution is based on a fixed “Income rider basis” that is significantly above the actual cash/contract value.  I expect the cash/contract value will drop quickly to a nominal amount in a few years.  My hope/idea is that if I convert it then, the tax would be based on that low cash/contract amount and that all subsequent distributions would be tax free and there is no 5 year rule in effecct for that cconversion.  Is that correct?thanis again.Pat and Cheryl Osler 



Submitted by Alan - IRA critic on Tue, 2023-10-17 23:21

  • When an IRA annuity is converted, assuming that you did not make any non deductible IRA contributions in the past that would have been tracked on Form 8606 the entire balance converted will be taxable. However, if the annuity has enough fringe benefits included there are some complex IRS Regulations that require the insurance company to report a larger taxable amount (fair market value) for the conversion. Only the insurance company can do these calculations, so you should ask them if the conversion reported on Form 1099R will be based on the cash value or some higher amount they should quote to you before you convert. There are up to 4 possible methods that the company could use. See QA 14 of the link in the last bullet point that explains these methods.
  • Any funds converted to your Roth IRA can be withdrawn anytime without tax or penalty for each spouse assuming that the spouse first contributed to a Roth over 5 years ago. If so, all your holding periods have been completed. You indicated that both you and your wife meet that requirement and also the requirement of being at least 59.5. Again, before doing any conversions, you must complete your RMD for all your non Roth IRAs for that year. Of course, both the conversion and the RMD will be taxable. 
  • 26 CFR § 1.408A-4 – Converting amounts to Roth IRAs. | Electronic Code of Federal Regulations (e-CFR) | US Law | LII / Legal Information Institute (cornell.edu)


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