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According to an article by Brandon Renfro, there are three 5-year rules for Roth IRAs, but he talks about the first two as they apply to the reader’s question. He explains the 5-year rule for Roth contributions and the 5-year rule for Roth conversions. I’m just interested in the second rule as I’m considering converting money from my 401(k) to a Roth IRA I already have. I used to contribute to it about 20 years ago when I was working. I’m now retired and I am 67 years old.
In my case I don’t have to wait five years to withdraw money from my account after it’s converted, right? It seems that there is a contradiction in the article because the writer implies by saying that both 5-year rules do not apply to the reader, and therefore me neither, since I’m in the same boat, so to speak. –William
William, this is a great follow-up question to that article and I’m glad you’re asking it. As I’ve mentioned before, the 5-year rules are confusing. Understanding their purpose and intent can help you follow when they apply. The short answer is yes, you’re interpreting the rules correctly for your situation. I’ll try to reword the explanation to make it clearer.
A financial advisor can help you navigate the 5-year rules and other areas of retirement planning. Connect with an advisor for free.
Why the 5-Year Rule for Roth Conversions Does Not Apply
You want to know whether the 5-year rule for Roth conversions would prevent you from accessing converted money right away given your situation. Plain and simple, it will not.
The 5-year rule for Roth conversions exists for one specific reason. It’s there to prevent people who are under age 59 ½ from circumventing the 10% early withdrawal penalty.
If someone is under 59 ½, each Roth conversion has its own five-year clock. Withdrawing converted funds before that clock runs out can trigger a 10% early withdrawal penalty, even though taxes were already paid on the conversion, unless an exception applies.
This rule closes a loophole that would otherwise allow someone to convert from an IRA to a Roth IRA, paying only income tax (but no penalty), and then withdraw the money from the Roth IRA, thereby avoiding the 10% penalty even though they are under 59 ½.
Because you are already over age 59 ½, you aren’t “early” anymore (that’s a polite way of saying it, right?) so that penalty is no longer an issue. The 5-year rule for Roth conversions does not impact you at all. You can withdraw converted dollars immediately after the conversion without triggering taxes or penalties.
(For custom advice, speak with a financial advisor and see how they can potentially meet your unique financial needs.)
What About the Other Roth IRA 5-Year Rule?
You didn’t ask about this, but to clarify where I think you’re sensing a contradiction I’ll go ahead and spell this one out, too. There is a separate 5-year rule that applies to Roth IRA contributions. It requires, in part, five years to pass after your first Roth IRA contribution. If you withdraw before then, earnings are subject to income tax.
You’ve already satisfied that rule as well because:
- You opened your Roth IRA roughly 20 years ago, and
- You’re over 59 ½.
That means you’ve met both conditions for qualified Roth withdrawals. (And if you have further questions about qualified withdrawals and Roth conversions, speak with a financial advisor.)
Is There a Contradiction in the Previous Article?
No, but I think the way I worded it may have caused confusion so let me rephrase. In the other article I said that the first rule, and also the second rule, do not apply to the reader who asked the original question. It may be more straightforward to say that neither rule applies to him:
- He’s over 59 ½, so the 5-year conversion rule relating to early withdrawal penalties is irrelevant.
- His first Roth IRA has already met the 5-year requirement on contributions. And again, he’s over 59 ½, so he can withdraw earnings tax-free.
You’re in the exact same position, which is why the same conclusion applies to you as well. (And if you want more in-depth help with your retirement plan, connect with a financial advisor for free.).
Bottom Line
Because you are over age 59 ½ and your Roth IRA has already been open for more than five years, neither rule applies to you. You can convert money from your 401(k) to a Roth IRA (incurring income tax on the conversion) and withdraw the converted dollars immediately without triggering additional taxes or penalties.
That said, Roth conversions themselves are still taxable events. You should evaluate the decision to convert within the context of your broader retirement income and tax strategy.
Retirement Planning Tips
- As retirement decisions become more complex, working with a financial advisor can help you navigate income planning, tax strategies and long-term care considerations. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Once you reach age 73, most tax-deferred retirement accounts require annual minimum withdrawals (RMDs). These distributions can increase your taxable income and affect Medicare premiums or tax brackets. Planning ahead, including partial Roth conversions or coordinated withdrawals, can help manage the tax impact.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.
Photo credit: Photo courtesy of Brandon Renfro, ©iStock.com/designer491, ©iStock.com/brizmaker