Ask an Advisor: At 61, Do I Still Need to Track the 5-Year Rule for Roth Conversions?

I still have a question I have not found directly answered in articles I’ve read about Roth conversions. There are two categories of money in a Roth account: converted funds and earnings. I understand the scenarios you’ve explained. However, I have also read elsewhere without mention of age 59 ½ that a five-year clock starts for each conversion in regard to accessing the earnings.

I’m 61 and doing multiple conversions. It’s not difficult to keep track of separate clocks, but is that necessary for someone beyond 59 ½? – Bill

Roth conversions can be an attractive tax strategy for people who expect to be in a higher tax bracket in the future. That said, it’s important to understand the various tax nuances of Roth conversions to ensure that you do not get hit with any penalties.

In short, the five-year clock for Roth Conversions is irrelevant to you because you’ve reached age 59 ½. However, if you haven’t satisfied the separate five-year requirement for Roth IRA earnings, a withdrawal could still trigger income taxes.

If you’re considering a Roth conversion strategy or have other questions related to your plan for retirement, connect with a fiduciary advisor for free and see how they can potentially help.

Two Separate 5-Year Clocks: An Overview

As you noted in your original question, your Roth IRA consists of both converted funds and earnings. This distinction is important because converted funds and earnings follow their own five-year clocks.

The 5-Year Clock for Roth Conversions

For converted funds, the five-year rule determines whether an early withdrawal could trigger a 10% penalty. If you withdraw converted funds before satisfying this requirement, the portion of the conversion that was originally taxable may be subject to the penalty, unless you qualify for an exception. What’s unique about the five-year clock for conversions is that it doesn’t matter when you convert funds during the calendar year. A completed Roth conversion on December 29, May 2 or January 3 all have a starting date of January 1.

Here’s the thing though: the five-year clock on Roth conversions is irrelevant for someone who’s age 59 ½ or older. Again, this five-year clock is meant only to determine whether a penalty on the converted funds should be imposed.

The IRS imposes the 10% penalty if you don’t meet one of the exceptions laid out in the Internal Revenue Code. One of these exceptions is age. An IRA owner will not be subject to the 10% early distribution penalty if they’re 59 ½ or older. You meet that exception, so no penalty would be imposed on any converted funds, regardless of how recently you completed the Roth conversion.

For example, say you converted $30,000 on Aug. 14, 2024. You made no other contributions or conversions prior, and you now want to take a withdrawal of $20,000 in 2026.

The $20,000 withdrawal is not included in your taxable income because you paid income tax on the conversion in the year the conversion was completed. Do you pay a 10% penalty on the converted amount? No. While it has been fewer than five years since the conversion, you are older than 59 ½, and therefore have an exception that waives the penalty.

If you were younger than 59½ and didn’t qualify for another exception, the taxable portion of the original conversion included in your withdrawal would generally be subject to the 10% penalty.

(And if you need additional help planning out your Roth conversions, consider working with a financial advisor.)

The 5-Year Clock for Earnings

The five-year clock for earnings is important because it is used to determine if a withdrawal of earnings from your Roth IRA meets the criteria of a qualified distribution. Qualified distributions are tax-free and penalty-free. Nonqualified distributions, meanwhile, may be subject to income taxes and an additional 10% penalty, depending on your age, the type of funds withdrawn and whether an exception applies.

The first test is to determine if you’ve satisfied one of the qualifying events. Reaching age 59 ½ is a qualifying event, so you pass that part.

The second requirement for a qualified Roth IRA distribution is the five-year rule. To satisfy this requirement, at least five tax years must have passed since January 1 of the year you first contributed to or converted funds into a Roth IRA. This five-year period applies across all your Roth IRAs, regardless of when you opened additional accounts.

For example, imagine that you opened your Roth IRA in 2020 and made a $2,500 contribution and the account is now worth $3,000.

Even if you made another Roth IRA contribution in 2023, you wouldn’t have to start a new five-year clock. The original clock began in 2020, so any withdrawals you make after satisfying the five-year requirement would be qualified distributions, provided you’ve also met the age or other qualifying condition.

(The five-year rules can be confusing, which is why it may make sense to consult a financial advisor if you’re planning to take Roth IRA withdrawals.)

Roth IRA Ordering Rules

I want to wrap up my response by quickly going over the ordering rules that apply when you make a Roth IRA withdrawal.

First, any Roth contributions you make are always deemed to come out before any conversions or earnings. You can always withdraw Roth IRA contributions tax-free and penalty-free regardless of your age or how long you’ve had the Roth IRA.

Next, any Roth conversions you’ve made are deemed to come out second. If you’ve made multiple Roth conversions, the earliest one is assumed to be taken first, followed by the second-earliest and so forth.

Roth IRA earnings are considered withdrawn last. (And if you’re planning to withdraw money from your Roth IRA, a financial advisor can help you understand how withdrawal ordering rules and the five-year requirements may affect your retirement income and taxes.)

Let’s say, for example, that your IRA is worth $125,000 and that you’ve made lifetime contributions of $25,000 and multiple Roth conversions totaling $75,000. The remaining $25,000 represents Roth IRA earnings.

You could withdraw $25,000 without incurring any penalty, since the contributions you’ve made are always tax- and penalty-free.

Because you are over age 59 ½, you could withdraw another $75,000 tax-free and penalty-free. If you weren’t over 59 ½, and also failed to meet any other IRS exception, withdrawals of converted funds would be subject to the 10% penalty.

If you wanted to take a full withdrawal of $125,000, then the $25,000 portion that represents earnings may or may not be included in taxable income. It all comes down to whether your first Roth account was funded at least five years ago.

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Bottom Line

Any withdrawal you make from your Roth IRA will be penalty-free because you’ve attained age 59 ½. The earnings on any converted amounts that are included within a withdrawal may still be included in taxable income if you don’t wait five tax years from when your Roth IRA was first funded. The funding can be due to either a contribution or a conversion.

Because of these nuances, I highly encourage you to work with a qualified tax professional before taking any withdrawal from your Roth IRA.

Retirement Planning Tips

Whether you’re just starting to plan for retirement or already in your golden years, a financial advisor can be a valuable resource. 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.
How you withdraw money from taxable, tax-deferred and Roth accounts can affect your lifetime tax burden. Consider drawing from multiple accounts to manage your taxable income each year. For example, combining traditional IRA withdrawals with tax-free Roth distributions may help you avoid moving into a higher tax bracket.

Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Matthew Hofacre, CFP®, EA, MSPFP, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Matthew is a financial advisor and owner of Pay It Forward Financial Planning. He has been compensated for this article. Additional resources from the author can be found at www.payitforwardfp.com. Please note that Matt is not a participant in SmartAsset AMP and is not an employee of SmartAsset.