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IRA to Roth IRA Conversion - If 60+ am I Subject to 5 year rule?

Forum|Forum|3 years ago
August 12, 2022
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I am thinking about converting my IRA to a Roth IRA but due to tax consequences, must do it slowly over several years. I am over 60 years old and retired. If I convert some of it in the 2022 tax year, some of it in the 2023 tax year, some of it in the 2024 tax year, and so on, does the 5 years start counting 1/1/2022 regardless of when I do the conversion? Or would I have to wait 5 years to take out the 2022 conversion, and 5 years from the date I converted the 2023 amount, and so on? Or does none of this matter because I am over 60 so I can take out any of them at any time? I thought the rules for converted Roth funds is different than regular contributions when you are employed. I am getting a lot of conflicting information about this so I'm hoping you can clarify.

Best answer by NCPERSON1

@jonic - it is somewhat simpler than that.

1) since you are over 60, there are no penalties for withdrawals - whether that is on the original contributions or on the earnings that occur along the way.

2) All the contributions come out first and the earnings last,

3 ) the contributions don't have to stay in for 5 years and it's after tax money in any event, so there is no tax implication (no tax no penalties, given your age) for a withdrawal no matter when it occurs

4) the earnings have to remain in the Roth for 5 years to be tax-free. But practically, that is not likely to occur (but indeed mathmatically possible). The earning from 2022 have to remain until 2027, the 2023 earnings until 2028, etc. But remember, that only becomes an issue if ALL the contributions have been withdrawn and you are withdrawing earnings. if you withdraw the earnings in less than 5 years, you'll pay ordinary tax on those withdrawn earnings, but again, no 10% penality as you are over 60.

as a side note, and you did not state you age, but note that there is a tax called "IRMAA" related to Medicare premiums. The ROTH conversions create taxable income and you'll want to assess any implications of IRMAA two tax years before you begin Medicare (so if you are going to go on Medicare in 2025, then your AGI in 2023 is going to define the IRMAA tax in 2025) as part of your conversion strategy.

B

Bsch4477

Employee

There's a separate five-year rule that applies only to those who convert other types of retirement accounts into Roth IRAs. Here, the idea of the rule is to prevent people from using Roth conversions to get penalty-free access to their traditional retirement accounts.

This five-year rule also starts the clock on Jan. 1 of the year in which you do the conversion. As a result, those who convert late in the year only have to wait a bit longer than four years before taking withdrawals.

However, this five-year rule is different in that it applies separately to each Roth conversion you do. Each new conversion starts its own five-year clock, and you'll need to account for multiple conversions to make sure you don't take out too much money too soon.

Note that the five-year rule applies equally to Roth conversions for both pre-tax and after-tax funds in a traditional IRA. That means, if you're using the backdoor Roth IRA strategy every year, your "Roth contributions" are really conversions, and you can't withdraw them for five years without penalty.

J

jonicAuthor

So just to be clear, it doesn't matter that I am already older than 60? If I spread out the conversion over several years instead of converting it all in one year, then each year I convert must wait 5 years, even though I am putting it into the same Roth IRA account? So for example, If I contribute 8/2022, I can take that portion out 1/1/2027, then convert more funds on 8/2023, I can take that portion out 1/1/2028, and so on? Not that I plan to, but I just like to know what the rules are.

O

Opus 17

Employee

@jonic wrote:

So just to be clear, it doesn't matter that I am already older than 60? If I spread out the conversion over several years instead of converting it all in one year, then each year I convert must wait 5 years, even though I am putting it into the same Roth IRA account? So for example, If I contribute 8/2022, I can take that portion out 1/1/2027, then convert more funds on 8/2023, I can take that portion out 1/1/2028, and so on? Not that I plan to, but I just like to know what the rules are.

Everyone is subject to the 5 year rule that if you take out earnings before your Roth account is 5 years old, the earnings are taxable. (The clock actually starts from opening your first Roth account, so if you had a Roth IRA more than 5 years ago, that clock is satisfied even if you open new accounts for these conversions.). If you have never had a Roth account before, you must satisfy that "master" 5 year rule, which is to say, if you open your first Roth IRA in 2022, you will pay regular income tax on any earnings withdrawn before January 1, 2027.

There is a different 5 year rule that says that each conversion carries a separate 5 year clock, and if you withdraw that conversion before 5 years, you will pay a 10% penalty for early withdrawal. Because the 10% penalty for early withdrawal never applies over age 59-1/2, the separate 5 year clock for each conversion can be ignored after age 59-1/2.

See more here,

https://ttlc.intuit.com/community/retirement/discussion/re-how-to-take-roth-earnings-out-after-age-59-5-if-you-have-multiple-conversions-some-more-than-5/01/2763088#M181190