Roth IRA W/D 5 yr Rule Clarification

[jimcrawford01]

I would like to clarify this rule. Assuming over Age 59 1/2, it has been stated here, in many threads, that as long as your 1st Roth met the 5 yr rule, all Roth distributions are tax and penalty free. I do not believe that to be the case regarding CONVERSIONS.

I have read Pub 590 B (2017). pp 30 seems to address this issue.

My interpretation:

Each CONVERSION has its own 5 year clock. Please correct me if this is not the case.

The problem is that folks are frequently using the terms CONTRIBUTION, CONVERSION, ROLLOVER and TRANSFER or whatever interchangeably. They all describe movement of money but have very different meanings.

With regard to Roth IRAs, I assume that WITHDRAWAL and DISTRIBUTION have the same meaning. Please help if I am incorrect.

Jim

[Silk McCue]

If over 59 1/2 and you have met the 5 year rule you are free and clear on all accounts. There is no special clock for Conversions under this scenario.

Withdrawals and Distributions are the same thing.

The answer regarding Conversions is found at the bottom of the referenced Roth IRA Rules - Table Approach shared below.


This link is to a post from August by Peter Foley

viewtopic.php?t=236628#p4095896

Text from the post linked above.

Here is the table version of the Roth Conversion chart that many here reference:

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

[David Jay]

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

^^^ This

It doesn't matter if it is a distribution or a withdrawal or a conversion or a contribution or earnings.

[as one who is over 59.5 and has owned a Roth for more than 5 years]

[David Jay]

Quoted directly from 590b (2017):

What Are Qualified Distributions?
A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

The payment or distribution is:

• Made on or after the date you reach age 59½...

From the flow chart, immediately below (to clarify the effect of a "qualified distribution"):

"The distribution from the Roth IRA is a qualified distribution. It is not subject to tax or penalty."

[sawdust60]

I'm trying to figure out if there is a reason not to do a Roth conversion this year. I'm trying to understand if there is any penalty, should I need those funds in 2019.

Still a problem -- with terminology perhaps...

Over 59.5 --

Is any distribution taxable from a conversion? First conversion in 2012, more than five years - a IRA/Roth conversion; no contributions. If I do a Roth conversion from IRA in 2018, can those amounts plus earnings be distributed in 2019 without tax or penalty? (Presume that 2012 and related earnings would be distributed first.)

It appears that no tax or penalty on amount converted, but what about earnings (obviously small)?

-- from pub 590-B:

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and isn't necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution.

Exceptions. You may not have to pay the 10% additional tax in the following situations.
You have reached age 59½.

And why use the word, 'may' ?

[Silk McCue]

I'm trying to figure out if there is a reason not to do a Roth conversion this year. I'm trying to understand if there is any penalty, should I need those funds in 2019.

Still a problem -- with terminology perhaps...

Over 59.5 --

Is any distribution taxable from a conversion? First conversion in 2012, more than five years - a IRA/Roth conversion; no contributions. If I do a Roth conversion from IRA in 2018, can those amounts ...

From my prior post above - this is a definitive and established answer provided numerous times here on Bogleheads.

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

All means all.


Cheers

[Alan S.]

I'm trying to figure out if there is a reason not to do a Roth conversion this year. I'm trying to understand if there is any penalty, should I need those funds in 2019.



Exceptions. You may not have to pay the 10% additional tax in the following situations.
You have reached age 59½.

And why use the word, 'may' ?

Only thing that comes to mind is when you have a 72t 5 year plan and bust it after age 59.5. Even then the penalty will not apply to distributions you took after 59.5, but if you bust the plan it will trigger retroactive penalty and interest on the distributions you took PRIOR TO 59.5. Of course, this is an unlikely scenario because 72t plans are relatively rare, and such plans that include a Roth IRA in the plan are extremely rare.


In describing the conversion holding period, I think it would have been better to outline that OTHER waivers of the penalty can apply before age 59.5 (eg higher education expenses, disability, high medical expenses, health insurance for the unemployed, 72t plan etc.

[jimcrawford01]

OP here. Thanks for the replies and info.

The language used in Pub 590 B can be confusing. No surprise there. It even uses the term "converted contribution". Just when you think you have it figured out, something new is thrown out there.

IF I accept the definition of "QUALIFIED DISTRIBUTION" on pp 30 of Pub 590 B (despite using the word "CONTRIBUTION"), then I am in agreement with the consensus of the BH.

[retiredjg]

I'm trying to figure out if there is a reason not to do a Roth conversion this year. I'm trying to understand if there is any penalty, should I need those funds in 2019.

Still a problem -- with terminology perhaps...

Over 59.5 --

Is any distribution taxable from a conversion? First conversion in 2012, more than five years - a IRA/Roth conversion; no contributions. If I do a Roth conversion from IRA in 2018, can those amounts plus earnings be distributed in 2019 without tax or penalty? (Presume that 2012 and related earnings would be distributed first.)

It appears that no tax or penalty on amount converted, but what about earnings (obviously small)?

-- from pub 590-B:

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and isn't necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution.

Exceptions. You may not have to pay the 10% additional tax in the following situations.
You have reached age 59½.

And why use the word, 'may' ?

You are over 59.5 and the IRA is old enough - you can take any money (including earnings) at any time.

[sawdust60]

Thanks for the replies. My plan is to do IRA to Roth conversions each year going forward, and avoid the IRMAA penalty which begins at age 63. Once RMD begins, the Roth conversions will be less. But I will have taxes withheld from the RMD at a higher rate, to cover the tax related to the Roth conversion. And if I make estimated tax payments, I could get the full IRA distribution into the Roth (before RMD begins).

[kaneohe]

............................................................

-- from pub 590-B:

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and isn't necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution.

Exceptions. You may not have to pay the 10% additional tax in the following situations.
You have reached age 59½.

And why use the word, 'may' ?

If you made a conversion 3 yrs ago, you may be watching the 5 yr clock for that conversion since each conversion conversion clock is separately determined. The "may" is because when you reach age 59.5, the conversion clocks limitation switch to the first Roth clock limitation. If your first Roth was the conversion 3 yrs ago, you are still subject to tax on the earnings (but no penalty). If your first Roth was >5 yrs old, then no tax or penalty.

Much easier to use the table above than to read a bunch of words.