Roth Conversion Withdrawl Rules

[David Althaus]

Sorry. This has probably been answered numerous times but can't seem to find.

If I start a Roth Conversion this year I must wait five years to withdraw earnings or face a penalty. Questions:

1. Do future conversions in a new year restart the withdrawl clock? To strive for clarity will 2021 conversion be available for penalty-free withdrawl in 2026, 2022 in 2027, etc. or does year one start the clock for the entire account?
2. Is it true I can withdraw initial sum at any time?

All the best

[JoMoney]

Specifically with conversions (a direct Roth contribution is different) you have to wait 5 years to withdraw the conversion amount. Withdrawing the earnings on those conversion amounts may still have a penalty if you don't meet other requirements (i.e. over age 59.5)

[sixtyforty]

I copied this from a previous thread, because I had a similar question last year. Can't find the thread but here is the gist of it;


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

[retiredjg]

If I start a Roth Conversion this year I must wait five years to withdraw earnings or face a penalty.

This starting point is incorrect in a couple of ways.

1. Earnings that occur inside a Roth IRA are not available tax free and penalty free until you are over 59.5 and your first contribution to Roth IRA was at least 5 years ago.

2. If you do a conversion of pre-tax money, you must wait 5 years in order to take out that conversion contribution without penalty. If you do a conversion of. post-tax money, there is no 5 year wait. If you do a conversion of a mixture of pre and post tax money, part has a penalty clock and part does not.

1. Do future conversions in a new year restart the withdrawl clock? To strive for clarity will 2021 conversion be available for penalty-free withdrawl in 2026, 2022 in 2027, etc. or does year one start the clock for the entire account?

Every conversion that includes converting some pre-tax money has a new 5 year clock. Penalties go away at age 59.5 even if the clocks have not finished running.

2. Is it true I can withdraw initial sum at any time?

It is true you can withdraw ordinary contributions as any time. But you are talking about conversions.


If you will tell us more about your situation and exactly what you want to do, better answers can be given.

• Have you ever contributed to a Roth IRA?
  
  What are you thinking of converting? Pre-tax money or post-tax money (non-deductible contributions) or a mixture?
  
  Have you ever rolled anything into Roth IRA?
  
  Your age?

[kaneohe]

I copied this from a previous thread, because I had a similar question last year. Can't find the thread but here is the gist of it;


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

Looks like you are a good saver.......just in case you lose that table, google this site for:
Roth IRA Withdrawal Table and you should be able to find it
https://www.google.com/search?sitesearc ... awal+table

you may have to sift thru the google results to find the table.
A better outcome results if you put in the creator's name (kawill) but you might not remember it (put it in the table you saved so you don't have to remember it).
https://www.google.com/search?sxsrf=ALe ... u4Q4dUDCA0

[kaneohe]

The kawill table is very useful for understanding/remembering the rules if you are somewhat familiar with them.
For the first timer, some additional words may help in clarifying.
1) The ordering rules: withdrawals from a Roth IRA are considered contributions first, then conversions (oldest first)
and within each conversion, the taxable part comes out before the non-taxable part; finally earnings come out last.
The table is written in this same order. Each conversion has its own 5 yr clock.
2) After age 59.5,the 5 yr conversion clock is replaced by a 5 yr clock on the first Roth IRA opened (even if that particular account has been closed).

If you are thinking of withdrawing "early" there could be tax consequences so you will need to keep good records of your contributions, conversions (dates/amount), and your withdrawals so you know which bins you are withdrawing from........and you might be asked to demonstrate where those numbers came from.

[uslee2004]

Just to add that all discussion thus far are for federal tax only. Some states does not follow federal tax treatment for Roth IRA on withdrawal.

[McDougal]

Just to add that all discussion thus far are for federal tax only. Some states does not follow federal tax treatment for Roth IRA on withdrawal.

Good point, thanks for posting this.

[Alan S.]

It might also be noted that the table intentionally does not address qualified first time homebuyer distributions, because addressing this type of distribute would have confuscated the table in many areas.

Basically, such a distribution is limited to 10k lifetime and reverses the normal ordering rules by assigning up to 10k of your earnings as the first dollars distributed. This feature is complex in many areas, as is the decision whether to actually enter the 10k exception on Form 8606 when you complete your taxes.

Many first time homebuyers can simply use the table and ordering rules to receive a reasonable amount from their Roth tax free without tapping earnings. They can still get the 10k penalty exception if they tap conversions under 5 years without entering that 10k amount on line 20 of Form 8606.

[TedSwippet]

I copied this from a previous thread, because I had a similar question last year.

I think I've lost count of the number of times I've seen this table reproduced on this site! It is invaluable, isn't it?

A year or so ago, I put together a wiki table representation of it, with the intention of adding it to the site's wiki, for ease of access and reference. I didn't take the effort forwards though -- couldn't decide if my wiki table was clearer or murkier than the original. Anyway, it's here:

https://www.bogleheads.org/wiki/User:Te ... Roth_Table

Worth working up into a small wiki page with a bit of explanation and notes on special cases, or not?

[FiveK]

I copied this from a previous thread, because I had a similar question last year.

I think I've lost count of the number of times I've seen this table reproduced on this site! It is invaluable, isn't it?

A year or so ago, I put together a wiki table representation of it, with the intention of adding it to the site's wiki, for ease of access and reference. I didn't take the effort forwards though -- couldn't decide if my wiki table was clearer or murkier than the original. Anyway, it's here:

https://www.bogleheads.org/wiki/User:Te ... Roth_Table

Worth working up into a small wiki page with a bit of explanation and notes on special cases, or not?

Yes. It's already reference #19 in the Treatment of Distributions section of the "Roth IRA" wiki. Seems it would be even better to have it included in that wiki article itself.

[TedSwippet]

... It's already reference #19 in the Treatment of Distributions section of the "Roth IRA" wiki. Seems it would be even better to have it included in that wiki article itself.

Well, that's a surprise. Thank you; I had no clue this was linked to from the main wiki!

It is probably not hugely healthy to have links to User pages from Main, so I have imported the table into the page directly, footnote 2. Although I have double- and triple-checked it against the KAWill original, it was fiddly enough that I would appreciate a peer review or two on it:

Roth IRA [footnote 2] - Bogleheads

[celia]

1. Do future conversions in a new year restart the withdrawl clock? To strive for clarity will 2021 conversion be available for penalty-free withdrawl in 2026, 2022 in 2027, etc. or does year one start the clock for the entire account?

Every conversion that includes converting some pre-tax money has a new 5 year clock. Penalties go away at age 59.5 even if the clocks have not finished running.

Not exactly. You still have to meet the 5-year rule since your first contribution or conversion was done. For example, if you first contribute at age 60, you still have to meet the 5-year rule. If you first contribute at 58, convert at 59, then turn 59.5, you've met the age rule, but not the 5-year rule. But in the big scheme of things, why even contribute to a Roth if the money will only be in the account for a few years? The biggest benefit is contributing when you get your first job and let it grow past age 59.5. That is the intent of the Roth--to encourage saving for retirement.

[terran]

Lots of good comments about the ordering rules already, so I won't add to those, but I think it's worth noting that "5 years" could be placed in quotes because it's actually 5 tax years. So a conversion completed on Dec 31, 2020 would be available for withdrawal without penalty on January 1, 2025, or 4 years and 1 day later, but 5 tax years later.

[FiveK]

... It's already reference #19 in the Treatment of Distributions section of the "Roth IRA" wiki. Seems it would be even better to have it included in that wiki article itself.

Well, that's a surprise. Thank you; I had no clue this was linked to from the main wiki!

It is probably not hugely healthy to have links to User pages from Main, so I have imported the table into the page directly, footnote 2. Although I have double- and triple-checked it against the KAWill original, it was fiddly enough that I would appreciate a peer review or two on it:

Roth IRA [footnote 2] - Bogleheads

Looks fine. Might not hurt to add examples to the first column, and/or to some of the text in the Distributions section. E.g., how distributions based on amounts from the backdoor Roth process would be handled.

One thing I don't understand, even after multiple readings, is the highlighted portion of "Taxable Portion of a Conversion applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions."

Seems that sentence would be correct if the highlighted portion were removed, and is incorrect as written.

Thoughts?

[kaneohe]

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

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

One thing I don't understand, even after multiple readings, is the highlighted portion of "Taxable Portion of a Conversion applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions."

Seems that sentence would be correct if the highlighted portion were removed, and is incorrect as written.

Thoughts?

Can't say I understand why it's there.........perhaps to emphasize the ordering rules.......contributions first, then conversions by oldest first (taxable portion before non-taxable part), etc. but not sure I'd get it from the words in wiki as shown unless I understood the concept first.

[Alan S.]

Would be better to change that portion of the wiki statement to "the lifetime total of conversions reported in prior years".

I agree that this statement generally makes sense and is correct because the 10% recapture penalty applying to the taxable portion of conversions should disregard conversions already done. But rather than just specifying earlier conversions that could include conversions done earlier in the same year, it is more accurate to indicate that only conversion amounts already reported in prior years should be included in the amount subtracted. That would conform with the ordering rules.

[FiveK]

Assume:
- Filer is under age 59.5
- $100 direct Roth contribution made 10 years ago
- Two years ago, a conversion was done that put $5000 of after-tax and $50 of taxed money into the Roth.
- This tax year, $200 was withdrawn from the Roth IRA.

Is there
- a penalty on $50 of the withdrawal because the taxable portion of the conversion is deemed to be withdrawn after the $100 contribution but before the $5000 untaxed portion of the conversion, or
- no penalty on the withdrawal because $200 does not exceed "the lifetime total of regular contributions [$100] to Roth IRAs plus the lifetime total of earlier conversions [$5050]"?

[kaneohe]

Assume:
- Filer is under age 59.5
- $100 direct Roth contribution made 10 years ago
- Two years ago, a conversion was done that put $5000 of after-tax and $50 of taxed money into the Roth.
- This tax year, $200 was withdrawn from the Roth IRA.

Is there
- a penalty on $50 of the withdrawal because the taxable portion of the conversion is deemed to be withdrawn after the $100 contribution but before the $5000 untaxed portion of the conversion, or
- no penalty on the withdrawal because $200 does not exceed "the lifetime total of regular contributions [$100] to Roth IRAs plus the lifetime total of earlier conversions [$5050]"?

I think it's a penalty on the $50.

"Taxable Portion of a Conversion applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions."........ok, starting to see your point.............but then there is the possibility of thinking all conversions are are subject to the penalty.
Perhaps if they added the words "withdrawn previously" to that sentence?

[retiredjg]

1. Do future conversions in a new year restart the withdrawl clock? To strive for clarity will 2021 conversion be available for penalty-free withdrawl in 2026, 2022 in 2027, etc. or does year one start the clock for the entire account?

Every conversion that includes converting some pre-tax money has a new 5 year clock. Penalties go away at age 59.5 even if the clocks have not finished running.

Not exactly. You still have to meet the 5-year rule since your first contribution or conversion was done. For example, if you first contribute at age 60, you still have to meet the 5-year rule. If you first contribute at 58, convert at 59, then turn 59.5, you've met the age rule, but not the 5-year rule.

Celia, you are talking about the steps necessary for the Roth IRA to be qualified.

Penalties, such as from not finishing a conversion clock, go away at 59.5 even if the Roth IRA is not qualified.

[retiredjg]

Assume:
- Filer is under age 59.5
- $100 direct Roth contribution made 10 years ago
- Two years ago, a conversion was done that put $5000 of after-tax and $50 of taxed money into the Roth.
- This tax year, $200 was withdrawn from the Roth IRA.

Is there
- a penalty on $50 of the withdrawal because the taxable portion of the conversion is deemed to be withdrawn after the $100 contribution but before the $5000 untaxed portion of the conversion, or
- no penalty on the withdrawal because $200 does not exceed "the lifetime total of regular contributions [$100] to Roth IRAs plus the lifetime total of earlier conversions [$5050]"?

The first one....penalty on the $50. The $200 comes out in this order...

1. $100 direct contribution
2. $50 taxable portion of the conversion that has not finished its conversion clock <---penalty on this part only
3. $50 from the non-taxable portion of the same conversion

[WoodSpinner]

One other aspect to note is that the withdrawal rules for a Roth 401K are different. Don’t mix them up.

WoodSpinner

[terran]

One other aspect to note is that the withdrawal rules for a Roth 401K are different. Don’t mix them up.

WoodSpinner

I could be wrong, but don't they become the same if you roll the Roth 401(k) over into an IRA?

[retiredjg]

One other aspect to note is that the withdrawal rules for a Roth 401K are different. Don’t mix them up.

WoodSpinner

I could be wrong, but don't they become the same if you roll the Roth 401(k) over into an IRA?

If you roll Roth 401k into Roth IRA, then Roth IRA rules apply.

If there are conversion clocks running in the 401k, they continue to run in the Roth IRA. Something that has to be watched. I don't know how that information is transmitted to the owner though.

[terran]

One other aspect to note is that the withdrawal rules for a Roth 401K are different. Don’t mix them up.

WoodSpinner

I could be wrong, but don't they become the same if you roll the Roth 401(k) over into an IRA?

If you roll Roth 401k into Roth IRA, then Roth IRA rules apply.

If there are conversion clocks running in the 401k, they continue to run in the Roth IRA. Something that has to be watched. I don't know how that information is transmitted to the owner though.

Wouldn't the 1099 from the year of conversion serve as a record for the conversion clock?

[retiredjg]

One other aspect to note is that the withdrawal rules for a Roth 401K are different. Don’t mix them up.

WoodSpinner

I could be wrong, but don't they become the same if you roll the Roth 401(k) over into an IRA?

If you roll Roth 401k into Roth IRA, then Roth IRA rules apply.

If there are conversion clocks running in the 401k, they continue to run in the Roth IRA. Something that has to be watched. I don't know how that information is transmitted to the owner though.

Wouldn't the 1099 from the year of conversion serve as a record for the conversion clock?

I suppose it would. I just don't think many people would think about whether clocks are running or not. So much confusion about the Roth rules....wish it could be simpler.

[WoodSpinner]

In addition, I don’t believe contributions to a Roth 401k come out first, it’s prorated with earnings. Also RMDs apply to Roth 401ks, not Roth IRAs.

WoodSpinner

[terran]

In addition, I don’t believe contributions to a Roth 401k come out first, it’s prorated with earnings. Also RMDs apply to Roth 401ks, not Roth IRAs.

WoodSpinner

Right, but I think, and retiredjg seems to confirm, that's only true while the money is in the 401(k). If it's rolled over to an IRA then the 401(k) contributions/earnings act like IRA contributions/earnings, so the contributions do come out first rather than being prorated.

[terran]

One other aspect to note is that the withdrawal rules for a Roth 401K are different. Don’t mix them up.

WoodSpinner

I could be wrong, but don't they become the same if you roll the Roth 401(k) over into an IRA?

If you roll Roth 401k into Roth IRA, then Roth IRA rules apply.

If there are conversion clocks running in the 401k, they continue to run in the Roth IRA. Something that has to be watched. I don't know how that information is transmitted to the owner though.

Wouldn't the 1099 from the year of conversion serve as a record for the conversion clock?

I suppose it would. I just don't think many people would think about whether clocks are running or not. So much confusion about the Roth rules....wish it could be simpler.

True. Knowing that I'll most likely be taking advantage of Roth ordering rules (planning to retire early) I keep track of all contributions and conversions (both IRA and 401(k)) in a spreadsheet, which should greatly simplify the withdrawal clock and contribution issues.

[retiredjg]

In addition, I don’t believe contributions to a Roth 401k come out first, it’s prorated with earnings. WoodSpinner

My understanding is that this is correct until age 59.5....the Roth 401k contributions come out with a prorated amount of Roth 401k earnings attached and the earnings are taxed. Obviously better to roll to Roth IRA.

I'm not sure just what happens after 59.5. I believe if the first contribution to Roth 401k was greater than 5 years before, the Roth 401k is "qualified" (anything is available without tax or penalty) but if it is not qualified, I don't know the order. Maybe the same as Roth IRA?

[FiveK]

Assume:
- Filer is under age 59.5
- $100 direct Roth contribution made 10 years ago
- Two years ago, a conversion was done that put $5000 of after-tax and $50 of taxed money into the Roth.
- This tax year, $200 was withdrawn from the Roth IRA.

Is there
- a penalty on $50 of the withdrawal because the taxable portion of the conversion is deemed to be withdrawn after the $100 contribution but before the $5000 untaxed portion of the conversion, or
- no penalty on the withdrawal because $200 does not exceed "the lifetime total of regular contributions [$100] to Roth IRAs plus the lifetime total of earlier conversions [$5050]"?

The first one....penalty on the $50. The $200 comes out in this order...

1. $100 direct contribution
2. $50 taxable portion of the conversion that has not finished its conversion clock <---penalty on this part only
3. $50 from the non-taxable portion of the same conversion

Agreed.

Given that, what is your opinion on this question?

One thing I don't understand, even after multiple readings, is the highlighted portion of "Taxable Portion of a Conversion applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions."

Seems that sentence would be correct if the highlighted portion were removed, and is incorrect as written.

[retiredjg]

I find it easy to mis-interpret. I think Alan's wording is less prone to problems.

Would be better to change that portion of the wiki statement to "the lifetime total of conversions reported in prior years".

Mostly, I'm just not sure that one sentence can describe this to a person who does not already know what it means. The only way I have ever been able to explain Roth conversion rules is to give examples. Trying to explain it in words is incredibly difficult and rife with misunderstanding.

[retiredjg]

Sorry. This has probably been answered numerous times but can't seem to find.

If I start a Roth Conversion this year I must wait five years to withdraw earnings or face a penalty. Questions:

1. Do future conversions in a new year restart the withdrawl clock? To strive for clarity will 2021 conversion be available for penalty-free withdrawl in 2026, 2022 in 2027, etc. or does year one start the clock for the entire account?
2. Is it true I can withdraw initial sum at any time?

All the best

This thread is wandering around with no comments from you. Did you get your questions answered?

[David Althaus]

Thanks all. I'm 73 and never converted anything to Roth. Think I can take out whatever I put in minus earnings and after five years of initial deposit can take any and all out at will. Reason I'm thinking about it (know this is taboo here) as a backup if step up basis is eliminated next year. Large tax deferred IRA and have been putting excess in taxable mainly for convenience. Should have been more explicit in initial question.

[retiredjg]

Have you ever put any money into Roth IRA at all? Or do you mean, if you do a Roth conversion this year, that will be your very first time to put money into Roth IRA?

[FiveK]

I find it easy to mis-interpret. I think Alan's wording is less prone to problems.

Would be better to change that portion of the wiki statement to "the lifetime total of conversions reported in prior years".

Mostly, I'm just not sure that one sentence can describe this to a person who does not already know what it means. The only way I have ever been able to explain Roth conversion rules is to give examples. Trying to explain it in words is incredibly difficult and rife with misunderstanding.

Because adding $5050 (i.e., "the lifetime total of conversions reported in prior years") to the $100 contribution would provide the same incorrect result (i.e., the $50 would not be subject to a penalty), I'll remove the whole clause from the wiki - unless someone can explain why it should remain?

[David Althaus]

Have never contributed one dollar to a Roth. Waited too long and now at my age Roth seemed to have only modest advantage over a taxable account. If step up eliminated that changes dramatically--assuming Roth remains as is.

[kaneohe]

I find it easy to mis-interpret. I think Alan's wording is less prone to problems.

Would be better to change that portion of the wiki statement to "the lifetime total of conversions reported in prior years".

Mostly, I'm just not sure that one sentence can describe this to a person who does not already know what it means. The only way I have ever been able to explain Roth conversion rules is to give examples. Trying to explain it in words is incredibly difficult and rife with misunderstanding.

Because adding $5050 (i.e., "the lifetime total of conversions reported in prior years") to the $100 contribution would provide the same incorrect result (i.e., the $50 would not be subject to a penalty), I'll remove the whole clause from the wiki - unless someone can explain why it should remain?

In your example the lifetime total of conversions reported withdrawn in prior yrs is 0. Totally agree w/
retiredjg about the difficulty of explaining a concept in a few words w/o a detailed example.

[FiveK]

In your example the lifetime total of conversions reported withdrawn in prior yrs is 0. Totally agree w/
retiredjg about the difficulty of explaining a concept in a few words w/o a detailed example.

Current wiki: "Taxable Portion of a Conversion applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions."

Let
the lifetime total of withdrawals from all Roth IRAs = A
the lifetime total of regular contributions to Roth IRAs = B
the lifetime total of earlier conversions = C

The sentence as written says "Taxable Portion of a Conversion applies only when A > (B + C)."

That is incorrect.

Per the IRS (and described by the table), "Taxable Portion of a Conversion applies when A > B."

Unless I'm missing something...?

[retiredjg]

Thanks all. I'm 73 and never converted anything to Roth. Think I can take out whatever I put in minus earnings and after five years of initial deposit can take any and all out at will.

This is correct.