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Thanks to both of you for the clarification.
In my case, I converted funds from a TIRA to a Roth, and they were recorded as in the Roth prior to the end of 2017. So I'm good as of 1/1/2022.
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I believe that the 5 year clock is per conversion. It has nothing to do with how old the IRA or 401K is.
Money converted in 2018 is eligible for Tax Free withdrawal in 2023.
Each conversion has it's own clock.

Overall the Roth IRA has a 5 year clock based on the 1st contribution. So a Roth IRA opened before 2013 are eligible for tax free withdrawals. The amount converted would need to wait 5 years from the conversion.


https://www.bankrate.com/investing/ira/roth-ira-5-year-rule-...

Mike
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If I've had a traditional IRA for 30+ years, and convert it to a Roth after age 60 but before age 70, I'm assuming I can take distributions out of the roth in the next 2-3 years, without having to be concerned about the 5-year rule?

Sorry - you do have to be concerned about the 5 year rule, since it is a requirement for a 'qualified distribution'. Here are the rules from IRS Pub 590-B https://www.irs.gov/pub/irs-pdf/p590b.pdf

What Are Qualified Distributions?

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. 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

2. The payment or distribution is:
a. Made on or after the date you reach age 5912,
b. Made because you are disabled (defined earlier),
c. Made to a beneficiary or to your estate after your death, or
d. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).


If your distribution is not a qualified distribution, then you need to use the 'ordering rules' from Pub 590-B to determine how much, if any, of your distribution will be taxable.

Two years later, the $100 has increased in value from $100 to $300. At the end of that second year, I take a $150 distribution from the Roth ($50 over my initial contribution). Is that going to give me any hassle with the IRS?

Well, it's not going to give you a hassle, but you will owe taxes at your ordinary income rates on $50 of the $150 because of taking out earnings as part of a non-qualified distribution. You don't have to pay the 10% penalty because you're over 59 1/2.

AJ
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I believe that the 5 year clock is per conversion. It has nothing to do with how old the IRA or 401K is.

Well, it is and it isn't. If the account is at least 5 years old, and you are 59 1/2 or older, then the individual conversion clocks don't matter - the distribution is qualified. It's only when you start taking non-qualified distributions that the 5 year clocks on individual conversions kick in. That's where the ordering rules come into play.

AJ
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Each conversion has it's own clock.

So do you need to have a separate account for each conversion until they can be grouped together after the youngest conversion reaches 5 years? Intending to do a significant amount of conversions between 2019 and 2025, but really not wanting to add 7 new accounts to our brokerage, and that's just for DH's TIRA.

IP
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1. 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,...

So I guess that would be a no to needing 7+ Roth conversion accounts as the time starts with the first conversion?

IP
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So I guess that would be a no to needing 7+ Roth conversion accounts as the time starts with the first conversion?

You don't have to have separate accounts. If you are over 59 1/2 and are taking non-qualified distributions because the account itself has not been opened at least 5 years, you need to follow the ordering rules, which basically means you take out all regular contributions first, then all conversion contributions, then you start on the earnings. Being over 59 1/2, there won't be penalties for early withdrawal, but earnings will be taxed at your ordinary income rate.

If you are under 59 1/2 and are taking non-qualified distributions, then penalties can be applied on conversion contributions that were converted less the 5 years prior to the distribution, as well as ordinary income and penalties on the earnings.

But all of the calculations are done on the form 8606 (and form 5392 for penalties), and don't require separate accounts for conversions.

AJ
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AJ,
Thanks for clearing that up. I have a followup. Roth IRA opened in 2010 via conversion. This Roth is all conversion money. Have separate 401K Roth all Cash contributions.

Conversion # 1 in 2010 now equals 60%
Conversion # 2 in 2015 now equals 25%
Conversion # 3 in 2018 now equals 20%



So I could take about60% out now tax free, or will be able to take about 75% in 2020 , or all tax free in 2023. Just trying to better understand the tax part. This Roth is going to be the last money that I touch but just checking tax issue.

Plan is to start withdrawing monies next year or 2020.
First from 401K
Then from IRA
Then Roth 401K
Last from this Conversion Roth.

6 years until RMD's start so taking a part of that balance lower before RMD's start.

Does this make sense.

Thanks
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Conversion # 1 in 2010 now equals 60%
Conversion # 2 in 2015 now equals 25%
Conversion # 3 in 2018 now equals 20%

So I could take about 60% out now tax free, or will be able to take about 75% in 2020 , or all tax free in 2023.


Or all tax free since first conversion was more than 5 years ago and he meets the age requirements?

IP
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IP,

That would be nice but not sure if I read it that way. I was over 59 1/2 for 2015 and 2018 conversion so maybe...

Mike
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Thanks for clearing that up. I have a followup. Roth IRA opened in 2010 via conversion. This Roth is all conversion money. Have separate 401K Roth all Cash contributions.

Is the "401(k) Roth" still in a 401(k)? Or have you rolled it to an IRA, and you're just calling it a "401(k) Roth" because that's where the money came from?

If both the accounts are IRA accounts, then it's all one large Roth IRA (Individual Retirement Arrangement, NOT Individual Retirement Account), so there's no point in looking at them separately. The IRS forces you to look at your total Roth IRA balances as one large pool, no matter how many different brokerage accounts you have.

If the "401(k) Roth" is still in a 401(k) account, those withdrawal rules are different than IRA rules. You will have to take RMDs from the 401(k) Roth account in the year when you reach 70 1/2. If you roll it over into an IRA, you will not have to take RMDs.

6 years until RMD's start

Well, RMDs aren't required for Roth IRAs, but assuming you mean that you will turn 70 1/2 in 6 years, that means that you are currently in your mid-60's (in other words, over 59 1/2), right? In that case, because you have had a Roth IRA established since 2010 (more than 5 years ago), then you have met the two criteria to take qualified withdrawals. Therefore, all distributions are qualified distributions, and you would not need to use ordering rules or worry about the 5 year rule for conversions.

Conversion # 1 in 2010 now equals 60%
Conversion # 2 in 2015 now equals 25%
Conversion # 3 in 2018 now equals 20%


This would only be important if you weren't at least 59 1/2, because then you would need to use the ordering rules. But then, I'm confused - what is the amount that was converted vs. what are the earnings on that converted amount? You need to separate the earnings from the amounts converted to use the ordering rules.

So I could take about60% out now tax free, or will be able to take about 75% in 2020 , or all tax free in 2023. Just trying to better understand the tax part.

No. If you are under 59 1/2 now, the only amount that you could take out without taxes or penalties is the amount that you converted in 2010. If you take out more than what was converted in 2010, you will owe a 10% penalty on the amount up to the total conversion amounts from 2015 and 2018, and you will owe taxes at your ordinary income rate plus a 10% penalty on any earnings.

If you won't be at least 59 1/2 by 2020, the total amount that you will have been able to take out of the account tax and penalty free would be the 2010 converted amount, plus the 2015 converted amount. If you take out more, the amount that you had converted in 2018 would be subject to a 10% penalty, and earnings will again be taxed at your ordinary income rate, plus a 10% penalty.

If you still won't be 59 1/2 by 2023, then the total amount that you will have been able to take out of the account tax and penalty free would be the total amount that you converted in 2010, 2015 and 2018. All earnings taken out would be taxed at your ordinary income rate plus a 10% penalty.

And remember - 59 1/2 means that you have to be at least 59 years and 183 days old on the day that you take the withdrawal. It's not like contributions, where you can make a contribution for 2018 any time between Jan 1, 2018 and Apr 15, 2019. If you take the withdrawal out when you are 59 years and 180 days old, you can be assessed a penalty for early withdrawal.

AJ
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That would be nice but not sure if I read it that way. I was over 59 1/2 for 2015 and 2018 conversion so maybe...

I don't think the age at which you make the contributions matter, just that you started the conversions more than 5 years ago.

From AJ's post:

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. 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

2. The payment or distribution is:
a. Made on or after the date you reach age 5912,
b. Made because you are disabled (defined earlier),
c. Made to a beneficiary or to your estate after your death, or
d. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).


The bolded part is what makes me think this may be the case, but as I have yet to start taking distributions and am unschooled, I posted my question to get feedback.

IDK. Lets wait for a pro.

IP
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That would be nice but not sure if I read it that way. I was over 59 1/2 for 2015 and 2018 conversion so maybe...

It doesn't matter if you are over 59 1/2 when you do the conversion. It matters if you are over 59 1/2 when you make the withdrawal. That, and that the Roth account has been open for at least 5 years. If this is the case, all withdrawals from the Roth IRA are tax and penalty free.

Again - withdrawals from a 401(k) account have different rules. So it matters whether you've rolled those over into an IRA or still have them in the 401(k).

AJ
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AJ, Thanks for the replies. Yes I am over 60 so 59 1/2 is not a problem. Also the Roth that I had in example is current value. It has grown over 100% over the years so my allowable withdrawals were very understated.

But if the fact that I am over 59 1/2. Account opened over 8 years then all withdrawals are tax free as of today. Still don't plan on touching that money for many years.


I will probably do a few more conversions if the tax situation warrants it. All of these accounts are well over 5 years and only this one Roth has conversions.

Thanks for the answers and the expert info.

Have a great Memorial Day and Weekend.

Mike
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AJ,

Thanks,

I have read up on 401K rules and I know they have different rules.

One quick question My current 401K and Roth 401K is 4 years old. BUT...
They were started when the company changed Brokerages. The previous account was 2 years old before this event and had both 401K and Roth 401K cash invested. Never any conversions. So this 401K-Roth should be counted as 6 years old as far as my first 401K Roth contribution is concerned. I have the old statements so should not be an issue. Will verify next week with company.

Thanks,

Mike
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It has grown over 100% over the years so my allowable withdrawals were very understated.

Actually, if you don't meet the rules for a qualified distribution (and I know you do, but for those who don't), your allowable tax and penalty free withdrawals were very overstated.

If you don't meet the rules for a qualified distribution, you can only withdraw amounts were cash contributions, plus amounts that were converted at least 5 years prior if you want to avoid both taxes and penalties. If you withdraw amounts that were converted less than 5 years prior, you may owe a 10% penalty, depending on why you don't meet the rules for a qualified distribution. And if you withdraw any earnings/growth, you will owe taxes at your ordinary income rate, and again, depending on why you don't meet the rules for a qualified withdrawal, you may owe a 10% penalty.

AJ
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My current 401K and Roth 401K is 4 years old. BUT...
They were started when the company changed Brokerages. The previous account was 2 years old before this event and had both 401K and Roth 401K cash invested. Never any conversions. So this 401K-Roth should be counted as 6 years old as far as my first 401K Roth contribution is concerned.


Yes, that's correct. Assuming your plan allows you to, you may take tax and penalty free withdrawals from your Roth 401(k) account now.

I would encourage you to roll the Roth 401(k) over to an IRA before the year you turn 70 1/2, so you don't have to take RMDs from the Roth 401(k) if you don't want to.

AJ
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AJ,

Retiring at end of 2018. So free to make moves in 2019 and 2020 while at a lower tax bracket.

Thanks,

Mike
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aj485,

You cite the rules from IRS Pub 590-B https://www.irs.gov/pub/irs-pdf/p590b.pdf

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. 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 …


I'm wondering how this impacts high income employees that have never, ever made an actual Roth IRA contribution?

Some of my coworkers are probably in this situation. They started contributing after joining Microsoft right out of college. By the time they considered a Roth IRA, their only option was a backdoor Roth IRA contribution.

And perquisite #1 specifies a contribution. But a conversion is clearly treated distinctly from a contribution in other parts of Pub 590-B. And this requirement clearly states that you must make a Roth IRA contribution, so the nondeductible Traditional IRA contribution obviously doesn't start the clock.

BTW, this might be even more complicated. Some of my coworkers are making after-tax 401(k) contributions and then doing in-service rollovers of that money into their Roth IRAs. I know some of them have never made a Roth IRA contribution and none of their Roth IRA was ever part of a Traditional IRA - all of it made its way there by way of an in-service rollover from our 401(k) plan.

Does this mean these people can never meet this requirement until 5 years after they manage to legitimately make a regular Roth IRA contribution? Or has the IRS ruled that a conversion is good enough to start this clock?

If they don't meet this requirement, doesn't that mean they would be stuck paying taxes on all earnings in the account made after the conversion, effectively negating any value from the conversion?

And for anyone that cares and has read this far, no this question wouldn't apply to me in any case. I made several regular Roth IRA contributions over a decade ago, so qualified distributions should not be a problem for me personally.

- Joel
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And perquisite #1 specifies a contribution. But a conversion is clearly treated distinctly from a contribution in other parts of Pub 590-B. And this requirement clearly states that you must make a Roth IRA contribution, so the nondeductible Traditional IRA contribution obviously doesn't start the clock.

Can you cite the specific place where conversions are cited as not being contributions in Pub 590-B? https://www.irs.gov/pub/irs-pdf/p590b.pdf

Here are some of the places that I found 'conversion' in 590-B:

Page 2 under "Reminders" Pub. 590-A covers contributions to traditional IRAs as well as Roth IRAs. This publication includes the rules for rollover and conversion contributions.

Page 7 under "Outstanding rollovers and recharacterizations" If a conversion contribution is contributed to a Roth IRA

Page 33 under "Ordering rules for distributions" There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans)

Also page 33 under "Ordering rules for distributions" it refers to 'regular' contributions vs. 'conversion' contributions:
1. Regular contributions.
2. Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first).


So, I think your friends and co-workers are safe in not having to pay taxes on a qualified Roth IRA distribution from this year, as long as the account was funded with a conversion contribution in or before 2013.

AJ
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Lots and lots of words, but let's state the Roth IRA rules in a short and simple format.

1. The first thing to come out of the Roth IRA is contributions. These are always tax free and penalty free.

2. When contributions are exhausted, the next thing out is conversions. Conversions are always tax free. (You paid the tax at the time of conversion.) They are subject to penalty UNLESS the conversion has been in the account at least 5 years OR the owner is over 59.5 years of age. (Or dead or disabled.)

3. The last thing out of a Roth is earnings. Earnings are subject to tax AND penalty UNLESS the owner is over 59.5 years of age (or dead or disabled) AND the account has been open for at least 5 tax years.

Using the info provided in follow up posts, all of your Roth withdrawals are now tax free. You had a Roth account open before 2013 and you are over 59.5.

The thing to remember here is that there are multiple 5 year tests. There is one for penalty-free withdrawals of conversions and another for tax and penalty free withdrawals of earnings.

--Peter
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Peter -- Quick question about the second to last word in your Item #3 -- "tax" years.
I opened up my first/only Roth IRA in December 2017.
Counting "tax years", five of them would be 2017, 2018, 2019, 2020, and 2021.
Thus, if I withdraw earnings on January 1, 2022, have I met the five year test, and the withdrawal is tax free? Even though, technically, it's only been four years and a month or so since I made the contribution?

Thanks.
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You can make a contribution to a prior year IRA up to the filing deadline for the tax return. So with the 2017 filing deadline of 4/17/2018 you could make a contribution on 4/17/2018 for 2017 and your file year period would be 2017, 2018, 2019,2020,and 2021 so a 1/17/2022 withdrawal would be tax free.
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I opened up my first/only Roth IRA in December 2017.
Counting "tax years", five of them would be 2017, 2018, 2019, 2020, and 2021.
Thus, if I withdraw earnings on January 1, 2022, have I met the five year test, and the withdrawal is tax free? Even though, technically, it's only been four years and a month or so since I made the contribution?


Yes, assuming that the first rollover or conversion contribution actually was in the Roth account by Dec 31, 2017, or as rosewine indicates, you made a regular contribution for the tax year 2017, even if it was made as late as April 17, 2018. Plus you have to be 59 1/2 by Jan 1, 2022.


It's a fine distinction that not everybody understands - the tax year for rollover and conversion contributions is based on the calendar year that they occur in, while regular contributions for a tax year can be made until the initial tax return filing deadline (around April 15 of the following year) for that tax year.

AJ
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Thanks to both of you for the clarification.
In my case, I converted funds from a TIRA to a Roth, and they were recorded as in the Roth prior to the end of 2017. So I'm good as of 1/1/2022.
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Peter -- Quick question about the second to last word in your Item #3 -- "tax" years.
I opened up my first/only Roth IRA in December 2017.
Counting "tax years", five of them would be 2017, 2018, 2019, 2020, and 2021.


Yep.

Thus, if I withdraw earnings on January 1, 2022, have I met the five year test, and the withdrawal is tax free?

Not enough information. Yes, you would meet the appropriate 5 year test. But you also have to be over 59.5 years of age to have a tax and penalty free withdrawal of earnings. For earnings, the test is 5 years AND old enough.

Even though, technically, it's only been four years and a month or so since I made the contribution?

Yep. You can actually get down to 3 years and 8 1/2 months if you make a contribution on April 15 for the prior year. That's why I mention "tax years".

--Peter
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