Is EVERYONE Subject to the 5-Year Conversion Rule?

Understanding Roth Conversion rules is critical to building a tax-efficient income strategy in retirement.

When it comes to some rules, that's easier said than done.

One of the most confusing set of rules are the 5-year Roth Rules. In part, they are confusing because they are all referred to as the '5-year rule' but they are several 5-year rules.

We find the 5-year rule specific to conversions can be especially cumbersome.

In summary, this rule specifies that every Roth Conversion starts a 5-year clock. You are not able to touch that conversion, without penalty, for five tax years. A 2021 conversion cannot be accessed until 2026.

If you break this rule, you will owe a 10% early withdrawal penalty in addition to the taxes you owed on the conversion. In most situations, this destroys the value of the conversion.

So does that mean everyone has to follow this 5-year conversion rule?

Well, not exactly.

The IRS lays out a list of exceptions to this 5-year rule. If you qualify for an exception, that Roth Conversion is immediately accessible.

In this video, we walk through who exactly qualifies for an exception and clear up any additional confusion around this Roth Conversion 5 year rule.

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Always remember, "You Don't Need More Money; You Need a Better Plan"

[rondematteo]

That's the best info on the 5 year rule, now know after 59 1/2 no tax penalty, great!

[jakejake]

I have watched many videos on the Roth conversion and the 5 year rule. I think you explained it the best!

[practicalshooter]

After 59 1/2 the bets are off. You can take out all conversions and distributions without taxes, but the earnings have to wait 5 years.

[bobriemersma]

These videos are useful even if one already knows these things. Having them re-examined this way helps one reinforce their knowledge and correct any flaws within it.

[johnscott]

For those under 59 and 1/2, the IRS has an order of distribution that they use. They consider that you first take out your contributions, then any conversions and lastly any earnings. So, depending on if you have been contributing to your Roth for a long time, you may be able to access a significant amount of your money.

[kenfrank]

Great video, I didn't know about the 59.5 rule until now. Gee, being an old guy has benefits!

[hacksawbob]

If you are above 59½, the 5-year conversion rule doesn't apply, but the 5-year Roth IRA rule still applies. If you convert into an existing Roth that has existed for at least 5 years, you're good to go. If you don't have a Roth and do a conversion (creating a Roth IRA via the conversion), you still have to wait 5 years. Not due to the conversion rule, just due to the general 5-year Roth rule.

[Harry_]

Outstanding presentation - easy to understand and with the IRS code for "proof." Thanks!👏👏

[asterixky]

After 59 1/2, principal from contributions and conversions can be withdrawn at anytime without penalties, but you have to wait 5 years from the opening of the Roth (5 years rule) to withdraw the interest tax free.

[karenstars]

Does that exception To waiting 5 years include the EARNINGS fom the 5 year rule or just the money you converted???

[janethunt]

Bless your heart for telling me this! From now on, I will keep cash that I don't need in a checking account in a Roth money market account to avoid taxable interest income.

[jakejake]

Thanks for clarifying the over 59.5 and 5 year rule. That's a big deal!

[karenminogue]

Great job. Appreciate that you did this explanation directly using the publication.

[papasquat]

The IRS website is a master's class in intentional convolution.

[wincoffin]

This is good news -- the IRS publications I found hard to understand! Question: If I'm over 59 1/2 and perform a new conversion, your video clearly says I can immediately have access to that new conversion bucket. But you don't say if I have access to its EARNINGS (which can start accumulating very quickly), before the 5 years is up. I think I do, but could you confirm? Thanks! By far the largest bucket in my Roth is earnings -- thank you $TSLA!

[bobb]

Such a great video and easy to understand.

[terryadams]

Another great video! Thanks for the clarification!

[backcountyrpilot]

IRS Publication 590-B

“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 tax year for which a contribution was made to a Roth IRA set up for your benefit.
The payment or distribution is:
Made on or after the date you reach age 59½,
Made because you are disabled (defined earlier),
Made to a beneficiary or to your estate after your death, or
One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10, 000 lifetime limit).”

[CaKiteboarding]

Very informative, you say you have access right away to the conversion if you are older than 59.5 years. Is that access just to money converted or also any earnings from that conversion? or are the earnings subject to the 5 year rule? Thanks

[Carnakr]

If possible to stay in the two lowest tax brackets out of a 401K or IRA over multiple years and take ordinary income into a normal tax brokerage account. Let this ordinary income sit in the brokerage account for one year then it becomes a long term capital. Then any gains taken out for married filing jointly have up to $96, 700 dollars at a 0 tax rate.