I find one of the most confusing set of rules for retirees are the three 5 year Roth IRA rules.
Often they each are referenced as ‘The 5 Year Roth Rule’ as if there is only one rule. However, there are three and each carries a different penalty for non-compliance.
The worst part about these penalties is that they destroy wealth in your most valuable retirement account: Roth IRA.
The confusion around these rules has been compounded in recent years. As recent as 2020, the estate planning rules have changed thus changing one of these rules.
In this video, we simplify and explain these rules in layman’s terms.
We cover:
1. The 5-Year Contribution Rule
2. The 5-Year Conversion Rule
3. The 5-Year Inheritance Rule
If you have any questions, please post them in the comments and we will make sure you get the answers you need.
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When it comes to retirement planning, the Roth IRA can be an invaluable tool. It allows you to save for retirement in a tax-advantaged way, and the money you contribute grows tax-free. But there are some important rules you need to be aware of when it comes to Roth IRAs. In particular, there are three confusing 5 year Roth IRA rules that you need to understand in order to make the most of your retirement savings.
The first 5 year Roth IRA rule is the 5 year holding period rule. This rule states that you must hold the Roth IRA for at least 5 years before you can withdraw any earnings tax-free. This means that if you withdraw any earnings before the 5 year mark, you will be subject to taxes and penalties. The 5 year holding period begins on the first day of the tax year in which you make your first Roth IRA contribution.
The second 5 year Roth IRA rule is the 5 year age requirement. This rule states that you must be at least 59 ½ before you can withdraw any earnings tax-free. This means that if you withdraw any earnings before the 5 year mark, you will be subject to taxes and penalties.
The third 5 year Roth IRA rule is the 5 year death requirement. This rule states that if you die before the 5 year mark, your beneficiaries will not be able to withdraw any earnings tax-free. This means that if your beneficiaries withdraw any earnings before the 5 year mark, they will be subject to taxes and penalties.
Navigating these three 5 year Roth IRA rules can be complicated, but understanding them is essential for making the most of your retirement savings. By knowing when you can withdraw earnings tax-free and when you or your beneficiaries may be subject to taxes and penalties, you can ensure that you are taking advantage of the tax-free growth of a Roth IRA.
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I started making contributions to a ROTH in 2017 -2019 in TSP. May of 2019 I moved all my funds to TD ameritrade. I will be 59 1/2 in 2023. In regards to the 5 year rule, does
the clock start at 2017, or does each year following 2017 have its own clock. You explained it both ways, at the start, and each individual year?? HELP !!!!!!!!!!
If your over 59.5 years and you do a Roth conversion do you have to wait 5 years?
What f-ing morons came up with these rules?
Thank you for this video. I'm retired with a IRA. I was considering doing a Roth conversion this year but would need to use some of that money, So now I understand the conversion 5 year rule. I may still do one, but it would be smaller than I originally considered. I'll wait until late in the year to determine how much I can convert after I've made the withdrawals I'll need this year. Again, thanks.
So if you are over 59.5 and do a 401k to Roth conversion into a Roth account that has been set up more than 5+ years ago you can withdraw it immediately tax free?
Thanks Tony
If I were over 59 1/2 wouldn’t the conversion be treated like a contribution, giving me immediate access to the amount converted. The earnings would then fall under the 5 year rule?
Thanks Ray
If today I open my first Roth ever and only fund it with a conversion from an IRA and never ever directly contribute to the Roth, will the first-Roth-account clock ever start? The conversion has its own clock. You said that this conversion gets treated like a contribution after 5 years, so does the first-Roth-account clock only start ticking then, or does it never start because I never made a direct contribution to the Roth? I ask because will be rolling 401(k] Roth assets into this Roth 10 or more years later and need to know when those funds will be available for withdrawal.
I'm currently doing a "mega backdoor Roth" i.e. after-tax contributions to my 401k which are then converted to my Roth 401k. If I understand correctly, these count as "conversions." If I were to leave my job and roll everything into a Roth IRA, would the conversions keep their original 5 year timers, or would the rollover reset everything?
As mentioned in Bhavishya Purana (book of future) the government just keeps increasing the tax burden on ordinary people stealing their hard earned money
Does the inheritance rule (wait for 10 year to avoid penalty) apply also to 401k and cash account? Can you provide the link to the rule? Thank you
Thanks. Still not sure if I understand for age over 59.5, retired, not working. Have the following: 2 tax deferred 401Ks (one of them contains small amount of after tax cobtribution); 2 tax deferred 403Bs; 4 Roth IRAs at different places that were opened well over 5 years ago; 1 nondeductible traditional IRA (contributed with after tax $ last year).
1. Can this non deductible traditional IRA be converted to Roth IRA and if necessary can the money be taken out shortly after. This would be a backdoor Roth conversion.
2. Would like to convert partial amounts of tax deferred 401K, 403B to Roth 401K, 403B (plans allow Roth version) respectively and when necessary can the money be taken out from Roth 401K, 403B accounts shortly after (if necessary).
Are there any restrictions doing conversions in item 1 and 2 during same year. And I assume in both cases, no penalties, or any restrictions on taking the converted money out including any earnings shortly after conversions due to age being over 59.5.
Sorry for the redundancy but I have to make sure that my feeble brain understands this rule. I am 63 years old and have an IRA but not a Roth IRA. If I open a Roth IRA and fund it solely with a conversion from my IRA, when can that converted money be withdrawn?
Outstanding content, thank you. These infographics are extremely helpful.
Follow-up question on contribution rule (and your infographic)…
Hypothetically, if one started the first roth conversion on 12/26/21, then on 01/01/26 (the fulfillment date), you can withdraw contributions + earnings, with no penalty, if age >= 59.5?
Put another way, given the duration of days from start to finish date, you can effectively 'reduce' the conversion waiting period to just over 4 years?
Question on 5 yr rule on Roth IRA converted amount from Trad IRA. Once 5 yrs past the money converted is treated as a contributed amount so they can be withdrawn without penalty or tax before 59.5. What about gain incurred over the years on converted amount? Are gains also considered contributed amount and can be withdrawn without penalty or tax before 59.5?
So basically if you are 59.5 and are doing a Roth conversion there is no 5 year rule. My CPA told me I would have to wait 5 years (I'm over 59.5 and suspect he's aware). I've read articles and watched many YT vids for which I got more confused. Not criticizing Safeguard Wealth Management but the topic seems it could be explained better. Even my CPA was confused. I often get more info from the comment section. BTW thanks for the vid, one of the better I've viewed. Thumbs up!
The 5 Year Conversion Rule…If I am older than 59 1/2 then would the 10% penalty still be in affect or do I still need to wait 5 years?
Excellent video. Very good job. One item you didn't mention was the the five year rules are eliminated with a "qualifying event". One of which is the turning 59 1/2. Is this correct for all 3 five year rules. Thanks, J.
So, just to be clear, if I am over 59 1/2 and I start doing some Roth conversions, can I withdraw from the Roth without any penalties?
For clarification, can I convert 401K traditional (in this case TSP 401k) to an existing Roth IRA (with another investment company) I opened more than 5 years ago and not start the clock over?
CLARIFICATION ON THE 5 YEAR ROTH CONVERSION RULE:
Every Roth Conversion has a separate 5-year clock that begins at the time of that conversion. There are a few exceptions, however, that let you bypass this rule. Here are a few of those exceptions:
– You have reached age 59.5
– You are totally and permanently disabled
– You use the distribution to buy, build, or rebuild a first home (to a limit)
– The distribution was made to a beneficiary after your passing
One thing that everyone gets wrong is conversions by people over 59 and 1/2. If you are 59 and 1/2 and you have had A Roth IRA (as in any) open fir five years then all distributions are qualified and tax free and penalty free. So if you open a Roth at a bank when you are 50 and then retire at 60 and roll company retirement funds into a traditional Ira, you can convert those funds and pay the tax on the transaction and those funds will be immediately available to you with no penalty.
I'm 53 and converted in 2012. I can just call my broker and say I want 10K of the principal and I pay NO penalty?
Could you make a video on the five year rule with people that are 59 1/2 or older that are going into retirement. Great videos thank you for all your hard work.