Today we’re talking about roth conversions and how the 5 year rule applies to the Roth conversion in particular. You may have seen many of our other videos on the 5 year rule for normal roth contributions but today we will focus on the fine print in the 5 year rule particularly for roth conversions.
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The 5-Year Rule on Roth Conversions: A Strategic Approach to Tax Planning
When it comes to planning for a comfortable retirement, one of the key considerations is how to minimize your tax liabilities. Roth conversions can be a powerful tax planning tool, allowing individuals to transfer funds from a traditional IRA to a Roth IRA, potentially enjoying tax-free growth and distributions in the future. However, there is an important rule to understand and consider in this conversion process: the 5-year rule.
The 5-year rule on Roth conversions stipulates that any conversions made to a Roth IRA must stay in the account for at least 5 years to avoid penalties and taxes on early distributions. This rule applies to each conversion made separately, meaning that the clock starts ticking on each converted amount. Understanding this rule is crucial because it can have significant implications for your retirement tax planning strategy.
One important aspect to consider is that the 5-year rule governs not only contributions to a Roth IRA but also conversions from traditional IRAs or other retirement accounts. This means that if you plan on converting funds from a traditional IRA to a Roth IRA, you need to take the 5-year rule into account.
Let’s break down the implications of the 5-year rule:
1. Tax-Free Growth: By converting funds to a Roth IRA and abiding by the 5-year rule, you have the opportunity to enjoy tax-free growth on your investments. This can be particularly beneficial if you expect your investments to grow significantly over time.
2. Withdrawal Flexibility: Once the 5-year holding period has passed, you can withdraw your converted funds from a Roth IRA tax-free. This can give you more flexibility in managing your retirement income and potentially lower your overall tax liability.
3. Penalty and Tax Exceptions: While the 5-year rule is generally applicable, there are some exceptions to keep in mind. For example, if you are over 59½ years old, you can withdraw your converted funds penalty-free and tax-free, as long as you have met the 5-year rule. Additionally, certain situations such as disability, death, or a first-time home purchase may allow for penalty-free and tax-free withdrawals even before the 5-year period is complete.
4. Strategic Planning: Understanding the 5-year rule can help you strategically plan your Roth conversions. For instance, if you anticipate a significant increase in income or tax rates in the near future, you might consider converting funds in smaller amounts over multiple tax years to spread out the tax liability and manage your overall tax bracket.
5. Inherited Roth IRAs: It is important to note that the 5-year rule also applies to inherited Roth IRAs. If you inherit a Roth IRA, you will need to maintain the 5-year holding period established by the original owner to continue enjoying tax-free growth and distributions.
In conclusion, the 5-year rule plays a critical role in Roth conversions and should be a key consideration for individuals looking to minimize their tax liabilities in retirement. By understanding the implications and exception of this rule, you can strategically plan your conversions, ensure compliance, and potentially enjoy tax-free growth and distributions on your Roth IRA investments.
Is there a max amount that you can convert to a Roth annually? Is it the same 6500 that is allowed in the ira?
If you are 67 and do a conversion, does the 5 year rule apply?
If you are 60 yrs or older and do your first conversion, that starts the 5 year clock. Do subsequent conversions start new 5 year clocks even at 60 years or older?
Great info as far as it goes – he says its important to "keep track" of your Roth conversions, but doesn't explain what records to keep; or how to document everything when you go to withdrawal the first conversion after it passes the 5 year rule, but before the 2nd conversion passes.
Finally, somebody shout out loud and clear what the five-year rule is for the amount you converted to Ross IRA. Thank you
For those above 59.5, (who have held any ROTH account for 5 years), any conversion amount in any year may be withdrawn at any time without tax or penalty. But take care about the earnings. These must remain in the ROTH for 5 years.
And that is why I am not doing huge conversions, just 20K per year. What I am planning to do is continue to reinvest in my brokerage account and live off the 401K money, depleting that first before even touching my brokerage account. Then taking SS at 70. I am sure the thieves…I mean the IRS, will kill us on capital gains, Biden and the liberals are salivating over that and can't wait to raise the capital gain taxes but for now I think this is the good play.
How does the 5 year rule apply if I open an new ROTH IRA with a different company than my current and then transfer older funds into my New Roth IRA? Thanks.
You've been doing this way too long to not know to put the mic on your chest!
I am a little confused. Does the five-year rule conversion rule applies if you are already older than 59 1/2.
Does the same five-year rules apply to earnings from the conversions?
So say if I withdraw a conversion before the 5 years and pay the 10% penalty, do I have to pay that upon withdrawl or when I file my taxes the following year?
If you need to do multiple IRA to ROTH IRA conversions over several years is it cleaner/better to so into a new (separate) roth account for tracking purposes?
Does the 5 year withdrawal rule for a ROTH Conversion apply to all ages, or different rule when ssy 69 or older?
This was extremely helpful and timely! I'm considering doing a conversion this year due a large tax credit that should offset the taxes due on the conversion. Now I know I'll have to wait the until January 2025 before I can touch the $$$ without penalty. Thank you!
I'm living off cash saving next three years. Will move from IRA to Roth IRA in the amount of our standard deduction each year… Around 25k. No fed tax since it's equal to SD, and my state doesn't tax IRA withdrawal or rollover!
Started with 25k and hope to have 100k in the Roth portion after three years. Tax free!
Great video – What about if I roll over a ROTH 401k into a ROTH IRA, can I withdraw the money from the ROTH IRA any second or Do I need to wait the 5 years too? Thanks
Roth conversions..just learning about this. I am turning 70 this year in a good place financially and want to leave the money I have saved for the kids. staying in the 12% tax bracket. Wise to convert as much as I can in the next 2 years??
Place a mic by the board. It's hard to hear you
The best time to discuss a Roth conversion is during a major pullback. Transfer the shares to the Roth rather than cash.
I don't get the restriction on the conversion…they will get their share of the tax next year when we will file and not have to wait 5 years… why this restriction?
I converted some in 2016, does this mean I can take out the conversion tax free this year or in 2021?