I encouraged my wife to take a $40,000 Roth conversion in a lower tax year. Even though she has another Roth IRA at a different broker, she was encouraged to keep the money where she already had her 401(k), which we converted to a IRA and then to a Roth IRA. She is well past age 59 ½. The five-year waiting period is over on her original Roth. Does she really need to wait the five years on the second Roth?
The answer in this situation is simple and straightforward: No, your wife doesn’t need to wait five years. She can begin withdrawing from her $40,000 Roth conversion at any time without incurring taxes or penalties.
If you have additional questions about the five-year rules or other retirement-planning topics, match with a financial advisor and get expert advice on your specific situation.
However, you obviously asked here because it wasn’t clear to you before, and that is understandable. Questions about the Roth IRA five-year rules come up quite often. There’s a good chance you’ve even read some conflicting statements or missed some nuance that made it confusing. I’ll explain why she doesn’t have to wait five years so you can understand the reasoning, rather than just taking my word for it.
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Part of the lack of clarity on this subject often stems from the fact that there are two separate five-year rules that apply to Roth IRAs. Let’s recap them here to put the analysis in the right context.
The main benefit of a Roth IRA is that your withdrawals are tax-free, as long as certain conditions are met. The five-year rules are part of what define those conditions.
This five-year rule relates to whether or not a Roth IRA withdrawal is qualified, and therefore entirely tax-free. A qualified withdrawal is one that satisfies two requirements:
The withdrawal occurs after five years have passed since your first contribution to a Roth IRA. You only need to satisfy this rule once, regardless of the number of Roth IRAs you have or the timing of subsequent contributions. If you withdraw from a Roth IRA but have not met this rule, the earnings portion of the withdrawal is taxable.
The second part of that rule outlines other conditions that must be met as well. For most retirees, satisfying the five-year rule and being over 59 ½ is what gets them there. (And remember, a fiduciary financial advisor can help you manage your retirement nest egg and make important critical decisions related to the money.)
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This rule requires that you wait five years after a Roth conversion before withdrawing. This rule applies separately to each conversion, so each has its own five-year clock. The five-year window begins retroactively on January 1 of the year in which the conversion was executed. For example, the five-year clock for a Roth conversion done in July 2024 would have begun Jan. 1, 2024.
If you don’t wait five years, withdrawals are potentially subject to the 10% early withdrawal penalty.
Each of these rules stand on their own. An important takeaway here is that each also has different implications. Stated simply, the contribution rule determines if you owe taxes on Roth IRA investment earnings when they are withdrawn. The conversion rule determines if you are liable for a 10% penalty on withdrawals from the converted funds.
(And if you need help with you financial plan for retirement, consider working with a financial advisor.)
Now let’s apply these to your wife’s situation.
You said she is well past 59 ½ and contributed to her first Roth IRA more than five years ago. That means she has satisfied this rule, and never again has to worry about it. Her Roth IRA withdrawals are qualified. She does not have to include the earnings portion of any amount withdrawn from her Roth IRA in her taxable income.
Here again, the fact she is over 59 ½ matters. Early withdrawals, which are subject to an additional 10% penalty unless you meet an exception, are those you take before turning 59 ½. Because she isn’t subject to an early withdrawal penalty to begin with, the five-year Roth IRA conversion rule is moot.
(Consider reaching out to a financial advisor before executing a Roth conversion or another retirement planning move with significant tax implications.)
Your wife doesn’t have to worry about the Roth IRA 5 year rule on contributions because she has already satisfied it, which you only have to do once in your life. Conversions are subject to a separate 5 year waiting period, but because she is over 59 ½ she wouldn’t be subject to the early withdrawal penalty anyway.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email [email protected] and your question may be answered in a future column.
Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.
The post Ask an Advisor: My Wife Did a $40K Roth Conversion in a Low-Tax Year. Does She Really Need to Wait 5 Years to Withdraw it? appeared first on SmartReads by SmartAsset.
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