Walter is 54. His self-directed IRA holds a rental property that pays him steadily every month, and for a few years he has been moving pieces of that account into the Roth version, a little at a time, whenever the numbers worked. His thinking was simple: get it into the Roth, let it grow, take it out tax free later. His Roth is not new. He opened it years ago. So when he asked at our August Q&A about pulling some of that converted money back out, he assumed the account being old settled the question. It does not. The reason is the Roth conversion 5-year rule, and I see it trip people up constantly.
Every Roth IRA has two separate five-year clocks, and they do two different jobs. Sneaky, but that is how it works.
The account clock starts the first time you fund any Roth IRA. Paired with age 59½, it decides whether your earnings come out tax free. The conversion clock starts with each separate conversion. It decides whether the 10% early distribution penalty hits converted money you take out before 59½. Walter cleared the account clock years ago. It covers none of his conversion clocks.
This is the clock most people have heard of. It runs five years from the first time you funded any Roth IRA, and Walter cleared it years ago.
Clearing it is only half of what you need. Earnings come out tax free when you have met that clock and you are past 59½. Both. Not either/or. Walter is 54, so his earnings are not free yet, no matter how old the account is.
Set the earnings aside, though, because that is not what he asked about. He asked about the money he converted. That money has a clock of its own.
No. This is the Roth conversion 5-year rule: every separate conversion starts its own five-year clock. Not the account's clock. That specific conversion's clock.
This one is not about income tax. Walter already paid that when he converted. It is about the 10% early distribution penalty. Take a converted amount out before its own five years are up, and before you are 59½, and the penalty can land on it even though the account itself is a decade old.
So Walter, at 54, can have a ten-year-old Roth holding money it would cost him 10% to touch, because that particular piece only came over last year.
He moved money in across five different years. That is five different clocks. The account's age covers none of them.
One conversion, one clock. I see this constantly with people funding a Roth out of rental income a little at a time. The IRS spells out the rule in Publication 590-B, under distributions of conversion contributions within the five-year period.
Reaching 59½ kills all the conversion clocks. Every one. Past 59½, you can pull converted money out no matter when you converted it.
What 59½ does not kill is the account clock for earnings. Those still need both conditions. If you are 62 but you opened your first ever Roth three years ago, your earnings are still taxable as ordinary income. There is no 10% penalty, because 59½ handles that. But the tax is there.
With self-directed IRAs, the devil is in the details. If you are converting a piece at a time as part of a broader Roth conversion strategy and you are not yet 59½, knowing which dollars are free and which are still on the clock is the difference between a planned withdrawal and a 10% surprise.
Schedule a Free Tax Strategy Session. Bring your conversion history and we will lay out every clock on your account and what each piece of money can do right now. Book your session here.
A: Yes. Every separate conversion starts its own five-year clock. Money converted in five different years carries five different clocks, and the age of the Roth account covers none of them.
A: Yes. Once you are past 59 1/2, the conversion clocks no longer matter and you can take converted money out no matter when you converted it. The account clock still applies to earnings.
A: Only if you are also past 59 1/2. Earnings come out tax free when both conditions are met. At 62 with a first Roth opened three years ago, earnings are still taxable as ordinary income, though the 10% penalty does not apply.
A: A penalty. Income tax was paid at conversion. The conversion clock governs the 10% early distribution penalty on converted amounts taken out before that conversion's five years are up and before 59 1/2.
Walter is a composite and the details are rounded to keep them readable. Your situation depends on things I cannot see from here, so take this as a reason to ask your own advisor a question, not as advice about your account.
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