Today, I’m breaking down the often misunderstood Roth conversion 5-year rule.

With the Tax Cuts and Jobs Act (TCJA) set to expire in 2026, many retirees are considering aggressive Roth conversions.

But before you jump in, it’s crucial to understand the unique rules and implications.

Whether you’re planning for retirement or already there, this guide will help you navigate the intricacies of the Roth conversion 5-year rule.

It will also help you avoid triggering unwanted taxes and/or penalties!

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What is a Roth Conversion?

A Roth conversion is the process of transferring money from a pre-tax retirement account (e.g., Traditional IRA) into an after-tax Roth IRA.

The catch?

You’re required to pay income taxes on the converted amount in the year of the conversion.

For example, if you convert $100,000 from your Traditional IRA to your Roth IRA in 2024, you’ll owe income taxes on that $100,000 when you file your taxes in April 2025.

Understanding the Roth Conversion 5-Year Rule

The 5-year rule for Roth conversions often causes confusion, partly because there are two different 5-year rules for Roth IRAs. Today, we’re focusing specifically on the rule for Roth conversions.

To determine how the Roth conversion 5-year rule applies to your situation, you need to answer two important questions:

1. Do you currently have a Roth IRA that was funded with any dollar amount at least 5 years ago?
2. Are you 59 ½ or older?

Let’s break down how your answers to these questions impact your ability to withdraw converted funds.

Scenario 1: “Yes” to Both Questions

If you answer “yes” to both questions, you can withdraw converted dollars from your Roth IRA without restriction.

You can withdraw:

• Converted amounts
• Prior Roth contributions
• Earnings from your Roth IRA

All of these withdrawals can be made without taxes or penalties.

Scenario 2: “No” to Question 1, “Yes” to Question 2

In this case, you’re over 59 ½ but don’t have a Roth IRA that’s been open and funded for at least 5 years.

Here’s what you need to know:

• You can withdraw the converted amount at any time without penalty.
• You’ll need to wait 5+ years from the year of conversion to withdraw any earnings penalty-free.

Scenario 3: “Yes” to Question 1, “No” to Question 2

If you have a Roth IRA that’s been open for 5+ years but you’re under 59 ½:

• Each Roth conversion you make will have its own 5-year clock.
• You’ll need to wait 5 years from the date of each conversion to withdraw those funds penalty-free.

The Order of Roth IRA Withdrawals

When you take money out of a Roth IRA, the IRS has a specific order for how those funds are withdrawn:

1. Roth IRA contributions come out first
2. Roth conversions come out second
3. Earnings or growth come out last

This order can impact whether your withdrawals are subject to taxes or penalties.

Why Does the 5-Year Rule Exist?

The 5-year rule prevents individuals under 59 ½ from accessing pre-tax retirement account dollars without penalty.

Without this rule, someone could potentially avoid early withdrawal penalties by converting Traditional IRA funds to a Roth IRA and immediately withdrawing them.

Roth Conversions and the Expiring Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act, which lowered tax rates for many Americans, is set to expire in 2026.

This has led many to consider aggressive Roth conversion strategies while tax rates are relatively low.

However, it’s important to remember:

• The future of tax rates is uncertain, especially with the 2024 election on the horizon.
• Roth conversions are essentially a bet on future tax rates being higher than current rates.
• There’s no way to avoid paying taxes on pre-tax retirement dollars eventually.

Considerations for Roth Conversions

When deciding whether to pursue Roth conversions, consider:

• Your current tax rate vs. your expected future tax rate
• The potential for tax-free growth in a Roth IRA
• Your overall retirement goals and legacy plans
• The impact of Required Minimum Distributions (RMDs) on your future tax situation

Remember, Roth conversions can be a powerful tool, but they’re not right for everyone. It’s crucial to evaluate your specific financial situation and goals before making a decision.

Frequently Asked Questions

Can I do a Roth conversion if I’m still working?

Yes, you can do a Roth conversion at any age, whether you’re working or retired. However, if you’re still working, be careful not to push yourself into a higher tax bracket with the conversion.

How much can I convert to a Roth IRA each year?

There’s no limit on how much you can convert from a Traditional IRA to a Roth IRA in a given year. However, converting a large amount could result in a significant tax bill, so it’s often wise to spread conversions over several years.

Can I undo a Roth conversion if I change my mind?

No, the Tax Cuts and Jobs Act of 2017 eliminated the ability to “recharacterize” or undo a Roth conversion. Once you convert funds to a Roth IRA, the transaction is irreversible.

Do I have to convert my entire Traditional IRA at once?

No, you can convert as much or as little as you want. Many people choose to do partial conversions over several years to manage their tax liability.

How does a Roth conversion affect my Medicare premiums?

A large Roth conversion could potentially increase your Modified Adjusted Gross Income (MAGI), which could lead to higher Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA). It’s important to consider this when planning your conversion strategy.