There Are Two 5 Year Rules for Roth Conversions
How to Benefit from Them

by JD Miller on November 3, 2011

JD Miller CPA
The Roth Conversion Guy

Avoiding unnecessary income taxes and penalties on your Roth conversions can be challenging if you don’t understand how the two 5 year rules for Roth conversions work. You must meet both Roth conversion 5 year rules to withdraw your part or all of your money without paying unnecessary income taxes and penalties.

The first 5 year rule determines when you can withdraw the income from your Roth IRAs income tax free.

The second 5 year rule determines whether or not you must pay the 10% Federal early withdrawal penalty on the amounts you convert to a Roth IRA.

I’ll explain how these two 5 year rules work in two articles. In this article, I’ll explain the first 5 year rule in this article. I’ll explain the second 5 year rule in another article.

Here’s how the first 5 year rule works.

The First 5 Year Rule Explained

This 5 year rule determines whether or not you pay tax on the income you earn on money you are saving in a Roth IRA. This money could have been money you contributed to the Roth IRA or money you converted to a Roth IRA from an IRA (or a 401k, 403b, or 457 plan account).

Once you meet the first 5 year rule, you can withdraw all of your money in your Roth IRA accounts, including income you earned in the Roth IRA accounts, income tax free at any time.

There is only one 5 year period for the first 5 year rule. Once you meet it, you’ve met it for life.

You can withdraw the money you converted at any time income tax free. You’ve already paid tax on it. However, before you can withdraw any of the income you earn on the money in your Roth IRA accounts income tax free, you must meet the first 5 year rule.

The 5 year period begins on January 1 of the earlier of the year that:

1. you first saved money in a Roth IRA account, or
2. you converted money from an IRA (or a 401k, 403b, or 457 plan account) you already had to a Roth conversion IRA.

The 5 year period ends on December 31st of the 5th year after the earlier of the year of:

1. your first contribution to a Roth IRA, or
2. your first Roth conversion.

Here Are Some Examples of How the First 5 Year Rule Works

Example 1: Suppose you never saved any money in a Roth IRA prior to the year you did your first Roth conversion. On December 13, 2010, you convert $10,000 to a Roth IRA account.

The 5 year period for this Roth conversion would end on December 31, 2014, the end of the 5th year after the year you did your Roth conversion, 2010.

The 5 year period begins with January 1 of the year that you first contributed money to a Roth IRA or that you converted all or part of an existing IRA (or 401k or 403b) to a Roth IRA. In this example, your Roth conversion was done on December 13, 2010. Your first year began on January 1, 2010.

You could withdraw any of the money you converted to your Roth conversion IRA prior to December 31, 2014 without paying income tax on any of the money.

There is only one 5 year period for the first 5 year rule. Once you meet it, you’ve met it for life. All Roth conversions made after December 13, 2010 are covered by the same 5 year period.

You would still be taxed on any income you withdrew from your Roth conversion IRA prior to December 31, 2014. However, beginning January 1, 2015, you could withdraw any or all of the income from any of your Roth IRAs tax free.

Example 2: Everything is the same as in Example 1 except that you already had money in a Roth IRA. You opened this Roth IRA on April 22, 2001 and deposited $100 in it on July 5, 2004. On December 13, 2010, you convert $10,000 to a Roth IRA account.

The 5 year period for this Roth conversion ended on December 31, 2008, the end of the 5th year after the year you made your first contribution to your first Roth IRA.

There is only one 5 year period for tax free income withdrawals from Roth IRA accounts. Once it’s met, it’s met for life. After you meet it once, you could withdraw any or all of the income from any of your Roth IRAs tax free.

Note: The 5 year period began with January 1 of the year that you first contributed money to a Roth IRA, 2004, not the year you opened the Roth IRA account. The 5 years ended on December 31, 2008.

Example 3: Everything is the same as in Example 2 except that you deposited $100 in your first Roth IRA on July 5, 2008. On December 13, 2010, you convert $10,000 to a Roth IRA account.

The 5 year period for this Roth conversion ended on December 31, 2012, the end of the 5th year after the contribution to your first Roth IRA.

Again, there is only one 5 year period for tax free income withdrawals from Roth IRA accounts. Once it’s met, it’s met for life. After you meet it once, you could withdraw any or all of the income from any of your Roth IRAs tax free.

The 5 year period began with January 1 of the year that you first contributed money to a Roth IRA, 2008, not the year you opened the Roth IRA account. The 5 years ended on December 31, 2012.

After December 31, 2012, you could withdraw part or all of the money you converted and the income it earned tax free.

Example 4: Everything is the same as in Example 1 except that on September 7, 2012, you convert another $10,000 to a Roth IRA account.

The 5 year period for this Roth conversion would end on December 31, 2014, the end of the 5th year.

The 5 year period begins with January 1 of the year that you first contributed money to a Roth IRA or that you converted all or part of an existing IRA (or 401k or 403b) to a Roth IRA. In this example, your first Roth conversion was done on December 13, 2010. Your first year began on January 1, 2010.

You could withdraw any of the money you converted to your Roth conversion IRA prior to December 31, 2014 without paying income tax on any of the money.

There is only one 5 year period for the first 5 year rule. Once you meet it, you’ve met it for life. All Roth conversions made after December 13, 2010 are covered by the same 5 year period.

You would still be taxed on any income you withdrew from your Roth conversion IRA prior to December 31, 2014.

After December 31, 2012, you could withdraw part or all of the money you converted and the income it earned tax free.

Summary

To withdraw your income from your Roth IRA accounts income tax free, you must meet the first Roth conversion 5 year rule.

You only need to meet this rule once in your lifetime.

Not knowing the Roth Conversion 5 Year Rules could cause you to trigger HUGE income taxes and penalties.

Protect yourself. Get the help of a CPA or other tax advisor who knows the Roth Conversion 5 Year Rules.

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