IRA to Roth IRA Conversions 5-year rule

[bbhoover]

Hello,

I am 69 years old.

Yearly, I have been converting qualified funds from an IRA to a fully matured Roth IRA. Both accounts are at a local bank.

Does a new 5-year rule apply to each conversion? 

Thanks,

Burt

[GailL1]

@bbhoover 

There is actually a different 5-year rule for different types of contributions and moving ROTH monies.  This is a great article from Schwab that explains each well and gives examples.- from the link:

Here are the five-year rules to be aware of…

• Roth IRA five-year contribution rule
• Roth conversion five-year rule
• Five-year rule for Designated Roth accounts
• Roth-to-Roth rollover five-year rules

Charles Schwab.com - What to Know About the Five-Year Rule for Roths 

Look under the heading of “Roth conversion five-year rule” for Conversions specifically -

from the link:

“. . . a completely separate five-year rule covering Roth IRA conversions from a traditional IRA or 401(k). Importantly, each Roth conversion has its own five-year holding period, which starts on January 1 of the year in which the conversion occurs. 

Under this rule, if you withdraw converted funds before age 59½, you will generally have to pay a 10% penalty on the any pre-tax assets that were converted—not just the earnings—as well as income taxes on the earnings. It doesn't matter if you have already met the five-year Roth contribution rule. 

After age 59½, you can withdraw converted funds without a 10% penalty. But remember, the five-year contribution rule (mentioned above) still applies—if that rule hasn't been met, taxes may apply for the earnings portion of the withdrawal.

So, how do you know whether you're taking a withdrawal of contributions, conversions, or earnings? For Roth IRAs, the IRS assumes you're taking out contributions first, followed by converted balances (on a first-in, first-out basis, so oldest conversions first), and then earnings last.

However, this can get complicated, especially if you have a mix of funds in your account, so be sure to work with a tax or wealth management professional.”

end copy/paste from the link

Your accountant can advise you on specifics. 

You are probably aware that conversions to a ROTH also counts as income for the purpose of Medicare Part B premium assessment - specifically the IRMAA assessment.

[bbhoover]

Thank you!