I’m converting $700k to a Roth to avoid after RMDs, although I’m finding conflicting information about waiting 5 years. What is allowed?

I’m 68 and recently retired and have about $1.4 million in leaving accounts ($1.2 million in a traditional IRA and $110K in a Roth). I’m also receiving about $47,000 a year in Social Security benefits. My RMDs are scheduled to begin in 2027, and because of this, my financial advisor and I are considering doing some annual Roth conversions before 2027., This all sounds like a perfect plan to me, yet, I get some contradictory data on when I can make withdrawals from the Roth.

My advisor says I would have to participate in each Roth conversion vault normally after 5 years before I would be able to make any withdrawals of the budget (conversion amounts and any income). Alternatively, I am additionally instructed that I can return in opposition to the conversion quantity without any waiting period since I have used more than 59 ½. For example, Mary Roth was founded in 2015 and had total contributions of $60,000 and earnings of $50,000. If I were to do a Roth conversion of $75,000 in 2024, should I have had $135,000 to withdraw without penalty? My advisor says that by the time 5 years have passed since the conversion in 2024, I will only have $60,000 available for withdrawal. What are the correct types of withdrawal laws and regulations in those cases?

– Jeff

Howdy Jeff, appreciated question. Sadly, this is an extremely complex topic, it has simply been confused. It is not by chance that you have received or discovered conflicting data. Thankfully, if you type the laws in order and are ready to store them immediately, the solution can be pretty cloudless.

Since you are over age 59 ½ and have had a Roth IRA for 5 years, you can withdraw any amount of money from any Roth IRA stability at any opportunity (by conversion or any other method) without any tax legal implications. Of responsibility or punishment. Length.

Having said that, I’m now another person who has given you information that contradicts anything else you’ve heard, right? Instead of avoiding this, let’s follow the path of the laws and refer to specific data obtained from the IRS. (And if you want financial advice or want to find an untested advisor to work with, this free tool can help you be safe from financial advisors lending to your branch.)

What are 5-generation laws?

While Roth IRAs are funded with after-tax cash that can be withdrawn tax-free, there are some laws governing removing this cash from your account.

The IRS has 3 “five-year rules” for different types of Roth IRAs, although we’ll discuss two of them here. Specifically, the primary five-year rule applies to accounts that start out as Roth IRAs, while the sovereign five-year rule applies only to accounts that can be converted to Roth IRAs. Keep in mind that violating both rules may result in a 10% early withdrawal penalty and/or source revenue tax on funding income. You’ll obviously want to stay as far away from those taxes and consequences as possible.

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5-Generation Rule for Roth IRAs

The first five-year rule dictates that you must wait five years after your initial contribution to a Roth IRA before you can make a tax-free withdrawal of any investment earnings. Alternatively, the five-year period is retroactive to January 1 of the 12th month in which your first contribution was made.

For example, for people who made their first contribution to a Roth IRA in November 2020, the five-year period officially began on January 1, 2020. Because of this, it is advisable to start withdrawing earnings after January 1, 2025. ,

However, living alone for five years is only part of the equation. Withdrawals from your Roth IRA must be “qualified” so you can avoid taxes and consequences. Thankfully, reaching day 59 ½ is probably the most common way to meet this actual need.

For example, while there is no loss from investing in a Roth IRA on day 45, one can make tax- and penalty-free withdrawals from the account over the next 5 years. They must wait 59 ½ days, be disabled or meet one of the significant alternative requirements set by the IRS for a certified withdrawal. Similarly, if you get your first Roth IRA at age 58, you still need to go through five years before it becomes income tax-free. In this example just 59 ½ turns is not a sufficient amount.

Failure to meet the five-year rule and the principles governing certified withdrawals may result in source revenue taxes on the earnings you withdraw, as well as a ten% tax penalty. Jeff, since you opened your Roth IRA in 2015 and you’re over 59 ½, you may already be satisfied with each of the laws. Basic and easy.

(And if you want help managing your Roth IRA, consider connecting with a financial advisor who serves your department.)

5-Generation Rule for Roth Conversions

There may also be a sovereign five-year rule for Roth conversions. If a person is under age 59 1/2, they must wait 5 years before being able to withdraw any cash converted from a traditional IRA to a Roth IRA. And unlike the first five-year rule that must be satisfied only once, this rule applies to every individual conversion.

Thankfully, you’re not affected by the consequences of a quick withdrawal during your day, so this five-year rule doesn’t apply to you either. You will automatically avoid the ten% penalty on withdrawals from a converted Roth IRA.

Alternatively, here is the context and reasoning for this IRS rule:

Anyone who is under 59 ½ often has to pay an additional 10% penalty on distributions from an IRA. Without this five-year rule, anyone can convert a traditional IRA to a Roth IRA (after all, paying taxes on the conversion) and immediately withdraw the money from the Roth IRA, saving an initial savings of 10%. Might be possible. Withdrawal penalty. The five-year rule on Roth conversions closes this potential loophole.

Keep in mind that each five-year period begins on January 1 of the year in which the conversion was made. (And if you want help making a Roth conversion, consider talking to a financial advisor who can walk you through the process.)

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As they say, the day has its privileges. Since you are over age 59 ½ and you are satisfied with the Roth IRA contribution rules, you no longer have to worry about taxes or consequences on any withdrawals you make from your Roth IRA.

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• Have a crisis fund readily available in case you have unexpected bills. A crisis fund should be liquid – in an account that is not liable to significant fluctuations like the book market. The compromise is that inflation will also reduce the value of liquid currency. However a high-interest account lets you earn compound interest. Evaluate the financial savings accounts of those banks.

Brandon Renfrow, CFP®, is a SmartAsset monetary planning columnist and solution to reader questions about personal finance and tax topics. Were you given a question you would like to answer? Email AskAnAdvisor@smartasset.com and your question is also answered in an hourly column. Questions are also edited for readability or scope.

Please note that Brandon is not a player on the SmartAsset AMP platform, he is not an employee of SmartAsset, and he has been compensated for this lesson. Questions are also edited for readability or scope.

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