With TreasuryDirect, you have no limit on how much you can redeem at one time. The second five-year rule determines whether the allocation of capital from the conversion of a traditional IRA or a traditional 401 (k) to a Roth IRA is exempt from punishment. When you convert a traditional IRA to a Roth IRA, you pay taxes on the money you exchange to secure tax-free withdrawals in the future, as well as various other benefits, including no required minimum distributions. The Roth IRA five-year rule states that you can’t withdraw income tax-free until at least five years have passed since you first deposited into a Roth IRA account.
However, people in this situation can still convert traditional IRAs into Roth IRAs, the strategy known as the backdoor Roth IRA. This account is also used to create RMDs from traditional IRAs (as RMDs are not required for retirement savings). The order of payouts for Roth IRAs is: first contributions, then conversions and then income. However, you may want to convert any E, EE, or I bonds that have already matured to accumulate money in your TreasuryDirect account and use that money to buy new savings bonds or other government bonds.
If you, as a beneficiary, receive a distribution from an inherited Roth IRA that hasn’t been held for five tax years, the income is subject to tax. This explains why line 9 of Figure 1 shows no difference between conversion and non-conversion when tax rates remain constant and the taxable account is completely tax-free. Roth IRAs are funded by after-tax contributions (which means you won’t get a tax deduction if you make them at this time), which is why you won’t be taxed on the money when you withdraw it. The new law also prohibits the renaming of amounts transferred from other retirement plans, such as 401 (k) or 403 (b) plans, to a Roth IRA.
If you invest your IRA in collectibles, the amount invested is considered paid out in the investment year, and you may have to pay an additional 10% tax on early distributions. For more information on losses on IRAs, see Publication 590-A, Contributions to Individual Retirement Plans (IRAs). So if you’re lucky enough not to have to withdraw money from your Roth IRA, you can simply let it continue to grow and let your heirs withdraw tax-free one day.
