The 5-year rule for Roth conversions requires you to wait five years, regardless of your age, before withdrawing converted balances, contributions, or income. If you withdraw money before the five years are up, you’ll have to pay a 10% penalty when filing your tax return. If you inherit a Roth IRA from someone other than your spouse, you have several options for withdrawing the money. Also note that there is a separate five-year period for Roth IRA conversions. However, this rule determines whether the conversion budget avoids penalty taxes.
Unless they are spouses of the deceased, Roth IRA beneficiaries must now withdraw all funds within 10 years of the original account holder’s death. Step 3 — An account form is sent to you (via email, fax, or mail) to initiate your conversion. Now that we’ve explained all the rules and exceptions, here’s a basic overview of Roth IRA distribution rules for each age group and when you can withdraw income without paying the 10 percent penalty or income taxes. In general, the five-year rule states that you must pay taxes and a 10% penalty if you withdraw money from a Roth IRA that has been in the account for less than five years.
You can choose to spread distributions from the inherited IRA over up to 10 years, with the minimum distributions required based on your annual life expectancy. Once you’ve met this five-year rule for a Roth IRA, you’ve essentially met it for all Roth IRAs for life. Not understanding the difference between the two and withdrawing profits too early is one of the most common Roth IRA mistakes. In summary, if you receive distributions from your Roth IRA earnings before meeting the five-year rule and before age 59, be prepared to pay income taxes and a 10% penalty on your income.
Roth IRA capital distributions are not taxable because you’ve already paid taxes on them. The first five-year rule states that after making your first contribution to a Roth IRA, you must wait five years to withdraw your earnings tax-free. Although you turned 59½ in your second year of contributing to a Roth IRA, you would only be eligible to withdraw distributions from your account without paying taxes after five years have passed. To discuss the potential benefits of switching Roth IRAs and Roth IRAs with a Wells Fargo retirement professional, call us at 1-877-493-4727. A Roth conversion will reposition your assets to a Roth IRA in a traditional IRA or a qualified employer-sponsored retirement plan (QRP), such as a 401 (k), 403 (b), or a state 457 (b).
If you do conversions over a period of years, you must track the amount of capital converted each year.
