A 68-year-old retiree named Jeff has reported receiving conflicting information about Roth IRA withdrawal rules. Jeff recently retired and holds about $1.4 million in retirement accounts, including $1.2 million in a Traditional IRA and $110,000 in a Roth IRA. He also receives approximately $47,000 annually in Social Security benefits.
Jeff stated that his Required Minimum Distributions are scheduled to begin in 2027. He and his financial advisor are considering annual Roth conversions before that date. However, Jeff expressed confusion over when he can make withdrawals from the Roth IRA.
"My advisor says I will have to wait the standard five years after each Roth conversion deposit before being able to make any withdrawal of those funds," Jeff said. "However, I have also been told I could withdraw against the conversion amount with no waiting period since I am older than 59 ½."
Jeff provided specific details about his Roth IRA, which was established in 2015 and contains $60,000 in contributions and $50,000 in earnings. He asked whether a $75,000 Roth conversion in 2024 would make $135,000 available for withdrawal without penalty.
His advisor maintains that only the original $60,000 would be available until five years pass for the 2024 conversion. Jeff has directly questioned what the proper withdrawal regulations are under these circumstances.
Financial columnist Brandon Renfro responded to Jeff's inquiry, acknowledging the topic's complexity. "This is unfortunately a very confusing topic that is easily jumbled up," Renfro said. "It is not surprising that you've received or found conflicting information."
Renfro stated that because Jeff is over 59 ½ and has had a Roth IRA for five years, he can withdraw any amount from any Roth IRA balance at any time without tax liability or penalty. "Period," Renfro emphasized.
The response referenced IRS rules, noting there are three "five-year rules" for different Roth IRA types. Two were discussed: one for accounts starting as Roth IRAs and another solely for converted Roth IRAs.
Renfro explained that the first five-year rule requires waiting five years after initial Roth IRA contributions before making tax-free withdrawals of investment earnings. The period is retroactive to January 1 of the year when first contributions were made.
"For example, if you made your first contribution to a Roth IRA in November 2020, the five-year period officially began on Jan. 1, 2020," Renfro said. "As a result, you could start withdrawing earnings after Jan. 1, 2025."
Renfro noted that withdrawals must be "qualified" to avoid taxes and penalties, with reaching age 59 ½ being the most common way to satisfy this requirement. He stated that Jeff, having opened his Roth IRA in 2015 and being over 59 ½, has already satisfied both rules.
Regarding Roth conversions, Renfro described a separate five-year rule requiring those under 59 ½ to wait five years before withdrawing converted funds. This rule applies to each individual conversion, unlike the first rule that needs satisfaction only once.
"Fortunately, you aren't subject to early withdrawal penalties by virtue of your age, so this five-year rule also doesn't apply to you," Renfro told Jeff. "You'll automatically avoid the 10% penalty on withdrawals from a converted Roth IRA."
Renfro provided context for the IRS rule, explaining that without it, someone under 59 ½ could convert a traditional IRA to a Roth IRA, pay taxes on the conversion, then immediately withdraw money to sidestep the 10% early withdrawal penalty.
Each five-year period for conversions starts on January 1 of the conversion year, according to the response. Renfro concluded by stating that because Jeff is over 59 ½ and has satisfied the Roth IRA contribution rule, he no longer needs to worry about taxes or penalties on Roth IRA withdrawals.