Opening a Roth IRA at 64 with a $100,000 conversion still leaves earnings taxable for years because the five-year qualification clock starts late. A qualified Roth distribution requires both age 59½ and a completed five-year clock, and satisfying only one of those conditions still triggers taxes on earnings. Converting as little as $1 into a Roth IRA today starts the five-year clock for every future Roth dollar, including large conversions made later.
Read More: Learn 7 ways to generate income with a $1,000,000+ portfolio (sponsor) A 64-year-old converts $100,000 from a traditional IRA into a new Roth, pays the conversion tax, and assumes the account is now tax-free. Three years later, needing cash, they withdraw more than the converted principal and discover the growth is taxable. Two five-year rules govern Roth IRAs, and conflating them causes this mistake.
The first determines whether a distribution is qualified, meaning earnings come out entirely tax-free. It runs from January 1 of the tax year of the first contribution or conversion to any Roth IRA the taxpayer owns. It is a lifetime clock, not per-account, and once satisfied never restarts.
The second applies separately to each conversion and governs the 10% additional tax on early distributions of converted principal before 59½. For a saver, the second rule is irrelevant because they are past 59½. The problem is purely the first rule.
The qualification clock started on January 1 of the year of that first conversion at 64 and won't end until January 1 of the fifth year after. Until then, earnings pulled from the account are taxed as ordinary income. If you've saved over $1,000,000, this guide is for you.
The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life. Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor) A qualified distribution requires both conditions: the owner must be at least 59½ (or meet a specified exception), and the five-year clock must have run.
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