At 65, Does the 5-Year Roth Rule Matter?

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We recently received the following reader question (lightly edited):

Megan Russell penned an excellent article in October 2017 explaining Roth IRA rules. I have a question and maybe Megan would be so kind as to answer.

I am 65 years old and for the last 5 years I have been converting $20k each year from my Regular IRA into the same Roth. So that Roth now has $100k of converted amounts in total with $10k of accumulated earnings on top of that for a total value of $110k.

Am I correct in my thinking that each conversion is subject to it’s own 5 year clock for when the earnings related to each conversion become tax free?

Or did the initial conversion start the clock for all other subsequent conversions so that after 5 years from conversion 1, all earnings related to subsequent conversions are grandfathered to the original conversion 1 “clock”?

Withdrawal rules from Roth IRAs often confuse taxpayers because there are actually two separate 5-year clocks that apply to Roth IRAs.

Those over age 59 1/2 can ignore the 5-Year Recapture Rule.

The five-year recapture rule (the one where you track the age of each conversion separately) is a methodology by which the IRS closes a loophole where taxpayers can avoid an early distribution penalty. The five-year recapture rule only matters for taxpayers younger than age 59 1/2, because those over age 59 1/2 already meet an exception to the early distribution penalty.

The idea of the recapture is that if you were to have taken an early withdrawal directly from your traditional IRA, you would have faced a 10% penalty. Without the recapture amount, doing a Roth conversion and then withdrawing from your Roth IRA would mean that you avoid this penalty. To make it so that taxpayers cannot use such a simple loophole to avoid the penalty, the IRS says that you still have the 10% penalty when you withdraw from your rollover contribution basis if it has been less than five years since you converted.

Being over age 59 1/2 though is always an exception to the 10% early distribution penalty. For this reason, those over age 59 1/2 do not need to keep track of the age of their Roth conversions. Withdrawals which are sourced from either contribution basis or conversion basis are always free of tax, and for those over age 59 1/2 they are also free of penalty.

Those over age 59 1/2 still need to heed the 5-Year Roth Rule.

The main five-year Roth rule is a test for whether a distribution from a Roth IRA is qualified.

A non-qualified distribution which is less than your remaining contribution basis is always free of tax and free of penalty.

However, the earnings portion of a distribution, that which exceeds the contribution basis in your Roth IRAs, needs to be a qualified distribution to avoid taxation.

To be a qualified distribution, two things must be true. First, a Roth IRA of yours has been set-up for at least 5 years. And second, the payment or distribution is made after you reach age 59 1/2 or satisfies one of three other conditions.

You can see that those over age 59 1/2 have already met the second part of this two part test.

However, the first part is that your first Roth IRA contribution happened at least five years ago. If your first Roth IRA contribution was within the last five years, then none of your distributions are qualified yet. This means that the earnings portion of any distribution will be taxable.

Withdrawal ordering might protect you.

When you go to withdraw from your Roth IRA, the IRS assumes that you withdraw from sources in the following order:

  1. regular contribution basis, which is never taxed and never subject to penalty;
  2. the taxable portion of your oldest Roth conversion (converted deductible basis), which is never taxed but the 5-Year Recapture Rule applies to determine penalty;
  3. the nontaxable portion of your oldest Roth conversion (converted nondeductible basis), which is never taxed and never subject to penalty;
  4. repeating numbers 2 and 3 on your next oldest Roth conversion;
  5. and then finally Roth IRA earnings, the portion not attributable to any kind of contribution basis, which may be subject to tax and penalty.

For those over age 59 1/2, you would need to withdraw all funds attributable to the first four of these items before your withdrawal would be sourced from Roth IRA earnings and the age of your Roth IRA would matter for taxation.


If we take your case as an example:

  • Age 65
  • Converted $20,000 in 2022, 2021, 2020, and 2019 for a total conversion basis of $100,000
  • Has $10,000 of earnings in 2023

If the first conversion in 2019 was your first ever Roth contribution, then that would mean that your Roth IRA is not yet at least five years old. This would mean if you withdrew your entire conversion basis of $100,000, it would be free of tax because withdrawals from basis are always free of tax and free of penalty because you meet an exception to the early distribution penalty. The exception you meet is that you are older than age 59 1/2.

If you withdrew $1 more for a total of $100,001, that one dollar would be sourced from earnings. It would be subject to taxation, because it is a non-qualified distribution because your Roth IRA is not at least five years old. However, it would be free of penalty because you meet an exception to the early distribution penalty. The exception you meet is that you are older than age 59 1/2.

If we take the same set of circumstances but assume that your first ever Roth contribution was years earlier, then we would get a different outcome. Let’s imagine that you contributed $100 to a Roth IRA when you were 42 in 2000, but you never invested the money and later withdrew the funds and closed the Roth IRA in 2002. Even though that Roth account does not exist any more, it would mean that your first Roth contribution was at least five years ago and all your distributions after age 59 1/2 would be qualified. The official IRS 5-year test is “the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit.”

This is why we often say, “Open a Roth IRA Today or Regret It Later.”

If you are interested in learning more about Roth contribution basis, you may enjoy reading our series on the topic here.

If you have a question you would like to ask, feel free to reach out. We often select new article topics from Contact Form requests we receive. If you feel you have a complex case that is not answered or addressed by articles previously written, you can try asking your questions of us and see if we respond. I cannot guarantee that we will answer your question, but you are always permitted to ask.

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Photo by Brooke Lark on Unsplash. The photo has been cropped and rotated.

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.