The OP is correct. I disagree with some of the posters above stating that earnings on Roth conversions are not subject to penalties if withdrawn within 5 yrs of conversion.
Earnings on Roth conversions that you withdraw within 5 yrs of conversion are handled differently from the conversion principal. You are subject to both income tax and the 10% penalty if the withdrawal occurs before the end of a 5-year holding period OR before age 59 ½.
Here is the answer from Ed Slott, a reputable source:
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Retirement Account Rollovers: Today's Slott Report Mailbag
Posted: 18 Jul 2019 06:39 AM PDT
By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport
Question:
Thank you for the opportunity to submit questions concerning our traditional IRA’s.
When we retired my wife and I had a traditional IRA and a 401(k) at our employer. A couple of years after we retired, we rolled our respective 401(k)’s over into our respective traditional IRA’s. Now we are considering rolling over annual amounts into newly created Roth IRAs for each of us at our brokerage house where our traditional IRA’s are administered.
We are somewhat confused concerning the 5 year holding period before funds can be withdrawn without penalty from the Roth Rollover. We have been told that the five year period applies to each annual rollover to our Roth and others have told us that there is only one five year holding period which applies only to the first rollover and not subsequent rollovers. Which is true? Furthermore, as we are both over 59 ½ years old, must we wait the 5 year period before being able to withdraw Roth IRA funds without penalty.
Thank you for considering our questions.
Chandler and Cheryl
Answer:
Hi Chandler and Cheryl,
There’s lots of confusion about the 5-year Roth IRA rules, so we’re not surprised you’re getting different answers.
What’s really confusing is that there are actually two 5-year rules. The good news is that you only have to worry about one.
The one you don’t have to worry about (Rule #1) determines whether amounts converted to Roth IRAs can be hit with the 10% early distribution penalty. The one you may have to worry about (Rule #2) determines whether earnings in a Roth IRA can be hit with taxes and the 10% penalty.
You can withdraw amounts you convert from your traditional IRA to a Roth IRA at any time without paying income tax. You’re stuck with the 10% early distribution penalty only if the withdrawal occurs before the end of a 5-year holding period (Rule #1) AND before age 59 ½.
Not that it matters to you, but the Rule #1 holding period applies separately to each Roth conversion and begins on the first day of the year of each conversion.
Since you’re both over 59 ½, you don’t have to worry about violating the Rule #1 holding period, and you can take your converted amounts at any time free from tax or penalty.
Earnings that you withdraw are handled differently. You are subject to both income tax and the 10% penalty if the withdrawal occurs before the end of a 5-year holding period (Rule #2) OR before age 59 ½. (There are special rules if a withdrawal of earnings is made on account of death, disability or first-time home purchase.)
The Rule #2 holding period starts when you do your first Roth IRA conversion. Unlike the Rule #1 holding period, it doesn’t re-start with each conversion. And, the 5-year period begins on January 1 of the year of your first conversion – no matter when the conversion actually occurs.
IRS rules allow you to withdraw all of your converted amounts (first in, first out) before touching your earnings. Since you’re over age 59 ½, any earnings you withdraw won’t be subject to tax or penalty -- as long as you wait until the end of the 5-year period that starts on January 1 of the year of your first Roth IRA conversion.
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