June 22, 2024

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This 5-Year-Rule Could Affect Your Roth Rollover Plans

2 min read

The Roth IRA has been called “the Swiss Army knife” of personal finance because of its flexibility and the tax-free status of its earnings. That’s the reason so many retiring workers move to roll their workplace 401(k) accounts into a Roth, and why so many financial advisors recommend converting a traditional IRA to a Roth.

The idea is that if you pay income tax on your retirement money now – especially when many account balances are significantly down – your tax-free Roth gains will make up the difference and possibly more.

But beware the 5-year Rule.

Below we’ll guide you through the ins and outs of the 5-year-Rule, but consider matching with a vetted financial advisor for free for more help managing a Roth rollover and other retirement needs.

The 5-year Rule: What You Need to Know

While the contributions to a Roth can be withdrawn at any time, you can’t touch the earnings unless the account’s been open for at least five years. So, if you’re rolling another retirement account into a Roth IRA in 2023, make sure you don’t need the earnings until at least 2028. If the account for the rollover is your first Roth IRA account or you opened your first Roth less than five years ago, the earnings will be taxed when withdrawn. One break is that even if a Roth you opened more than five years ago is closed, it still counts toward the 5-year rule.

And, yes, the 5-year rule counts even if you’re older than 59.5 – you need to satisfy both requirements or you lose the tax break on gains.

If you’re contemplating converting an Individual Retirement Account into a Roth, it’s even worse. The 5-year rule on Roth conversions requires you to wait the full five years before withdrawing any converted balances — contributions or earnings — regardless of your age.

That doesn’t diminish the attractiveness of a Roth account for people who want to take more control over their investments than they get through a workplace 401(k) or 403(b) plan, which can be limited…

2023-10-22 11:26:22

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