Education >> Retirement Planning

Roth Conversion Funds Untouchable for 5 Years

Unless you want to pay a 10% penalty

When you make a direct contribution to a Roth IRA, you can withdraw that money at any time without penalty. The earnings, however, must stay in the account until you are 59½ — or you’ll incur taxes at ordinary income tax rates, plus a 10% penalty.

The rules for Roth IRA conversions are different.

If you convert money to a Roth IRA and are under age 59½, you can’t withdraw the rollover contributions for five years. If you do, you’ll face a 10% penalty. (The rules for distributions of earnings are the same as with direct contributions.) There are exceptions for medical expenses, first-time homebuyers, disability and higher education. And each conversion has its own five-year holding period.

Even though you should never, ever tap IRA or other retirement funds before retirement, it’s important to understand these rules. It just goes to show that Roth IRA conversions are a lot more complicated than you think.

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