September 14, 2025 • 24 mins
This Suze School episode is a Masterclass on the two types of five year rules surrounding Roth retirement accounts. Knowing which is which, will help you avoid penalties and making mistakes when you need to take money from a Roth retirement account.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Suze (00:08):
September 14, 2025. Welcome everybody to the Women and Money
podcast as well as everybody smart enough to listen. Suze O here,
and you get out that Suze notebook right here and
right now because this is a little bit of a
master class on the 5 year rule when it comes
to Roth IRAs, both contributory Roths as well as converted Roths.
(00:33):
And I'm only dealing with Roth IRAs today, everybody, just
so you know, are you ready?
There are two different types of Roth retirement accounts, and
a Roth retirement account, as you better know by now,
is an account that is funded with after-tax dollars.
(00:53):
And it grows and it grows, and if you meet
certain rules, you can take out everything tax free later on,
and it is those rules known as the 5 year
rule that screws everybody up. So let's first begin with
a contributory Roth. What is a contributory Roth? Just as
(01:15):
its name says, you contribute to it with after-tax dollars
every single year.
It's not coming from another account. It is coming from
your pocket into this account.
And the money that you contribute is known as your
original contributions.
(01:37):
Now while that money sits in there, obviously it's growing
and growing. The growth of your original contributions is known
as earnings, and it is your earnings that the five
year rule applies to, not your contributions. Let me give
(01:58):
you an example.
You are 38 years of age, and you put in
$7,000 with after-tax money you contribute it to your Roth IRA.
At 39, you do the same thing. At 40, you
do the same thing. You have contributed $21,000 and over
(02:20):
those three years.
The account is worth $28,000 now, or the difference, that
$7,000 difference, that is the money that your contributions earned.
The 5 year rule says you can take out any
of your original contributions without taxes or penalties regardless of
(02:47):
your age or how long the account has been open,
so you are 40 years of age and you need money.
And where do you get that money from? Your Roth,
and that Roth has only been open for three years.
But in this example you can take out up to
(03:08):
$21,000 of your original contributions without taxes or penalties.
Regardless of age or how long the account has been open,
but Suze, it says there's a 5 year rule. Listen
to me, the 5 year rule does not apply to
(03:32):
your contributions. It only applies to earnings. So in this case,
you cannot take out your earnings until the account has
been opened for 5 years and
you are 59 and a half years of age. If both of those
things have been met.
(03:53):
Then you can take it all out income tax and
penalty free period done.
Right, but you're saying to me, OK, but what if
I don't start a contributory Roth until I'm 58? Then what?
You're 58, you contribute $8,000 a year at 58, 59
(04:18):
and 60. All right. And now you have contributed $24,000
and over those three years it's now grown to $30,000.
And you want to take out all 30,000 because you
think you're over 59 and a half. Can you? No, you cannot without taxes. Now, once,
(04:44):
you listen closely, once you become 59 and a half or older.
The 10% penalty for age absolutely goes away.
So you could if you wanted to. Doesn't matter. You
could take out up to the 24,000 just like if
you were younger, however, to access the $6,000 in this
(05:08):
case of earnings.
You would have to wait until you were 62, five full
years to take out the earnings. Otherwise you're going to
pay ordinary income tax on the earnings. Obviously there's no
age 10% penalty.
But you are going to owe ordinary income tax on
(05:31):
that $6,000. Does that make sense? So the 5 year
taxation rule applies to earnings and how long the account
has been open. I hope that's clear to all of you.
Now let's go to conversions. Conversions again,
(05:57):
are when you convert from a taxable account to an
after tax account.
Now I think the best way for you to understand
conversions is to use examples, but before I give you
an example, I want you to know that there isn't
(06:18):
just one 5 year rule. There are two, and this
is what you have to understand. The first 5 year
rule
will be based on your very first Roth IRA opening,
and that will determine when earnings can be withdrawn tax
(06:39):
and penalty free, provided you are 59 and a half or older, and
I'm going to give you an example of that in
a second. The second 5 year rule applies to each
Roth conversion.
And governs when you can withdraw that specific converted amount
(07:00):
penalty free if you are under 59 and a half. Every Roth conversion
has its own 5 year time clock.
And you have to know the difference, so I'm going
to give you examples now, but just keep that in
mind what I just said to you.
(07:24):
You're 57.
And you do your very first Roth conversion in 2025.
You do not have a Roth IRA. You've never opened
up any type of Roth prior to this. This is
going to be your first Roth and your very first
Roth conversion.
(07:45):
So you're 57 again and you do your first Roth
conversion in 2025.
In 2027 you are going to be 59 and a half.
And once you are 59 and a half, you can take out the
amount of money that you converted.
(08:07):
No tax and no penalty because that's attached to your age,
but your earnings aren't tax free until 2030. Why? Because
the account has not been open for at least 5 years.
So once you attain 59 and a half, you can take out your
(08:30):
conversion money, no tax, no penalty.
But earnings in this example you can't take out until 2030.
Now let me give you another example.
You've listened to me, and you opened up a Roth
years ago and it has already met the 5 year requirement.
(08:53):
You're 57.
And you do your very first wroth conversion, but you
already had another Roth for 5 years at 59 and a half in
the year 2027, everything is going to be tax free.
(09:14):
Conversions and earnings, no penalty. No penalty because you're already
now 59 and a half. No taxation on any of it, including the earnings. Why?
Because your Roth converted account takes on the time frame
(09:35):
of your very first Roth IRA that you opened.
I know I have said to you, and it is true,
every time you convert a Roth, it has its own
5 year clock, absolutely true.
But if you already have a Roth IRA that had
(09:56):
been open for 5 years, every conversion takes on the
5 year clock of your very first Roth IRA that
you opened.
That's where the confusion is. Everybody, you think your Roth
IRA has its own time clock, and it does, but
(10:20):
it also will take on the time clock of the
very first Roth IRA that you opened.
And it is this time clock that allows you, once
you are 59 and a half years of age or older, that determines
(10:41):
when your earnings can be withdrawn tax and penalty free,
but the key is you have to be 59 and a half or older.
That's why
if you converted at the age of 57, but you
already had a Roth for 5 years at 59 and a half in
(11:04):
just 2 and a half years, everything is tax-free conversion and earnings.
That is why I've always said to you.
Actually, I haven't said it to you. I've begged you.
I've begged you on my hands and knees, everybody, to
open up a Roth IRA, whether you're going to fund
it or not. I don't care if you put $1
(11:25):
in it. I don't care how you get that $1
in it, but if you open a Roth IRA and
fund it with just $1 that is the Roth IRA
that is going to follow you.
And your time clocks for the rest of your life.
Every conversion, your 5 year time clock is going to
(11:47):
be attached to the very first Roth that you have opened.
When it comes to being able to withdraw your earnings,
tax and penalty free, provided you are aged 59 and a half or older,
let me give you another example though. Maybe you're 40
(12:09):
and you convert $20,000 into a brand new Roth.
You can't touch that conversion for 5 years without a 10% penalty,
and you can't touch the earnings until you're 59 and a half and
the Roth has been open for 5 years. So let's
(12:33):
just say, however, notice that I said you can't touch
that conversion for 5 years without a 10% penalty. Remember
you have already paid taxes on it.
The 10% penalty in this case is not attached to age.
It is attached to how long the Roth IRA you
(12:56):
just converted to has been open.
Now in this case here this is where the second
5 year rule applies because when it comes to a
conversion and you wanting to touch the converted amount.
(13:16):
What's key here is that this 5 year time clock
is not attached to the first Roth IRA you ever open.
It is in this particular case that every single converted
Roth has its own 5 year time clock.
(13:36):
And you cannot touch the money that you originally converted
for at least 5 years, assuming you're under 59 and a half, all right,
without a 10% penalty. Do you see, so it's very important.
So again this
(13:57):
situation does not use the clock from your original Roth
IRA even if you opened it up years ago. If
it hasn't been opened for 5 years, you can withdraw
that $20,000. You're not going to pay taxes on it
because you already did, but you're going to have to
pay a 10% penalty. Are you understanding when it's taxed
(14:22):
and when it's not?
If you really want to make your life really simple
with a converted Roth, simply open up a Roth IRA
today and get that 5 year time clock moving.
And remember when you do convert, just leave the amount
(14:44):
you converted alone,
for at least 5 years to avoid the 10% penalty,
if you are under 59 and a half. Just know those two things
and your life will be pretty simple.
Now I hope that has cleared it up for you.
(15:05):
What are some of the biggest mistakes really that all
of you make?
Believing that you can take out a conversion any time
you can't if you're under 59 and a half, forgetting
that earnings come out last.
And they aren't tax free until 5 years plus 59 and a half
(15:27):
have been met.
You're waiting too long to open a Roth IRA because
even that $1 gets your clock going and you're mixing
up the two rules, one for earnings and one for conversions.
Don't confuse them.
So I hope I haven't confused you more.
KT (15:47):
Hi everybody, it's KT!
She, she confused me, but I'm here.
Suze (15:52):
She's been so good.
KT (15:54):
I've
been listening and I have some questions for Suze, but
I just want you to know I promised I'd be
at Suze School and I'm here.
It's
Sunday and I'm here, baby.
Suze (16:04):
Right? And believe it or not, it is
a very, very complicated topic.
KT (16:11):
So it's not just me.
Suze (16:11):
So it's not just KT, and I was like, KT,
if I do this Suze school, you have to sit
there and not drink water, not reach for this because
KT fidgets. You just fidget, don't you?
KT (16:23):
It's hard for me to be still.
Suze (16:24):
And so and then it distracts me and then I
have to start over so it can be very complicated. However...
You have been writing and, and by the way, when
you want to write in a question, you do it
at ask Suze SUZE podcast at gmail.com, and I said, KT,
forget the names. Who cares about the names because too
many people wrote in the same questions, right? But KT
(16:47):
I think picked five.
KT (16:49):
I have five questions that I thought would be good.
Suze (16:52):
Do I look like
I just put myself through it to explain all this.
All right, go on.
KT (16:55):
She spent everyone. OK...
Suze (16:58):
It takes more than that to spend me.
KT (17:00):
My first
question says, hey, Suze, I'm 58. I just converted $100,000.
I'll be 63 when the 5 year clock is up.
Do I still owe the 10% penalty if I withdraw
before then since I'm over 59 and a half?
Suze (17:20):
How would you answer that?
KT (17:21):
No, because she, she already gave everyone the answer. She's
over 59 and a half.
Suze (17:27):
So the truth is, remember everybody, the magic age is 59 and a half.
Once you all reach 59 and a half, it doesn't matter when you convert.
It doesn't matter about anything.
The 10% early withdrawal penalty for age no longer applies,
but the 5 year clock on conversions really only matter
(17:50):
if you're under 59 and a half for the amount you converted. Earnings
are a different thing, but anyway, OK.
KT (17:57):
So that's why I have the next question.
I'm 45. I converted $20,000 at the age of 40.
Suze (18:05):
So funny. I use that as an example.
KT (18:07):
The 5 years are up. Can I take out my
conversion dollars now and what happens to the earnings?
Suze (18:14):
So as I
said in the podcast, right, is that KT, this person
can take out the $20,000 that they converted because they
already pay taxes on it, so they don't have to
pay tax or penalties again as long as the five
years are up. But those five years only apply to
(18:35):
the converted amounts. The earnings on that money, if they
touch it before 59 and a half, they're going to owe taxes and
penalties on it.
All right, so there's a difference between the amount they
converted and the earnings. So I hope that's clear to
all of you. Was that clear to you?
KT (18:55):
I just have to ask you, you said penalties. Is
it just the 10% penalty?
Suze (19:00):
Yes, but if you take out, you convert $20,000. You
already pay taxes on it. Three months later you decide,
I want that money.
It hasn't been in there for 5 years yet. If
you take it out, they're going to charge you a 10%
penalty because you have to think about it this way, KT.
That $20,000 came from a traditional IRA. Never paid taxes
(19:24):
on it, anything, you're 40 some odd years of age,
and you just withdrew all $20,000. You'd have to pay
taxes and a 10% penalty.
Therefore, when you convert it, the IRS is like, no, no, no, no,
I'm not letting you get money out of your IRA,
so to speak, and not have to wait to touch it.
(19:47):
That's why the 5 year penalty was put into effect.
So when you convert, you have to leave it there
for 5 years.
Otherwise, if you then take out what you converted, you
still owe the 10% penalty because you already paid the taxes.
Did that make sense?
KT (20:07):
It makes sense, but just so that everyone knows, it's
not even if you take out that full amount, any amount,
you have a penalty.
Suze (20:14):
Any amount that you originally converted, you will owe a 10%
penalty on if the account hasn't been opened for 5 years.
KT (20:26):
Ok, next question.
This is really important, everybody, because this is what I
call the what ifs. These are the what ifs. If
I do a Roth conversion this year and then I
die next year, does my beneficiary have to wait out
the 5 year conversion clock?
Suze (20:45):
No, thank God, right. So beneficiaries, everybody are not subject
to that 10% early withdrawal penalty. However, they may still
owe income tax on the earnings if the Roth wasn't
open for at least 5 years, but the 5 year clock,
so to speak, doesn't affect them with the 10% penalty.
(21:08):
That is why,
you are to open up a Roth IRA first thing
Monday morning if you do not have one. All right, go on.
KT (21:16):
All right, that's good. Next question, Suze. I've had a
Roth IRA since 2010.
Suze (21:22):
Good.
KT (21:23):
I'm 62. I just converted more money last year. Do
I have to wait 5 years before I can touch
the earnings from that conversion?
Suze (21:34):
This is why I am telling you to open up
a Roth IRA right now, and the answer is KT, no,
because their Roth had already been opened for more than
5 years. They opened up a Roth in 2010. The
5 year clock started in 2010.
(21:54):
So therefore,
KT (21:55):
And and it's a he just so you know, and
he's 62,
Suze (21:58):
All right. And so because he's over 59 and a half and because
the Roth took on the time frame of the 2010 one.
There are no penalties and everything is tax-free, earnings as
well as contributions. All right.
KT (22:18):
Go have a party. So Suze, my last question is
from
a listener who wrote in, I converted $50,000 at 35,
at 38, I now need $10,000 back from my conversion. Suze,
can I just withdraw part of what I converted, or
do I trigger penalties on the whole thing?
Suze (22:41):
No, sweetheart, you absolute... is it a woman? Yeah, all right,
so you absolutely can withdraw
part, but any amount you take out from a conversion
within its 5 year clock and before the age of
59 will be hit with the 10% penalty. The rest
can keep growing inside of the Roth, so you are
(23:01):
going to pay a 10% penalty on that $10,000 just
that simple.
Was that everything, or you have a lot there and
you think that's enough for everybody?
KT (23:12):
I think that's good. Yeah, these are my favorite Roth questions.
I almost know the answers to all of them. I've been,
I mean, I'm sitting here listening like you are, so
don't do a quizzy.
Suze (23:25):
I'm just like, is she tempting me? Is she tempting me?
KT (23:29):
Don't do a quizzy.
Suze (23:30):
All right, everybody, I hope that has helped you and
clarified it for you.
If not, I'm sure I'll hear from you. But until Thursday,
what do you want to say, KT?
KT (23:44):
OK everyone, remember people first, then money, then things.
Suze (23:48):
That is the correct order, everybody...
KT (23:50):
And have a great Sunday today.
Suze (23:52):
Yeah, but I have to say one other thing. When
we say people first, we mean you.
You have to give to yourself as much as you
give of yourself. Don't you ever forget that I said that.
All right, stay safe, stay healthy, and stay secure. See
you Thursday. Bye bye.
September 14, 2025. Welcome everybody to the Women and Money
podcast as well as everybody smart enough to listen. Suze O here,
and you get out that Suze notebook right here and
right now because this is a little bit of a
master class on the 5 year rule when it comes
to Roth IRAs, both contributory Roths as well as converted Roths.
(00:33):
And I'm only dealing with Roth IRAs today, everybody, just
so you know, are you ready?
There are two different types of Roth retirement accounts, and
a Roth retirement account, as you better know by now,
is an account that is funded with after-tax dollars.
(00:53):
And it grows and it grows, and if you meet
certain rules, you can take out everything tax free later on,
and it is those rules known as the 5 year
rule that screws everybody up. So let's first begin with
a contributory Roth. What is a contributory Roth? Just as
(01:15):
its name says, you contribute to it with after-tax dollars
every single year.
It's not coming from another account. It is coming from
your pocket into this account.
And the money that you contribute is known as your
original contributions.
(01:37):
Now while that money sits in there, obviously it's growing
and growing. The growth of your original contributions is known
as earnings, and it is your earnings that the five
year rule applies to, not your contributions. Let me give
(01:58):
you an example.
You are 38 years of age, and you put in
$7,000 with after-tax money you contribute it to your Roth IRA.
At 39, you do the same thing. At 40, you
do the same thing. You have contributed $21,000 and over
(02:20):
those three years.
The account is worth $28,000 now, or the difference, that
$7,000 difference, that is the money that your contributions earned.
The 5 year rule says you can take out any
of your original contributions without taxes or penalties regardless of
(02:47):
your age or how long the account has been open,
so you are 40 years of age and you need money.
And where do you get that money from? Your Roth,
and that Roth has only been open for three years.
But in this example you can take out up to
(03:08):
$21,000 of your original contributions without taxes or penalties.
Regardless of age or how long the account has been open,
but Suze, it says there's a 5 year rule. Listen
to me, the 5 year rule does not apply to
(03:32):
your contributions. It only applies to earnings. So in this case,
you cannot take out your earnings until the account has
been opened for 5 years and
you are 59 and a half years of age. If both of those
things have been met.
(03:53):
Then you can take it all out income tax and
penalty free period done.
Right, but you're saying to me, OK, but what if
I don't start a contributory Roth until I'm 58? Then what?
You're 58, you contribute $8,000 a year at 58, 59
(04:18):
and 60. All right. And now you have contributed $24,000
and over those three years it's now grown to $30,000.
And you want to take out all 30,000 because you
think you're over 59 and a half. Can you? No, you cannot without taxes. Now, once,
(04:44):
you listen closely, once you become 59 and a half or older.
The 10% penalty for age absolutely goes away.
So you could if you wanted to. Doesn't matter. You
could take out up to the 24,000 just like if
you were younger, however, to access the $6,000 in this
(05:08):
case of earnings.
You would have to wait until you were 62, five full
years to take out the earnings. Otherwise you're going to
pay ordinary income tax on the earnings. Obviously there's no
age 10% penalty.
But you are going to owe ordinary income tax on
(05:31):
that $6,000. Does that make sense? So the 5 year
taxation rule applies to earnings and how long the account
has been open. I hope that's clear to all of you.
Now let's go to conversions. Conversions again,
(05:57):
are when you convert from a taxable account to an
after tax account.
Now I think the best way for you to understand
conversions is to use examples, but before I give you
an example, I want you to know that there isn't
(06:18):
just one 5 year rule. There are two, and this
is what you have to understand. The first 5 year
rule
will be based on your very first Roth IRA opening,
and that will determine when earnings can be withdrawn tax
(06:39):
and penalty free, provided you are 59 and a half or older, and
I'm going to give you an example of that in
a second. The second 5 year rule applies to each
Roth conversion.
And governs when you can withdraw that specific converted amount
(07:00):
penalty free if you are under 59 and a half. Every Roth conversion
has its own 5 year time clock.
And you have to know the difference, so I'm going
to give you examples now, but just keep that in
mind what I just said to you.
(07:24):
You're 57.
And you do your very first Roth conversion in 2025.
You do not have a Roth IRA. You've never opened
up any type of Roth prior to this. This is
going to be your first Roth and your very first
Roth conversion.
(07:45):
So you're 57 again and you do your first Roth
conversion in 2025.
In 2027 you are going to be 59 and a half.
And once you are 59 and a half, you can take out the
amount of money that you converted.
(08:07):
No tax and no penalty because that's attached to your age,
but your earnings aren't tax free until 2030. Why? Because
the account has not been open for at least 5 years.
So once you attain 59 and a half, you can take out your
(08:30):
conversion money, no tax, no penalty.
But earnings in this example you can't take out until 2030.
Now let me give you another example.
You've listened to me, and you opened up a Roth
years ago and it has already met the 5 year requirement.
(08:53):
You're 57.
And you do your very first wroth conversion, but you
already had another Roth for 5 years at 59 and a half in
the year 2027, everything is going to be tax free.
(09:14):
Conversions and earnings, no penalty. No penalty because you're already
now 59 and a half. No taxation on any of it, including the earnings. Why?
Because your Roth converted account takes on the time frame
(09:35):
of your very first Roth IRA that you opened.
I know I have said to you, and it is true,
every time you convert a Roth, it has its own
5 year clock, absolutely true.
But if you already have a Roth IRA that had
(09:56):
been open for 5 years, every conversion takes on the
5 year clock of your very first Roth IRA that
you opened.
That's where the confusion is. Everybody, you think your Roth
IRA has its own time clock, and it does, but
(10:20):
it also will take on the time clock of the
very first Roth IRA that you opened.
And it is this time clock that allows you, once
you are 59 and a half years of age or older, that determines
(10:41):
when your earnings can be withdrawn tax and penalty free,
but the key is you have to be 59 and a half or older.
That's why
if you converted at the age of 57, but you
already had a Roth for 5 years at 59 and a half in
(11:04):
just 2 and a half years, everything is tax-free conversion and earnings.
That is why I've always said to you.
Actually, I haven't said it to you. I've begged you.
I've begged you on my hands and knees, everybody, to
open up a Roth IRA, whether you're going to fund
it or not. I don't care if you put $1
(11:25):
in it. I don't care how you get that $1
in it, but if you open a Roth IRA and
fund it with just $1 that is the Roth IRA
that is going to follow you.
And your time clocks for the rest of your life.
Every conversion, your 5 year time clock is going to
(11:47):
be attached to the very first Roth that you have opened.
When it comes to being able to withdraw your earnings,
tax and penalty free, provided you are aged 59 and a half or older,
let me give you another example though. Maybe you're 40
(12:09):
and you convert $20,000 into a brand new Roth.
You can't touch that conversion for 5 years without a 10% penalty,
and you can't touch the earnings until you're 59 and a half and
the Roth has been open for 5 years. So let's
(12:33):
just say, however, notice that I said you can't touch
that conversion for 5 years without a 10% penalty. Remember
you have already paid taxes on it.
The 10% penalty in this case is not attached to age.
It is attached to how long the Roth IRA you
(12:56):
just converted to has been open.
Now in this case here this is where the second
5 year rule applies because when it comes to a
conversion and you wanting to touch the converted amount.
(13:16):
What's key here is that this 5 year time clock
is not attached to the first Roth IRA you ever open.
It is in this particular case that every single converted
Roth has its own 5 year time clock.
(13:36):
And you cannot touch the money that you originally converted
for at least 5 years, assuming you're under 59 and a half, all right,
without a 10% penalty. Do you see, so it's very important.
So again this
(13:57):
situation does not use the clock from your original Roth
IRA even if you opened it up years ago. If
it hasn't been opened for 5 years, you can withdraw
that $20,000. You're not going to pay taxes on it
because you already did, but you're going to have to
pay a 10% penalty. Are you understanding when it's taxed
(14:22):
and when it's not?
If you really want to make your life really simple
with a converted Roth, simply open up a Roth IRA
today and get that 5 year time clock moving.
And remember when you do convert, just leave the amount
(14:44):
you converted alone,
for at least 5 years to avoid the 10% penalty,
if you are under 59 and a half. Just know those two things
and your life will be pretty simple.
Now I hope that has cleared it up for you.
(15:05):
What are some of the biggest mistakes really that all
of you make?
Believing that you can take out a conversion any time
you can't if you're under 59 and a half, forgetting
that earnings come out last.
And they aren't tax free until 5 years plus 59 and a half
(15:27):
have been met.
You're waiting too long to open a Roth IRA because
even that $1 gets your clock going and you're mixing
up the two rules, one for earnings and one for conversions.
Don't confuse them.
So I hope I haven't confused you more.
KT (15:47):
Hi everybody, it's KT!
She, she confused me, but I'm here.
Suze (15:52):
She's been so good.
KT (15:54):
I've
been listening and I have some questions for Suze, but
I just want you to know I promised I'd be
at Suze School and I'm here.
It's
Sunday and I'm here, baby.
Suze (16:04):
Right? And believe it or not, it is
a very, very complicated topic.
KT (16:11):
So it's not just me.
Suze (16:11):
So it's not just KT, and I was like, KT,
if I do this Suze school, you have to sit
there and not drink water, not reach for this because
KT fidgets. You just fidget, don't you?
KT (16:23):
It's hard for me to be still.
Suze (16:24):
And so and then it distracts me and then I
have to start over so it can be very complicated. However...
You have been writing and, and by the way, when
you want to write in a question, you do it
at ask Suze SUZE podcast at gmail.com, and I said, KT,
forget the names. Who cares about the names because too
many people wrote in the same questions, right? But KT
(16:47):
I think picked five.
KT (16:49):
I have five questions that I thought would be good.
Suze (16:52):
Do I look like
I just put myself through it to explain all this.
All right, go on.
KT (16:55):
She spent everyone. OK...
Suze (16:58):
It takes more than that to spend me.
KT (17:00):
My first
question says, hey, Suze, I'm 58. I just converted $100,000.
I'll be 63 when the 5 year clock is up.
Do I still owe the 10% penalty if I withdraw
before then since I'm over 59 and a half?
Suze (17:20):
How would you answer that?
KT (17:21):
No, because she, she already gave everyone the answer. She's
over 59 and a half.
Suze (17:27):
So the truth is, remember everybody, the magic age is 59 and a half.
Once you all reach 59 and a half, it doesn't matter when you convert.
It doesn't matter about anything.
The 10% early withdrawal penalty for age no longer applies,
but the 5 year clock on conversions really only matter
(17:50):
if you're under 59 and a half for the amount you converted. Earnings
are a different thing, but anyway, OK.
KT (17:57):
So that's why I have the next question.
I'm 45. I converted $20,000 at the age of 40.
Suze (18:05):
So funny. I use that as an example.
KT (18:07):
The 5 years are up. Can I take out my
conversion dollars now and what happens to the earnings?
Suze (18:14):
So as I
said in the podcast, right, is that KT, this person
can take out the $20,000 that they converted because they
already pay taxes on it, so they don't have to
pay tax or penalties again as long as the five
years are up. But those five years only apply to
(18:35):
the converted amounts. The earnings on that money, if they
touch it before 59 and a half, they're going to owe taxes and
penalties on it.
All right, so there's a difference between the amount they
converted and the earnings. So I hope that's clear to
all of you. Was that clear to you?
KT (18:55):
I just have to ask you, you said penalties. Is
it just the 10% penalty?
Suze (19:00):
Yes, but if you take out, you convert $20,000. You
already pay taxes on it. Three months later you decide,
I want that money.
It hasn't been in there for 5 years yet. If
you take it out, they're going to charge you a 10%
penalty because you have to think about it this way, KT.
That $20,000 came from a traditional IRA. Never paid taxes
(19:24):
on it, anything, you're 40 some odd years of age,
and you just withdrew all $20,000. You'd have to pay
taxes and a 10% penalty.
Therefore, when you convert it, the IRS is like, no, no, no, no,
I'm not letting you get money out of your IRA,
so to speak, and not have to wait to touch it.
(19:47):
That's why the 5 year penalty was put into effect.
So when you convert, you have to leave it there
for 5 years.
Otherwise, if you then take out what you converted, you
still owe the 10% penalty because you already paid the taxes.
Did that make sense?
KT (20:07):
It makes sense, but just so that everyone knows, it's
not even if you take out that full amount, any amount,
you have a penalty.
Suze (20:14):
Any amount that you originally converted, you will owe a 10%
penalty on if the account hasn't been opened for 5 years.
KT (20:26):
Ok, next question.
This is really important, everybody, because this is what I
call the what ifs. These are the what ifs. If
I do a Roth conversion this year and then I
die next year, does my beneficiary have to wait out
the 5 year conversion clock?
Suze (20:45):
No, thank God, right. So beneficiaries, everybody are not subject
to that 10% early withdrawal penalty. However, they may still
owe income tax on the earnings if the Roth wasn't
open for at least 5 years, but the 5 year clock,
so to speak, doesn't affect them with the 10% penalty.
(21:08):
That is why,
you are to open up a Roth IRA first thing
Monday morning if you do not have one. All right, go on.
KT (21:16):
All right, that's good. Next question, Suze. I've had a
Roth IRA since 2010.
Suze (21:22):
Good.
KT (21:23):
I'm 62. I just converted more money last year. Do
I have to wait 5 years before I can touch
the earnings from that conversion?
Suze (21:34):
This is why I am telling you to open up
a Roth IRA right now, and the answer is KT, no,
because their Roth had already been opened for more than
5 years. They opened up a Roth in 2010. The
5 year clock started in 2010.
(21:54):
So therefore,
KT (21:55):
And and it's a he just so you know, and
he's 62,
Suze (21:58):
All right. And so because he's over 59 and a half and because
the Roth took on the time frame of the 2010 one.
There are no penalties and everything is tax-free, earnings as
well as contributions. All right.
KT (22:18):
Go have a party. So Suze, my last question is
from
a listener who wrote in, I converted $50,000 at 35,
at 38, I now need $10,000 back from my conversion. Suze,
can I just withdraw part of what I converted, or
do I trigger penalties on the whole thing?
Suze (22:41):
No, sweetheart, you absolute... is it a woman? Yeah, all right,
so you absolutely can withdraw
part, but any amount you take out from a conversion
within its 5 year clock and before the age of
59 will be hit with the 10% penalty. The rest
can keep growing inside of the Roth, so you are
(23:01):
going to pay a 10% penalty on that $10,000 just
that simple.
Was that everything, or you have a lot there and
you think that's enough for everybody?
KT (23:12):
I think that's good. Yeah, these are my favorite Roth questions.
I almost know the answers to all of them. I've been,
I mean, I'm sitting here listening like you are, so
don't do a quizzy.
Suze (23:25):
I'm just like, is she tempting me? Is she tempting me?
KT (23:29):
Don't do a quizzy.
Suze (23:30):
All right, everybody, I hope that has helped you and
clarified it for you.
If not, I'm sure I'll hear from you. But until Thursday,
what do you want to say, KT?
KT (23:44):
OK everyone, remember people first, then money, then things.
Suze (23:48):
That is the correct order, everybody...
KT (23:50):
And have a great Sunday today.
Suze (23:52):
Yeah, but I have to say one other thing. When
we say people first, we mean you.
You have to give to yourself as much as you
give of yourself. Don't you ever forget that I said that.
All right, stay safe, stay healthy, and stay secure. See
you Thursday. Bye bye.
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