Taking Money Out

What if I convert and then need to withdraw money from my Roth within the first five years?

If you withdraw converted amounts within five years and are under age 59½ at that time, you'll owe a 10% penalty tax on the amount withdrawn¹ - no worse than if you had taken the money out of your original IRA. Withdrawals after age 59½ are exempt from the penalty no matter when you converted. Once five tax years have passed, starting with the year of conversion, you can withdraw conversion money (but not earnings) without penalty regardless of age.

• Example 1: Tom, age 40, converts a $40,000 deductible IRA into a Roth. He'll owe income tax on the converted amount, but no 10% penalty. If he withdraws $5,000 the next year, he'll have to pay a $500 penalty.
• Example 2: Joan, age 59, converts a $40,000 deductible IRA into a Roth. She'll owe income tax on the converted amount, but no 10% penalty. If she withdraws $5,000 the next year, her withdrawal is exempt from the penalty because she is age 60.
• Example 3: Carol, age 30, converts a $40,000 deductible IRA into a Roth. She'll owe income tax on the converted amount, but no 10% penalty. If she withdraws $5,000 five years later, her withdrawal is exempt from the penalty even though she is only 35 years old because five years have passed since the conversion.

If I take money out of my Roth, can I decide whether to withdraw contributions, conversion money or earnings?

No. Specific rules establish the type of money you'll receive. Regular Roth contributions (if you've made any) always come out first, then converted amounts (starting with the oldest conversion first) and then earnings. All Roth accounts are treated as a single Roth, so you can't avoid the ordering sequence by setting up separate accounts.

I know I can withdraw earnings from my Roth tax-free after five years if I meet certain requirements. Does the five-year period restart for each contribution or conversion I make?

No. All Roth money has a single five-year clock that begins with the tax year of your first contribution or conversion to any Roth account. Once this five-year period ends, any earnings you withdraw are considered to have met the five-year requirement. So if your first Roth contribution or conversion was for the 2010 tax year, you'll never have to think about the five-year requirement again after 2014.