Two five-year clocks run on every Roth conversion

A client who converted a traditional IRA to a Roth in each of the past three years asks a fair question: when does each conversion clear its five-year period? Ed Slott's Aug. 13 IRAHelp mailbag answers with two clocks. The difference between them is where clients get tripped up.

The first clock is the penalty clock. Any converted dollars taken out before age 59½ draw the 10% early distribution penalty unless that conversion's five years have run. Each conversion has its own period, starting Jan. 1 of the year the conversion happens. A June 2025 conversion therefore starts on Jan. 1, 2025. Clients who are already 59½ can ignore this clock entirely.

The second clock is the earnings clock, and it determines whether the earnings part of a Roth distribution is taxable. It never resets. The period begins Jan. 1 of the year of the client's first Roth conversion or contribution; every later conversion or contribution rides on that original date. A client with a 2021 first contribution and a 2025 conversion has one earnings clock dated 2021, not two.

Slott also clears up the worry that the money is locked away. The converted amount itself, and any Roth contribution, can be withdrawn tax-free at any time. The five-year periods govern the penalty on converted amounts and the tax on earnings, not the return of the original dollars.

The same mailbag turns to a question that is getting practical as Trump accounts near conversion age. Contributions can flow into the account through Dec. 31 of the year a child turns 17, the growth period. An individual can put in $5,000 a year, indexed starting in 2028, and employer contributions count against that same cap. Children born before 2025 or after 2028 miss the $1,000 federal seed contribution, though they can still take individual contributions during the growth period.

On Jan. 1 of the year a child turns 18, the account can convert to a Roth IRA. Slott runs through the alternatives — rollover to a traditional IRA or a company plan, withdrawal, or keeping it as a traditional IRA — before focusing on the Roth conversion. Converting in that first eligible year starts the penalty clock on Jan. 1 of the child's 18th year, so the account clears the penalty clock by the time the child turns 23. The earnings clock starts on that same date and carries the account forward from there.

For the advisor, the job is to record each conversion year on the client's Roth ledger. The penalty clock is per event and the earnings clock is per account, and the two run on different schedules. Slott's answer gives advisors a two-line explanation that settles a recurring client question without a research detour.