When it comes to retirement savings, the rules around Roth IRAs can be confusing — even for experienced investors. One listener of Suze Orman‘s “Women & Money” podcast recently discovered a little-known regulation that means he won’t be able to touch part of his retirement money until 2030.
A Listener’s Costly Surprise
Albert, a 57-year-old listener, wrote to Orman after moving $10,000 from his traditional IRA into a Roth IRA in 2024. Like many investors, he knew he would owe ordinary income taxes on the conversion. What he didn’t realize was that the converted money comes with its own clock: a separate five-year waiting period before it can be withdrawn penalty-free.
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“I freaked out,” Albert admitted. He had assumed the Roth IRA he opened in 2021 covered all deposits and conversions under the same rules.
Orman confirmed his concern. “Every conversion has its own five-year rule, period,” she told him.
How the Five-Year Rule Works
The five-year rule is one of the trickier aspects of Roth IRA planning. Contributions you make directly to a Roth IRA are always accessible tax- and penalty-free. But converted funds are different. Each time you convert money from a traditional IRA to a Roth IRA, the IRS starts a new five-year timer.
For Albert, that means his $10,000 converted in 2024 won’t be available for about five years from the time he converted it. The waiting period applies regardless of how long the Roth IRA account has been open.
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The rule is also calculated in a unique way. As Orman explained, the clock starts on Jan. 1 of the year you made the conversion — even if you converted on the very last day of the year. So, a conversion on Dec. 31, 2024, is treated as if it began Jan. 1, 2024. In that case, the money would be available starting Jan. 1, 2029.
Penalties Depend on Age and Earnings
Another layer of complexity involves age and earnings. Since Albert is already 57, he’ll be over 59½ by the time his five-year clock runs out. That’s important because withdrawals made before age 59½ are usually subject to a 10% early withdrawal penalty. Once you’re past that age, the penalty no longer applies.
However, there’s still the matter of taxes on earnings. To avoid ordinary income tax on the growth of the converted money, investors must satisfy both conditions: being at least 59½ and having the account open for at least five years. That’s why timing matters so much with conversions.
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A Lesson for Other Investors
Albert’s story is a cautionary reminder for anyone considering a Roth IRA conversion. While Roth IRAs can provide tax-free income in retirement, the rules about when you can access the funds are stricter than many realize.
Orman reassured Albert that he hadn’t made a mistake. “You’ll be there before you know it,” she said. But the exchange highlights why it’s important to understand IRS rules before moving money between retirement accounts.
For investors nearing retirement, the five-year rule can impact cash flow planning. Before making a Roth conversion, it may be wise to consult a financial advisor to ensure you won’t need that money before the clock runs out.
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