Roth five-year rule on conversion accounts

Let's clarify a couple of points. You can take a distribution from an IRA or a Roth IRA any time you want at an any age. If you take it from an IRA that does not have a cost basis, you will owe tax and if you are not age 59.5 you will also owe the eary withdrawal penalty of 10% (there are exceptions to the penalty). When Congress created the Roth IRA and made earnings and distributions tax-free, a very clever fellow in the back row raised his hand and said: Wait a minute, wait a minute... you've left a loophole. What if a taxpayer who is not yet age 59.5 wants to take a distribution from his IRA? He can avoid the penalty by converting his IRA to a Roth, pay the tax and then take the distribution from the Roth tax-free. As the distribution is tax-free, there is no early withdrawal penalty. So, Congress closed the loophole by requiring a taxpayer making a conversion to wait 5 years in order to avoid the early withdrawal penalty on a tax-free distribution. Once agan, the guy in the back row said: Wait a minute, wait a minute. What if the taxpayer is already age 59.5? He wouldn't pay the 10% penalty in an IRA, why should he pay it in a Roth IRA? So, Congress created the following rule:

To avoid the 10% early withdrawal penalty if you convert an IRA to a Roth IRA, you must wait until at least Jan.1 of the fifth year following the year of conversion to take a distribution that comes from the conversion. However, there is no 10% penalty if you have already attained age 59.5 or you can meet one of the approved exceptions to the early withdrawal penalty.

As you have already attained age 59.5, you would not be subject to the early withdrawal penalty from the Roth IRA even if five years have not elapsed.

As ridiculous as it may be, I always understood it to be 5 years or

Here is the section in the Regs (1.408A-6) that adresses the 10% penalty:

Q?5. Will the additional tax under 72(t) apply to the amount of a distribution that is not a qualified distribution? A?5. (a) The 10-percent additional tax under section 72(t) will apply (unless the distribution is excepted under section 72(t)) to any distribution from a Roth IRA includible in gross income. (b) The 10-percent additional tax under section 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution, if the distribution is made within the 5-taxable-year period beginning with the first day of the individual's taxable year in which the conversion contribution was made. The 5-taxable-year period ends on the last day of the individual's fifth consecutive taxable year beginning with the taxable year described in the preceding sentence. For purposes of applying the tax, only the amount of the conversion contribution includible in gross income as a result of the conversion is taken into account. The exceptions under section 72(t) also apply to such a distribution.

Please note the last sentence that says the exceptions under section

For reference purposes, you can read the rules in the Fairmark press Guide to Roth IRAs at