The Roth Conversion Rule That Trips Up Almost Everyone

​The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

I had a conversation recently with a client who had done everything right.

She had 27 years of PERS 2 service. A healthy DCP balance. An IRA from a previous job. She was 56 and thinking seriously about retiring at 58 or 59.

We were talking about Roth conversions when she stopped me: "Wait. If I convert this year, I cannot touch that money for five years, right?"

It is one of the most common questions I hear. And the answer is almost always: it depends.

The Roth conversion 5-year rule is one of the most misunderstood pieces of the tax code. Even reputable financial publications get it wrong.1 There are actually two different 5-year rules, one for contributions and one for conversions, and mixing them up can lead to unnecessary taxes or unnecessary fear of a strategy that could save you real money.2

A quick refresher on Roth conversions

A Roth conversion is when you move money from a pre-tax account (like a Traditional IRA or your DCP) into a Roth account. You pay income tax on the converted amount that year. But after that, the money grows tax-free, withdrawals are tax-free, and there are no required minimum distributions.3

For Washington State public employees with a pension, the years between retirement and claiming Social Security can be a golden window for conversions. Your taxable income may drop significantly once you stop working. That creates room to convert at lower tax brackets.

But before you convert a single dollar, you need to understand how the withdrawal rules work. And that starts with two simple questions.

Two questions that simplify everything

Here is the easiest way to figure out how the 5-year rule applies to your situation. Answer these two questions:

1. Do you currently have a Roth IRA that was funded at least 5 tax years ago (with any dollar amount)?
2. Are you age 59 ½ or older?

If you answered yes to both, you are in what I think of as the golden scenario. You can withdraw everything from your Roth IRA (contributions, conversions, and earnings) completely tax-free and penalty-free. Full stop.2

This is the part that surprises people. If you are over 59 ½ and you have had any Roth IRA open for at least five tax years, a brand new conversion you do today is accessible immediately. No new 5-year waiting period on the converted amount.4

The scenario that matters most for pre-retirees

Let me walk through a hypothetical that comes up frequently.

Say Tom is a 57-year-old county maintenance supervisor with 25 years of PERS 2 service. He opened a Roth IRA eight years ago and put in $500 just to get it started. He is now thinking about doing a $50,000 Roth conversion from his Traditional IRA.

Tom might assume he has to wait five years before touching that $50,000. But here is what actually happens.
Because Tom is under 59 ½, this conversion does start its own 5-year clock for penalty purposes. If he tried to withdraw the converted amount before five years pass and before he turns 59 ½, he would face a 10% early withdrawal penalty.2

But here is the key. When Tom turns 59 ½ (about two and a half years from now), that penalty clock becomes irrelevant. The 10% penalty only applies to early withdrawals. Once you are 59 ½, you are no longer "early." And because Tom already has a Roth IRA that is more than five tax years old, he satisfies both conditions for a qualified distribution.4

At 59 ½, Tom can withdraw the full $50,000 conversion plus any growth, tax-free and penalty-free. No five-year wait required on the conversion itself.

This is the piece that gets misreported constantly. The conversion-specific 5-year rule is an anti-abuse rule designed to prevent people under 59 ½ from using Roth conversions to dodge early withdrawal penalties.1 Once you are past 59 ½, it simply does not apply to you.

Where people actually get tripped up

The scenario that can catch you off guard is when you are over 59 ½ but have never had a Roth IRA before.
In that case, you can access your converted principal right away (you already paid tax on it). But any earnings on that conversion are not tax-free until the Roth has been open for five tax years.2 It is a narrow issue, but it matters if you are converting a large amount and it grows significantly in the first few years.

This is why starting a Roth IRA early, even with a tiny amount, is such a valuable move. It starts the clock. And once that clock has run, it never resets, even if you close the account and open a new one later.1

One thing every Washington State employee can do right now

If you do not already have a Roth IRA, open one and fund it with any amount. Even $50.

If your income is too high for a direct Roth IRA contribution, you can do a small conversion from a Traditional IRA instead. Either way, you start the 5-year clock.2

This is one of those rare pieces of financial planning advice that costs almost nothing, takes 15 minutes, and could save you real money down the road. Especially if you are a PERS, TRS, or LEOFF 2 member planning to retire in your late 50s and considering Roth conversions during those bridge years between retirement and Social Security.

Now that the 2017 tax rates were made permanent by the One Big Beautiful Bill Act, the old "convert before rates go up" urgency has faded. But the underlying math has not changed. Roth conversions remain one of the most powerful tools to manage your tax bill across a multi-decade retirement.5

​The 5-year rule is not a reason to avoid the strategy. It is a detail to understand so you can use it with confidence.
And as always, work with your CPA or financial advisor before making any conversion decisions. The rules are nuanced, and your individual tax situation matters.
 

Sources
1. Slott, Ed. "The most misunderstood Roth conversion tax rule." InvestmentNews. October 8, 2019. https://www.investmentnews.com/ira-alert/the-most-misunderstood-roth-conversion-tax-rule/169866
2. Kitces, Michael. "Understanding The Two 5-Year Rules For Roth IRA Contributions And Conversions." Kitces.com. January 1, 2014. https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
3. Internal Revenue Service. "Roth IRAs." https://www.irs.gov/retirement-plans/roth-iras
4. Taylor, Joy. "What to Know About the Five-Year Rules for Roth IRAs: The Kiplinger Tax Letter." Kiplinger. January 14, 2025. https://www.kiplinger.com/taxes/five-year-rule-on-roth-ira-contributions-and-payouts-kiplinger-tax-letter
5. Internal Revenue Service. "Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs)." https://www.irs.gov/publications/p590b

-Seth Deal