Say I convert $100,000 each year from a traditional IRA to a Roth IRA over five years. In the sixth year I will have converted $500,000 but only $100,000 will have been in a Roth for five years. Does that mean that in year six I can only withdraw interest or principal on $100,000 from the account, even though the total balance would be $500,000? – Tom C.

According to T. John Chase, managing director of TLP Advisors/Tax-Pros, Macedonia, Ohio, each $100,000 chunk you convert would be considered separate and have its own five-year waiting period before a qualified distribution could occur. Chase notes that the five-year IRA conversion rule that allows you to withdraw funds without an early withdrawal penalty only applies to withdrawals of contributions or conversion principal — not investment gains. (Chase also points out that there is a different five-year rule for regular contributions to a Roth IRA. With these contributions, the five-year clock starts ticking when you make the first contribution, and doesn't reset for every new contribution.)

Consider this example: If the $100,000 from your first rollover had generated $5,000 in earnings after five years, you still can't touch that $5,000 until you are 59 ½ or older. Otherwise you'll face a 10% penalty and income taxes on those earnings. "Of course, if you're 59½ or over, you're free to withdraw however much you want once the five years have passed," Chase says.

Chase cautions that making multiple conversions and withdrawals may attract the attention of the IRS. "So you can expect some correspondence from the IRS asking you to account for that money," he says. The burden will often fall on you to produce the paper trail showing that your conversions and withdrawals complied with the five-year rule and other regulations.

— Marc Mewshaw

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