There are 2 5-year rules

If you make a conversion, you must wait five years or until you reach age 59 1/2, whichever comes first, before you can withdraw the converted amount free of the 10% penalty. Each conversion has its own five-year holding period. So if a young account owner does one conversion in 2013 and a second conversion in 2014, the amount from the first conversion can be withdrawn penalty-free starting in 2018 and the amount from the second starting in 2019.

Earnings on a converted amount can be withdrawn tax- and penalty-free after the owner reaches age 59 1/2, as long as he or she has had any Roth IRA opened at least five years.

There's an order to withdrawals

The rules for determining the source of money coming out of a Roth work in the taxpayer's favor. The first money out is considered contributed amounts, so it's tax- and penalty-free. Once contributions are depleted, you dip into converted amounts (if any). This money is tax- and penalty-free for owners 59 1/2 and older or younger ones who have had the converted amount in a Roth for more than five years. Only after you have cashed out all converted amounts do you get to the earnings. Once the account owner is 59 1/2 and has had one Roth for at least five years, earnings, too, can be withdrawn tax- and penalty-free.

The ability to tap money in a Roth IRA without penalty before age 59 1/2 allows for flexibility to use the Roth IRA for other purposes. For example, the account could be used as a fallback for college savings.

Once you reach retirement, having a pot of tax-free income to draw upon may allow you to lower your tax bill. Roth money doesn't count in the calculation for taxing Social Security benefits, for example, or in the calculation for the new tax on investment income.

You can take a mulligan

Roth IRA conversions come with an escape hatch. If you converted $50,000 but the Roth is now worth $35,000, you would still owe tax on the $50,000. Undoing the conversion—known as a recharacterization—wipes away the tax bill. Recharacterizing can also pay off if you can't afford the tax bill or the conversion unexpectedly pushes you into a higher tax bracket.

You have until Oct. 15 of the following year to undo a conversion. So a 2013 Roth IRA conversion can be reversed up until October 15, 2014.

But note: While you can now convert a traditional 401k to a Roth 401k within a company plan, an in-plan conversion cannot be reversed.

A Roth can benefit heirs

Unlike traditional IRA -- which you must begin to tap at age 70 1/2 -- Roth IRAs have no minimum distribution requirements for the original owner. So, if you don't need the money, it can grow in the tax shelter until your death. If your spouse inherits the account, he or she never has to make withdrawals, either.

If the Roth IRA passes to a nonspouse heir, the rules change. They are required to take minimum distributions starting the year following the death of the original owner, or empty the account within five years of the account owner's death. Distributions, though, will still be tax-free and can be stretched over the beneficiary's life expectancy. A young child or grandchild who inherits a Roth has the potential for decades of tax-free growth.

Wealthy taxpayers may find another estate-planning advantage to a Roth conversion. The taxes paid on a Roth conversion will be removed from their taxable estate.

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