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Understanding the Roth IRA 5-Year Rule

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The Roth IRA 5-year rule determines when withdrawals of earnings or converted funds can be taken without taxes or penalties. For earnings, the rule requires that at least five tax years have passed since the first contribution. For converted funds, the clock starts on each conversion, and early withdrawals may incur penalties if accessed too soon. Knowing the specifics of this rule can help avoid unexpected tax implications when planning retirement distributions.

The rules for Roth IRAs and retirement planning can be complicated, so consider working with a financial advisor who can help you navigate these complexities. Connect with a fiduciary advisor today.

What Is the Roth IRA 5-Year Rule?

The Roth IRA five-year rule is not a single guideline but a collection of rules designed to govern when funds in a Roth IRA can be withdrawn tax-free. These rules apply separately to earnings, converted funds and inherited IRAs, each with its own timeline and requirements. Let’s break down each of these rules to clarify how they work.

1. The 5-Year Rule for Earnings

The first five-year rule applies to the earnings on funds contributed to a Roth IRA. For a withdrawal of earnings to qualify as tax-free, the account must meet two requirements: it must have been open for at least five tax years, and the withdrawal must occur under a qualifying condition, such as the account holder reaching age 59 ½, becoming disabled or using the funds for a first-time home purchase.

The five-year period for contributions begins on January 1 of the tax year in which the first contribution is made, regardless of the exact date of the deposit. For example, if you make your first contribution in April 2025 for the 2024 tax year, the five-year clock starts retroactively on Jan. 1, 2024. This timeline allows account holders to count the entire first tax year, even if the contribution was made later.

It’s important to note that this rule only applies to the earnings on your contributions. The contributions themselves can generally be withdrawn at any time without taxes or penalties, since they were made with after-tax dollars. However, improperly timing withdrawals of earnings can result in unexpected tax liabilities.

2. The 5-Year Rule for Roth Conversions

SmartAsset: Understanding the Roth IRA 5-Year Rule

The five-year rule for Roth conversions ensures that funds converted from a traditional IRA to a Roth IRA are not used as a workaround for early withdrawals. Each conversion has its own separate five-year clock, which starts on January 1 of the year in which the conversion occurs. For example, if you convert funds in July 2025, the five-year clock for that specific conversion starts on Jan. 1, 2025.

During this five-year period, any withdrawals of converted funds may incur a 10% early withdrawal penalty if you’re under age 59 ½. This is true even though the converted funds have already been taxed. However, the penalty applies only to the converted amount, not to any earnings generated after the conversion.

It’s also worth noting that this rule is separate from the five-year rule for contributions and earnings. For account holders who make multiple conversions over time, careful record-keeping is necessary to track each conversion’s five-year timeline and avoid penalties on early withdrawals.

3. The 5-Year Rule for Inherited Roth IRAs

The five-year rule becomes more complex when it involves inherited Roth IRAs. If a beneficiary inherits a Roth IRA, they must determine whether the original account owner satisfied the five-year rule for earnings. If the original account was open for at least five tax years before the account holder’s death, any withdrawals of earnings will be tax-free for the beneficiary.

If the original account holder had not met the five-year holding period at the time of their death, their beneficiary won’t be permitted to withdraw the earnings tax-free until the five-year window has elapsed. The start of this five-year clock depends on whether the original account holder made their first contribution or completed a conversion. In cases where the clock has not yet run out, any distributions of earnings may be subject to taxes.

For beneficiaries who are required to deplete the account under the 10-year rule for inherited IRAs, the interplay between the five-year rule and the 10-year rule adds another layer of planning complexity. While beneficiaries can withdraw contributions tax-free at any time, they must carefully time earnings withdrawals to avoid tax implications.

Exceptions to the Five-Year Rule

SmartAsset: Understanding the Roth IRA 5-Year Rule

You can qualify for an exception to the five-year rule if you withdraw $10,000 for your first home purchase. You may also qualify for an exception if you are disabled or if you inherit the Roth IRA after your death. Here are five additional exceptions available to you:

  • The use of the funds to cover unreimbursed medical expenses if they exceed 7.5% of your adjusted gross income.
  • You are unemployed and can’t afford health insurance premiums.
  • You need to cover qualified higher education expenses for either you or a family member.
  • The IRS has placed a tax levy on you.
  • You agree to accept equal periodic payments for five years or until you are 59 ½, whichever comes last.

After you become age 59 ½, you can withdraw funds from the Roth IRA at any time if you’ve met the five-year rule. If you have not met the five-year rule, you can withdraw your contributions tax-free but not your earnings. You do not have to pay a penalty in this case.

Bottom Line

The Roth IRA five-year rule encompasses several distinct guidelines. The first applies to earnings, requiring that the account be open for five tax years before withdrawals are tax-free. The second governs conversions, where each converted amount has its own five-year timeline to avoid penalties. The third pertains to inherited Roth IRAs, ensuring beneficiaries adhere to the original account’s timeline or start their own five-year clock.

Tips for Retirement Planning

  • As you can see, the Roth IRA five-year rule is complex. You may find it best to consult a financial advisor who specializes in retirement planning and/or tax strategy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Look at the SmartAsset retirement tax calculator to determine where you’d like to live during retirement to reduce your tax liability.
  • How much money will you need to retire? Find out by using the SmartAsset retirement calculator.

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