The Roth IRA can be a great retirement savings vehicle, but you got to follow the rules or it could spoil your retirement when it comes time to withdraw from the Roth.
In this video I discuss the Five Year Rule and how it affects your withdrawals from a Roth IRA.
Any contributions you make to a Roth are tax and penalty free at any age. However, any earnings are subject to taxes and penalties unless the 5 year rule is met or other exceptions qualify.

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Saving for retirement is important for everyone, and one way to make sure you have enough funds is by opening a Roth IRA account. A Roth IRA is a type of retirement account that allows you to contribute after-tax money, meaning you won’t have to pay taxes on your contributions later when you withdraw them. However, there is a rule regarding the withdrawals you make from your Roth IRA that you need to know about, which is the 5-year rule.

What is the 5-year rule?

The 5-year rule is a regulation that determines when you can withdraw your earnings from a Roth IRA account without incurring any penalties or taxes. According to the rule, you can withdraw your contributions at any time, tax-free and penalty-free. Still, if you want to withdraw your earnings before you turn 59 ½, the account must have been open for at least five years.

When does the 5-year rule start?

The 5-year period starts on January 1 of the year in which you make your first contribution to your Roth IRA account. For example, if you opened your Roth IRA account in 2019 but didn’t make your first contribution until 2020, your five-year period would start on January 1, 2020. The five-year period applies to each conversion or rollover you make to your Roth IRA account.

What happens if you withdraw your earnings before the 5-year period is over?

If you withdraw your earnings from your Roth IRA account before the five-year period is up, you may have to pay taxes on the earnings as well as a 10% early withdrawal penalty. It’s essential to remember that the penalty only applies to the earnings you withdraw, not the contributions. So if you have contributed $10,000 and earned $3,000, and you withdraw $3,000 before the five-year period is over, you’ll need to pay taxes and the penalty on the $3,000 earnings, not the $10,000 contribution.

Can you avoid the 5-year rule?

The five-year rule applies to your earnings, not your contributions. If you’re willing to withdraw only your contributions, you won’t have to worry about the 5-year rule. It’s also possible to avoid the 5-year rule altogether by waiting until you turn 59 ½ to withdraw your earnings. At that point, you may withdraw both contributions and earnings without penalties or taxes.

In conclusion, the 5-year rule is an essential regulation regarding Roth IRA accounts to avoid penalties and taxes. To ensure you’re maximizing your retirement savings, make sure to comply with the 5-year rule guidelines, and consult with a financial advisor if you have any doubts or concerns about your Roth IRA account.