In today’s video we will discuss the 5 Year Rule of the Roth IRA, and what it means to you and your retirement savings.

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A Roth IRA is an individual retirement account where your investments grow tax-free into retirement. It is funded with after-tax money. You choose your investments, and when you retire, your withdrawals are tax-free, if you meet the 5-year rule. If you don’t meet this rule, you could end up paying a 10% penalty and taxes on your earnings.
The main rule you need to follow is what is called the 5-Year Rule for Tax-Free Withdrawals from a Roth IRA. It will come into play when you withdraw your earnings from your Roth IRA. (Not your contributions as they are always free from penalty and taxes since you deposited after-tax money into the Roth)
If you withdraw your earnings: Your earnings will be tax-free if you make a withdrawal on or after the date you turn 59 1/2, and if it has been 5 years since your first contribution to any Roth IRA you own. This is what I call the sweet spot!
What if you own multiple Roth IRAs? It doesn’t matter, as the clock starts ticking with your very first contribution to any Roth IRA. So, you could have 10 different Roth IRAs and it won’t matter where you take withdrawals from. As long as you are beyond the 5-year rule.
There are a few exceptions to this rule such as:
first-time home purchase,
college expenses,
and birth or adoption expenses.
Also, to pay for health insurance for the self-employed.

Roth IRA 5-Year Rule for Tax Free Withdrawals…(read more)

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A Roth IRA is a great retirement savings vehicle that allows you to save money on a tax-deferred basis. One of the main benefits of a Roth IRA is that it allows you to withdraw your contributions and earnings tax-free after a five-year holding period. This five-year rule is known as the Roth IRA 5-Year Rule for Tax Free Withdrawals, and it’s the key to unlocking the full potential of a Roth IRA.

The Roth IRA 5-Year Rule states that any contributions you make to your Roth IRA must stay in the account for at least five years before you can withdraw them tax-free. This five-year period starts on the first day of the tax year in which you make your contribution. For example, if you make a contribution in 2021, the five-year period starts on January 1, 2021 and ends on December 31, 2025.

The five-year rule is important because it helps ensure that you don’t take advantage of the tax-free withdrawals offered by a Roth IRA. If you withdraw contributions before the five-year period is up, you will have to pay taxes and a 10% early withdrawal penalty on the amount you withdraw.

The five-year rule also applies to earnings that you make on your contributions. Any earnings that you make on your contributions must also stay in the account for at least five years before you can withdraw them tax-free.

The five-year rule is an important consideration when you’re deciding when to make withdrawals from your Roth IRA. Generally speaking, the longer you wait to make withdrawals, the more tax-free earnings you will be able to withdraw.

For example, if you wait until the five-year period is up before you make withdrawals, you will be able to withdraw your contributions and any earnings tax-free. However, if you make withdrawals before the five-year period is up, you will have to pay taxes and a 10% early withdrawal penalty on the amount you withdraw.

The five-year rule is also important for determining when you can take advantage of the “sweet spot” for Roth IRA withdrawals. Generally speaking, the sweet spot for Roth IRA withdrawals is when you are age 59 ½ and have had the Roth IRA for at least five years. At this time, you can withdraw your contributions and earnings tax-free, and you won’t have to pay any early withdrawal penalty.

The Roth IRA 5-Year Rule for Tax Free Withdrawals is an important consideration when you’re deciding when to make withdrawals from your Roth IRA. By understanding the five-year rule and taking advantage of the sweet spot, you can maximize the tax-free withdrawals offered by a Roth IRA.