There are two different 5-year rules for Roth IRA accounts. One applies to Roth IRA accounts and determines, in part, whether the withdrawal of earnings is subject to income tax. The second applies to Roth IRA conversions and determines whether a withdrawal will trigger the 10% penalty tax.
In this video we walk through both 5-year rules. We’ll cover what they are, how they work, and what it means for retirement savings.
These are complicated rules, so be sure to check out the resources below. And as always, consult a tax professional before making any decisions.
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I’m the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I’m also the author of Retire Before Mom and Dad–The Simple Numbers Behind a Lifetime of Financial Freedom (
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Rob, thanks for info. ROTH IRA is DYNOMITE! Wait 5 Years, Take Out All EARNINGS, Tax Free ? WOW! Wish these accounts were available 20 years ago. Any strategy to ADD FUNDS beyond IRS limits ?
That was fantastic.
Can you use the funds in the roth ira to invest in a vanguard index fund?
@Rob Berger There's another 5 year rule when it comes to roth accounts, it has to do with inheritance issues, specifically when the roth is inherited by a trust or is simply left to an estate there is a 5 year time line to remove the funds, rather than the 10 years afforded to a spouse or other family member. I think this came into effect with the SECURES act in 2019.
I'm 63, I opened a Roth with a bank several years ago. I then moved it to Fidelity. Which opening date satisfies the 5 year rule?
Thank you. I had taken out money for my home when I refinanced and now I am sorry I did as the rules really had me confused. Also, I should have waited another year as I would have been 59-1/2.
You write: "Contributions can be withdrawn penalty and tax free"???? BUT if you are under 59 1/2 and even if you meet the 5 year rule, your withdrawal of contributions (not earnings) is called "Unqualified". I did this…..I'm not sure if I was taxed 10% (or other "pro-rated" rate) or not?? I followed the IRS flow chart you posted the link for and I get "not qualified" may be subject to 10% penalty.I thought I understood but now not sure.
I withdrew some of my Roth contributions $ well before 59 1/2 but it was considered an "Unqualified" Event yet I think I was not taxed on it. Does that sound right?
I didn't tell the IRS about my Roth Contributions in the early years (around 2008) I contributed. I didn't think IRS needed to know and I don't think the person who did my taxes asked either. Since I started using H&R Block software I tell the IRS. Anyway, I hope I can take out my contributions and eventually earnings without penalty…..BUT I want to continue contributing up until 59, so that might be a bit of a hassle with the 5 year rule.
this is why everyone needs to open a roth ira. just put some money there and forget it. i put just 1k in last year. started my 5 yr. count down. wish i knew this sooner. my two sons open roth ira's. they are 16.
Could any or all of the wealth planners clearly state that interest earned on a roth ira is NOT taxed after you satisfy both the 5-year and the 59-1/2 year rule. PLEASE?
Rob, I have some money in an old 403b from a previous job. I want to roll it over to a Roth. The amount in the 403b would be considered income, correct? If so, that amount added to our combined income would not put us in a different tax bracket. Is that how the taxing works for that sort of conversion?
This may be a very basic question. How do you determine if you are taking out the contributions and not the earnings? While withdrawing do I need to keep a track whether the money removed is from either or? Will brokerage account custodian take care of that?
Also, how can I track if I satisfy 5 year rule. Is it just when my first ROTH IRA opened?
Thank you Rob for the detailed explanation of the five year rules. Good news for me is that I have contributed to my Roth IRA fro. 2016 till now with out missing to contribute to max per year.
I hope most of the people contribute to ROTH IRA and save for retirement.
Regards, Sunil
I liked your video a lots, been trying to get this strait in my head about converting a IRA to a Roth IRA and converting a 401k to a Roth IRA after 59 1/2.I would really like to find a flow chart made up by someone showing this after 59 1/2 and already having a Roth IRA for over 5 years. the flow chart would go something like this, – are you over 59 1/2 years old (yes or no) if (yes) have you had a Roth IRA for 5 years (yes or no) if (yes) and you want to direct transfer a 401K into a Roth IRA do you have to wait 5 years before you can take out any earnings without a penalty (yes or no). Does anyone have a flow chart made up like this or has anyone seen such a flow chart? IF SO, PLEASE LEAVE A LINK TO IT FOR THOSE THAT ARE STILL CONFUSED ABOUT IT. Thanks TC – Flow charts make thing simple for us simple minded people.
I opened a Fidelity Roth IRA by performing a Roth conversion of a small amount of money that I had in a traditional 457. I also have a Roth TSP that I have had for well over 5 years. I will be rolling it over into the same Fidelity Roth IRA upon retirement. If I understand correctly, the 5 year clock will start ticking for the initial 457 conversion funds when the funds were converted to a Roth IRA. The 5 year clock will start ticking for the Roth TSP funds upon the rollover into the initial Fidelity Roth IRA. Am I correct?
Great work. Very clear explanation. Thanks!
Thank you for some enlightening information!
So, let me know if I'm correct or not.
1) I am over 60.
2) I have had a Roth IRA for 20 years.
3) I converted an IRA into a Roth IRA last year and I was over 60 all last year.
If I understand the rules correctly, I can completely ignore them because:
1) Old Roth ==> No worries about the first 5 year rule because I have an old Roth IRA.
2) Old Me (over 60) ==> I can withdraw both principle and earnings on my converted Roth IRA even though I converted it 1 year ago because I'm old.
Is this a correct assessment?
Important: Roth IRA contributions have to EARNED income. Let's say you're a landlord all you income is from the rentals then you can't contribute any of it to a Roth IRA, unless in the meanwhile you had held par-time at McDonald's. My question is if you have a Roth IRA for 30 years when you take out money how do the IRS track which year contribution is which portion of earned income (if they tax you they have to pinpoint which year your illegal contributions are) and how do they determine which portion of illegally contributed money can be taxed again…? Anyone…?
Interesting. I just closed a 10 year old self directed ROTH and distributed the asset, a piece of land, to myself. The Roth was a conversion from a regular IRA 10 years ago. I paid taxes on the conversion at that time. I’m over 60. So I meet the 5 yr rule but I also have another Roth with say 30k in it. The value of the land is say 30k 20 the original conversion amount and 10k earnings. But based on your explanation that additional 10k is treated as contributions not earnings. Not sure it matters since it’s clearly a qualified distribution. But in either case there should be no tax due.