Roth IRAs offer significant tax advantages — and, unsurprisingly, there are strings attached. You’ll need to abide by IRS rules for these investment retirement accounts to avoid the sticker shock of penalties or taxes when you take distributions. Here's a summary of how it works:
The Roth IRA five-year rule lets you withdraw your earnings tax- and penalty-free if you've had the account for at least five years after your first contribution.
For withdrawals of earnings to qualify as tax-free, they must also occur after you've reached age 59½ (or because you qualify for certain exceptions).
If you convert a traditional IRA or 401(k) to a Roth IRA, withdrawals are subject to a five-year waiting period to avoid a penalty.
Distributions to beneficiaries of a deceased IRA holder are also subject to the five-year rule.
Roth IRA five-year rule for withdrawals
The Roth IRA five-year rule says you can withdraw your investment earnings tax-free and penalty-free as long as you've held the account for at least five years.
It’s important to note this rule applies specifically to investment earnings. The contributions you’ve made to your Roth IRA can be withdrawn at any time because you’ve already paid taxes on that money.
If you don't wait five years before withdrawing earnings, you may have to pay taxes and a 10% penalty on the earnings portion of your withdrawal.
» Learn more about Roth IRA early withdrawal penalties
The five-year period begins Jan. 1 of the year you made your first contribution to a Roth IRA. Once you clear that five-year period, for withdrawals of earnings to qualify as tax-free, they must also be done after you've reached age 59½ or because you qualify for certain exceptions.
If you've had your Roth for less than five years, there are also exceptions that can get you off the hook for the 10% penalty on withdrawn earnings — but not all income taxes.
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Exceptions to the 10% penalty
Here's a roundup of the conditions that may let you bypass the 10% penalty or both the 10% penalty and the income taxes you would otherwise owe on withdrawn earnings:
Early distributions of earnings for these reasons are considered qualified: not subject to taxes or the 10% penalty | Early distributions of earnings for these reasons are considered exceptions: taxable as income, but not subject to the 10% penalty |
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You've held a Roth IRA for at least five years AND you are taking the distribution in one of the following circ*mstances:
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Five-year rule for Roth IRA conversions
Similar to the rule above, withdrawals of money from the conversion of a traditional IRA or 401(k) to a Roth IRA are subject to a five-year waiting period to avoid a penalty.
For this rule, the five-year period begins the first day of the tax year in which you converted money from a traditional IRA (or did a rollover from a qualified retirement plan) to your Roth IRA. For example, if you do a conversion on May 1, 2024, the rule for that conversion actually begins on January 1, 2024. Each conversion or rollover you make is subject to a separate five-year waiting period.
» Learn more about Roth IRA conversion rules
If you don’t wait the requisite five-year period from conversion to withdrawal, you may have to pay a 10% penalty, along with any income taxes owed. The same exceptions apply to the five-year rule of withdrawals of conversions as any other type of early distributions — see chart above for examples).
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Five-year rule for Roth IRA beneficiaries
The final five-year rule applies to distributions to beneficiaries of a deceased IRA holder. As noted by the other two rules, death is an exception to penalties for early withdrawals — but to avoid ordinary taxes, beneficiaries still must abide by the two prior rules pertaining to the waiting period for making withdrawals of investment earnings or converted amounts.
» Read more: Learn about your options when you inherit an IRA
If you are the beneficiary of a Roth IRA, double-check the timing of the account's initial contributions, conversions or rollovers.
Distributions of earnings and rollovers won’t necessarily qualify as tax-free if any of the five-year rules prohibit it, even though the original owner of the Roth IRA has died. Those amounts will be included in the beneficiary’s gross income and therefore subject to income taxes, just as if the money had gone to the original IRA owner instead.
