With a Roth IRA, you can invest and save money that you have already paid taxes on, which may eliminate tax concerns when you take out the money in retirement. This is a great way to save money for retirement.
However, a lot of owners of Roth IRAs might not be aware of the 5-year aging requirement, or the 5-year rule, which can significantly affect withdrawals from these accounts. Breaking this rule may lead to fines or taxes, or perhaps both.
To recap, contributions to a Roth IRA are not tax deductible, in contrast to traditional IRAs, which are funded with pretax money and may offer tax deductions based on income. Contributions are made with pre-tax money, and earnings may grow tax-free. There is also no requirement to make required minimum distributions (RMDs), which are withdrawals you must make or risk penalties starting at age 73. RMDs do apply to traditional IRAs.
Contributions to a Roth IRA are always tax- and penalty-free to withdraw. However, account earnings are exempt from this and are subject to the 5-year rule.
Yes, you can withdraw money from your Roth IRA after 5 years, but there are some important rules to keep in mind.
The Roth IRA 5-Year Rule Explained
The Roth IRA 5-year rule states that you can withdraw your contributions from a Roth IRA at any time without penalty. However, if you want to withdraw earnings from your Roth IRA before you’ve met the 5-year rule, you may have to pay taxes and penalties.
The 5-year rule begins on the first day of the tax year in which you made your first contribution to a Roth IRA. So, if you made your first contribution on January 1, 2018, the 5-year rule would expire on December 31, 2023.
Here are some key points to remember about the Roth IRA 5-year rule:
- You can withdraw your contributions from a Roth IRA at any time without penalty.
- You can withdraw earnings from a Roth IRA without penalty if you meet the 5-year rule and are 59½ or older.
- You may have to pay taxes and penalties if you withdraw earnings from a Roth IRA before you meet the 5-year rule.
- The 5-year rule applies to all Roth IRAs, even if the account holder is 59½ or older.
- The 5-year rule applies to inherited Roth IRAs as well.
Exceptions to the Roth IRA 5-Year Rule
There are a few exceptions to the Roth IRA 5-year rule. You may be able to withdraw earnings from your Roth IRA before you meet the 5-year rule without penalty if you are using the money for:
- A first-time home purchase
- Qualified higher education expenses
- Medical expenses that exceed 7.5% of your adjusted gross income
- Disability
How to Withdraw Money from Your Roth IRA
To withdraw money from your Roth IRA, you will need to contact your IRA custodian. You can usually do this online, by phone, or by mail.
When you withdraw money from your Roth IRA, you will need to specify whether you are withdrawing contributions or earnings. If you are withdrawing earnings, you will need to provide your IRA custodian with the date of your first contribution to a Roth IRA.
Taxes and Penalties on Roth IRA Withdrawals
If you withdraw earnings from your Roth IRA before you meet the 5-year rule, you may have to pay taxes and penalties. The amount of taxes and penalties you will owe will depend on your income and the amount of the withdrawal.
Here is a table that shows the taxes and penalties that may apply to Roth IRA withdrawals:
| Withdrawal Type | Taxes | Penalties |
|---|---|---|
| Contributions | None | None |
| Earnings (before 5-year rule and under age 59½) | Ordinary income tax | 10% penalty |
| Earnings (after 5-year rule and age 59½ or older) | None | None |
The Roth IRA 5-year rule is an important rule to understand if you have a Roth IRA. By understanding the rule, you can avoid paying taxes and penalties on your withdrawals.
Here are some additional resources that you may find helpful:
- Investopedia: What Is the Roth IRA 5-Year Rule? Withdrawals, Conversions, and Beneficiaries
- Fidelity: What is the Roth IRA 5-year rule and how does it work?
Frequently Asked Questions
What happens if I withdraw money from my Roth IRA before I meet the 5-year rule?
If you withdraw earnings from your Roth IRA before you meet the 5-year rule, you may have to pay taxes and penalties. The amount of taxes and penalties you will owe will depend on your income and the amount of the withdrawal.
Can I use the money from my Roth IRA for a down payment on a house?
Yes, you can use the money from your Roth IRA for a down payment on a house. This is one of the exceptions to the Roth IRA 5-year rule. You can withdraw up to $10,000 from your Roth IRA for a first-time home purchase without penalty.
Can I use the money from my Roth IRA to pay for college?
Yes, you can use the money from your Roth IRA to pay for college. This is another exception to the Roth IRA 5-year rule. You can withdraw earnings from your Roth IRA for qualified higher education expenses without penalty.
Can I use the money from my Roth IRA to pay for medical expenses?
Yes, you can use the money from your Roth IRA to pay for medical expenses. This is another exception to the Roth IRA 5-year rule. You can withdraw earnings from your Roth IRA for medical expenses that exceed 7.5% of your adjusted gross income without penalty.
Can I use the money from my Roth IRA to pay for disability expenses?
Yes, you can use the money from your Roth IRA to pay for disability expenses. This is another exception to the Roth IRA 5-year rule. You can withdraw earnings from your Roth IRA for disability expenses without penalty.
What happens if I inherit a Roth IRA?
If you inherit a Roth IRA, you will need to follow the same rules as the original account holder. This means that you will need to meet the 5-year rule before you can withdraw earnings from the account without penalty.
What happens if I die and my Roth IRA is still open?
If you die and your Roth IRA is still open, your beneficiaries will be able to withdraw the money from the account without penalty. However, they will need to pay taxes on any earnings that have not been taxed.
The Roth IRA 5-year rule is an important rule to understand if you have a Roth IRA. By understanding the rule, you can avoid paying taxes and penalties on your withdrawals.
Roth conversions and the 5-year rule
Internal Revenue Service (IRS) mandates a five-year waiting period before allowing withdrawals of balances converted from traditional IRAs to Roth IRAs. Alternatively, you may pay an early withdrawal penalty of 10% of the conversion amount in addition to income taxes in the tax year in which you make the conversion. (If you are 59½ years of age or older, the penalty for withdrawals is waived. ).
However, regardless of when in the year the conversion was completed, the clock starts on January 1 of that year. Therefore, in practice, the aging requirement might only be a little over 4 years if you converted in December.
It is important to note that each conversion counts differently when applying the 5-year rule. The same rules apply to so-called backdoor Roth IRA conversions.
Viewpoints: Why Consider a Roth Conversion Now has more information about Roth IRA conversions.
What is the 5-year aging rule?
The Roth IRA 5-year rule stipulates that a minimum of 5 years must pass between the start of the tax year on which you make your first contribution to the account and when you take out earnings. A withdrawal of earnings is deemed nonqualified if it is made less than five years after the original date of the account and could be subject to penalties or taxes, or both.
An account owner who is 59½ years of age or older may make a qualified distribution of earnings, which is free from taxes and penalties, after the 5-year rule has been satisfied. 1.
Note: All Roth IRAs are subject to the 5-year aging requirement, even if the account holder is 59½ years of age or older. It covers withdrawals from Roth IRAs that were initially owned as well as inherited Roth IRAs depending on when the original owner made the initial contribution. Conversions from traditional IRAs to Roth IRAs are subject to an additional 5-year aging rule.
Up until the current tax year’s tax filing deadline, you can continue to make contributions to a Roth IRA for the previous tax year. Therefore, in reality, the aging requirement may be no more than three years if you made a contribution in April of the previous tax year.