What is the Roth IRA 5-year rule? (2024)

Key points

• The five-year rule determines whether you can withdraw Roth IRA earnings tax-free.
• The five-year period begins with your first contribution to any Roth IRA.
• There are different five-year rules for Roth IRA conversions and inherited Roth IRAs.

Retirement accounts are powerful tax-advantaged tools that help you save for your golden years. Unfortunately, they usually require locking away your money for decades.

Roth IRAs make it easier to access your retirement funds if you need them in a financial emergency or for another reason. But they also have unique requirements, including the five-year rule, which limits when you can withdraw your earnings tax-free.

Before investing in or withdrawing money from a Roth IRA, understand the five-year rule and the penalties you could face for not following it.

The Roth IRA five-year rule: What is it?

The Roth IRA five-year rule states that you can’t withdraw earnings tax-free unless it’s been five years or more since you first contributed to a Roth IRA. But that restriction doesn’t apply to all the money in your Roth IRA.

“You can withdraw your original principal from a Roth IRA at any time since the funds were contributed on an after-tax basis,” says David Edmisten, a certified financial planner and the founder of Next Phase Financial Planning. “The rules for any additional taxes or penalties apply only to the investment earnings on the amount you originally contributed.”

Example: Suppose in 2024 you contribute $7,000 to a Roth IRA. By the following year, your balance grows to $7,500. The five-year rule applies only to the $500 of earnings.

Roth IRA withdrawals

As mentioned above, you generally must wait at least five years after your first Roth IRA contribution to withdraw your earnings.

Note: The five-year clock starts on Jan. 1 of the year you make your first contribution to any Roth IRA, not necessarily the Roth IRA from which you’re withdrawing funds.

If you withdraw earnings from your Roth IRA before satisfying the five-year requirement, your distribution could be subject to income taxes, a 10% penalty or both. And reaching age 59½ won’t necessarily get you off the hook.

“Those individuals, while avoiding a 10% penalty for early withdrawal, would still owe ordinary income taxes on earnings if they did not satisfy the five-year rule,” says Kevin Chancellor, a financial planner with Black Lab Financial Services.

Remember that when you withdraw funds from your Roth IRA, there is an order in which your account is depleted, says Jamieson Hopp, a certified financial planner at Millennial Wealth. “No matter what, your contributions are always taken out first, which is always a tax-free withdrawal.”

Roth IRA distributions are always made in the following order:

• Regular contributions.
• Conversion and rollover contributions.
• Earnings on contributions.

Penalty exceptions

The five-year rule is strict. If you don’t meet it, you won’t be able to avoid income taxes.

But the five year-rule is only one piece of the puzzle. Once you satisfy it, for a withdrawal of earnings to be tax- and penalty-free, it must be made after you reach age 59½ or because one of the following exceptions applies:

• You are totally and permanently disabled.
• You are a deceased IRA owner’s beneficiary.
• You withdraw up to $10,000 for your first home.

If you haven’t met the five-year rule, you may be able to avoid the 10% penalty — but not income taxes — in certain circ*mstances. Here are some examples:

• You are 59½ or older.
• The withdrawal is for unreimbursed medical expenses.
• The withdrawal is for medical insurance costs while you are unemployed.
• You are totally and permanently disabled.
• You are terminally ill.
• You are a deceased IRA owner’s beneficiary.
• You are receiving distributions as a series of substantially equal periodic payments.
• The withdrawal is for qualified higher education expenses.
• The withdrawal is for your first home (up to $10,000).
• The withdrawal is due to an IRS levy.
• The withdrawal is for qualified birth or adoption expenses (up to $5,000).

Roth IRA conversions

A conversion allows you to roll funds from a pretax retirement plan into a Roth IRA. You pay income taxes at the time of the conversion, meaning you can access those converted funds tax-free.

But to avoid the 10% penalty, you generally must satisfy the five-year Roth IRA conversion rule.

“For Roth conversions, the five-year-holding period is set for each individual conversion amount,” Edmisten says. “The five-year period is counted as tax years. So, for example, a Roth IRA conversion made any time in 2023 would be counted as having been made as of Jan. 1, 2023.”

In the case of that 2023 conversion, you would be able to take a penalty-free withdrawal as early as 2028. If you made another conversion in 2024, you would be able to withdraw that money penalty-free as early as 2029. The process of gradually moving money to your Roth IRA each year is known as a Roth conversion ladder.

Note: If you’re 59½ or older when you make a withdrawal, you won’t pay the 10% penalty no matter how long the money is in the account. Other exceptions may also apply.

Five-year rule for beneficiaries

The original owner of a Roth IRA is not required to take distributions in their lifetime. But if you inherit a Roth IRA, it will be subject to required minimum distributions.

The good news is you won’t owe taxes on withdrawals from an inherited Roth IRA as long as the original owner held the account for five years or more. And the 10% penalty that applies to Roth IRA withdrawals before age 59½ doesn’t apply to inherited Roth IRAs.

The rules for taking RMDs depend on when the original account owner died and what type of beneficiary you are:

• Nonspousal beneficiaries who inherit an IRA from someone who died in 2020 or later may be required to withdraw the entire account balance within 10 years.
• Spousal beneficiaries may be permitted to stretch out RMDs over their life expectancy.

Roth IRA five-year rule overview

The Roth IRA has powerful tax advantages but is subject to unique requirements.

It is “the only IRA where there is a waiting period to gain the potential tax benefits from withdrawals, even if a person has already reached 59½ and is allowed normal distributions in other tax-deferred IRA types,” Chancellor says.

You can withdraw your Roth IRA contributions anytime. But you generally can’t withdraw your investment earnings tax-free unless it’s been at least five years since you first contributed to a Roth IRA. If you withdraw earnings from your Roth IRA before meeting the five-year rule, your distribution could be subject to income taxes, a 10% penalty or both.

“However, if a person has held the Roth IRA for five years and has reached the normal retirement age of 59½, the Roth IRA is one of the most tax-efficient and least restrictive accounts available,” Chancellor says.