Roth IRA 5-year rule: Withdrawals, conversions & inheritances

If you're contributing to a Roth individual retirement account (IRA) as part of your retirement planning, you're enjoying the tax-advantaged benefits of growing your nest egg while setting yourself up to make tax-free withdrawals down the road.

However, Roth IRA withdrawals are subject to a 5-year rule that could impact your withdrawals. Here's a closer look at this rule, when it applies and how to comply.

This article covers:

• When can you withdraw from your Roth IRA?
• How Roth IRA conversions work with the 5-year rule
• Withdrawal rules for inherited Roth IRAs
• How the 5-year rule is calculated
• How a canceled contribution factors into the 5-year rule
• Early Roth IRA withdrawal exceptions

The Roth IRA 5-year rule refers to a waiting period in which you can make penalty and tax-free withdrawals from your Roth IRA. The 5-year rule applies to three specific situations: withdrawals, conversions and inherited IRAs.

The primary Roth IRA 5-year rule allows you to withdraw earnings from your Roth IRA tax-free if your first deposit was made at least 5 years ago and you're age 59½ (or meet a qualifying event such as a disability).¹ If you withdraw Roth IRA earnings from your account before the five years are up, you may be faced with a 10% tax penalty and will have to pay taxes on the earnings withdrawn. Because of the rule, dipping into your Roth IRA soon after you first fund it can be expensive.

However, this rule is all about your earnings, not your original contributions. You already paid taxes on contributions you made into your Roth IRA. So when you withdraw the funds you contributed, you don't have to pay income tax again, or incur a penalty.

Let's say you put $5,000 in a Roth IRA and that less than 5 years later, you have $5,300 in the account. If you were going to withdraw all of it early, you'd be looking at paying income tax on the $300 you earned, plus 10% penalty unless one of the IRS penalty exceptions was met. The original $5,000 that you contributed won't be subject to income tax or a penalty.

A Roth IRA conversion happens when you take money from one type of retirement account, such as a traditional IRA, and put it into a Roth IRA. If you do a Roth conversion, you must leave that money in the account for 5 years or pay a penalty unless an IRS penalty exception applies.

The money held in a traditional IRA hasn't been taxed yet. But when you convert it to a Roth IRA, you owe taxes on it immediately. If you use money from the traditional IRA to pay the taxes, you may be subject to a 10% penalty because those funds are not considered part of the Roth conversion. Figuring out whether a withdrawal is coming from a conversion or an original contribution is complicated. It's a good idea to talk with a financial advisor about your specific situation before withdrawing money so you know what the tax implications might be.

Moreover, when you convert to a Roth IRA, an additional 5-year waiting period begins. You need to leave the money you converted in the account for at least 5 years, unless the distribution meets one of the IRS penalty exceptions, or you could be charged the 10% penalty when you withdraw the conversion amount. This separate 5-year rule applies to each conversion you make.

If you're considering a Roth conversion, a financial advisor can help you decide if it may be a smart move if you expect to be subject to a higher marginal tax rate after the Tax Cuts and Jobs Act (TCJA) sunsets at the end of 2025. This means that you would pay taxes on your IRA money sooner, at potentially lower rates—while TCJA rates remain in effect—rather than at potentially higher rates if the TCJA sunsets and taxes revert to pre-TCJA levels.

In the event of an inherited Roth IRA, you still are required to pay taxes on earnings if you take them out within 5 years of the first deposit by the original owner. However, inherited IRAs are excluded from the additional 10% penalty.

Learn more about inheriting a Roth from:

• Your spouse
• A parent

It depends. For contributions, the IRS starts counting from the first day of the tax year that your first contribution applied to rather than the specific date you made the contribution. For instance, if you made your first contribution in February 2024 for the 2023 tax year, the 5 years would start counting on January 1, 2023, even though that was before you deposited the money. For conversions, the timer starts on the first day of the tax year in which you made the conversion. So if the conversion happened in February 2024, the 5 years would start counting on January 1, 2024.

You also don't have to follow the 5-year rule when you cancel a contribution. If you contribute to a Roth IRA, you can change your mind until the tax due date plus extensions for that year. Pulling out the money you contributed (plus the earnings on it) by this deadline cancels the contribution. It's like that contribution never happened, so the 5-year rule doesn't apply—however, you would need to count those earnings toward your income when you pay taxes and if you're under 59½ you'll have the 10% penalty on the earnings also.

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Creating a Roth IRA can make a big difference in your retirement savings. All future earnings are sheltered from taxes under current tax laws. If you meet a qualifying distribution event, the Roth IRA can provide truly tax-free growth potential.

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Thankfully, there are a few exceptions to the Roth IRA early withdrawal penalty rules. This makes it possible to withdraw money during times of need, when your options may be limited. Common exceptions to the 10% penalty include:

• Age 59½
• Withdrawing up to $10,000 for a first-time home purchase
• Disability
• Distributions paid to a beneficiary
• Funding health insurance premiums if you're unemployed
• Paying non-reimbursable medical expenses if they exceed 7.5% of your adjusted gross income
• Addressing an IRS tax levy
• Contributing to higher education expenses for either yourself or a family member

In addition to these exceptions, the Secure Act 2.0 created additional exceptions for early withdrawal in these situations:

• Anyone diagnosed with a terminal illness or medical problem that could cause death within 84 months or less has no withdrawal penalty if they pass away in that time frame or repay within three years.
• If the plan owner's residence is located in a federally declared disaster area and they experience disaster-related economic loss, they may withdraw up to $22,000 without penalty.
• Individuals experiencing domestic abuse may make hardship withdrawals of $10,000 or 50% of their vested balance, whichever is less. The withdrawal must be made within one year of the abuse.
• Workers under age 59½ may withdraw up to $1,000 per year without penalty for emergencies and can repay within three years.²
• Firefighters, corrections officers and other similar workers do not have a 10% penalty for distributions if they retire in the year they turn 50 or after and have at least 25 years of service with the employer.
• Beginning in 2026, it's possible to withdraw $2,500 per year without penalty for long-term care contract premiums.
  

Financial advisors can offer guidance on planning for retirement and incorporating a Roth IRA into your retirement strategy. So if you currently own a Roth IRA or if you're thinking about a Roth IRA conversion, you may want to connect with a financial advisor for help navigating these complex 5-year rules.