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Roth IRAs: The Five-Year Rule

Michael Ringler


An individual retirement account (IRA) is one of the most popular ways to save for retirement, and about as easy to understand and set up. But there are also a host of rules that apply to IRAs, some of which can be confusing. And because there are so many—and the IRS continues to add new rules ad nauseam—it can be easy to fall into traps that compromise your reasons for opening an IRA account.

IRAs are personal retirement savings accounts that offer tax benefits and a wide range of investment options. Many investors use IRAs as their primary source of retirement savings, typically either a Traditional IRA or a Roth IRA. The most significant difference between the two is that contributions to the Traditional IRA are made in pre-tax dollars and contributions to the Roth are in dollars that have already been taxed. When you draw dollars from a Traditional IRA in retirement—you must wait until age 59 ½ to avoid a 10 percent penalty on withdrawals—you pay taxes on the withdrawals at your ordinary income tax rate at that time. The theory is that your tax rate will be lower in retirement than during your working years. The advantages of the Roth include tax-free withdrawals. The added advantage is that the earnings that have been accumulating on the investments in your Roth also come out tax-free.

Still, there are caveats. One example is the five-year rule that accompanies a Roth IRA. The IRS rule dictates that you must wait at least five years after opening a Roth for “qualifying” withdrawals to be tax-free and penalty-free, the “qualifications” being you’ve waited the five years and you’ve reached age 59 ½.

Of course there are nuances. Withdrawals from a Roth IRA that are not qualified distributions are includable in income to the extent they are attributed to earnings. However, Roth IRA distributions are treated first as a return of contributions, and all of an individual’s Roth IRAs are treated as a single Roth IRA for this purpose [IRC Sec. 408A(d)(4)]. Contributions include amounts converted, or rolled over, from traditional IRAs, but these conversion contributions are considered only after regular annual Roth IRA contributions. As well, distributions of those converted amounts are considered withdrawn on a first-in, first-out (FIFO) basis.

You can make withdrawals prior to five years up to the amount you have contributed to a Roth account. Regular contributions can be withdrawn tax-free and penalty-free at any time, even if the five-year waiting period has not expired and you have yet turned 59 ½. For example, you open an account with $5,000 in after-tax dollars in 2020, but decide you need at least some of that money in 2023. The investments in the account have added earnings of $1,500 to your account value. You can withdraw up to the $5,000 you have contributed without tax or penalty, but none of the gain until the five-year anniversary, and then only if you have reached the age of 59 ½.

Inherited IRAs come with their own set of rules, but they are also subject to the five-year wait for withdrawals from the time the account was opened by the original owner. That is, they inherit the five-year wait along with the Roth IRA assets. There are exceptions relative to withdrawals from IRAs inherited by spouses, minor children, and disabled individuals, but even in those cases, the five-year rule applies.

Roth IRAs are highly recommended as ways to invest for retirement because of the many advantages they offer. You can open an account for any amount, as little as a dollar to start the five-year period, so a Roth IRA is a great way for young people to begin saving early for retirement. No matter how much they can afford to set aside, they will benefit considerably from all those years of tax-free earnings.

Because the IRS frequently changes and adds new rules for retirement savings, it is wise, as with any investment vehicle, to consider all the rules before investing. We can help. For more information on Roth IRAs and other ways to save for retirement, or to schedule a meeting with an HBKS financial advisor, call (716) 672-7800, or email me at


The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

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