Two Five-Year Rules for Roth IRAs: Kiplinger Tax Letter

It’s vital to know when the five-year rule clock starts for tax-free and penalty-free earnings.

A piggy bank sitting next to a calculator has Roth IRA written on it in black marker.
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Roth IRAs are good retirement savings options. Although you can’t deduct contributions to a Roth IRA, the money inside the account grows tax-free. Payouts of earnings after age 59½ are generally not taxable. You can also withdraw your contributions at any time on a tax-free basis and without having to pay a penalty. Payouts of earnings before age 59½ are hit with a 10% additional tax or penalty. 

But be sure you know the five-year rules. Failing to comply with the rules can result in a surprise federal tax bill. They can be complicated, but we break them both down for you with examples. 

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 1. Five-Year Rule: Roth IRA contributions

The first rule applies to Roth IRA contributions and whether distributed earnings are tax-free to you.

Payouts of earnings after age 59½ aren’t taxed if at least five tax years have passed since the owner first contributed to a Roth IRA. The five-year clock starts the first time money is deposited into any Roth IRA that you own, through either a contribution or a conversion from a traditional IRA. The clock doesn’t restart for later Roth payins or for newly opened Roth IRA accounts. 

Here are two examples that illustrate the effect of this first five-year rule. 

  • Scenario 1: You are age 61 and you funded your first Roth IRA three years ago. In 2024, you take a distribution. You will be taxed on the earnings in the account because it’s been less than five years since you first contributed to the Roth IRA.
  • Scenario 2: You’ve owned a Roth IRA since 2014. In 2022, you opened and funded a second Roth IRA. Because you funded your first Roth in 2014, you needn’t wait five years to take money from your second Roth for the earnings to be tax-free, provided you are at least age 59½ at the time of the distribution.  

 2. Five-Year Rule: Roth IRA conversions

The second rule applies specifically to Roth IRA conversions and whether the 10% early distribution penalty hits pre-age-59½ payouts. 

This five-year rule doesn’t apply to new contributions to Roth IRAs but to conversions of pre-tax income from traditional IRAs to Roths. Under this rule, if someone under age 59½ does a Roth conversion, and later takes a distribution within five years of the conversion and before turning age 59½, then the amount of conversion principal that is withdrawn is hit with the 10% early distribution penalty. Once you turn 59½, you needn’t worry about this five-year rule, even if you take a payout before your conversion meets the five-year period. For example, there’s no 10% penalty if you do a Roth IRA conversion at age 58 and withdraw funds two years later at age 60. (However, based on the circumstances, the first five-year rule may apply to tax the post-conversion earnings).

Under this rule, each conversion has its own separate five-year period, which differs significantly from the first five-year rule discussed. For instance, if you do multiple Roth IRA conversions, there will be multiple five-year time periods, even if each conversion is done into the same Roth IRA account you owned for years. 

Let’s explain this second five-year rule with an example. Say you are 51 and convert your traditional IRA into a Roth IRA that you have had for many years. You will be taxed on the converted amount. Four years later, you liquidate the Roth. Your post-conversion earnings will be subject to ordinary income tax rates and the 10% penalty because you are not age 59½ at the time of the distribution. Additionally, your converted principal will also be hit with the 10% penalty.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe. 

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Joy Taylor
Editor, The Kiplinger Tax Letter

Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits The Kiplinger Tax Letter and contributes federal tax and retirement stories to and Kiplinger’s Retirement Report. Her articles have been picked up by the Washington Post and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments.