Roth IRAs are an appealing retirement product for a range of reasons: They allow for tax-free growth and qualified withdrawals and provide more flexibility than their traditional counterparts. Still, that flexibility has some limits, including the Roth IRA 5-year rule.

If you’re planning on opening a Roth account or recently have, understanding how the Roth IRA 5-year rule works can help you avoid unnecessary and costly taxes and penalties.

Roth IRA Overview

Though similar to traditional IRAs, Roth accounts have significant, defining features, including:

• Tax Structure: Contributions are made with after-tax dollars, and qualified withdrawals are tax-free. Funds grow tax-free while in the account.
• Contribution Limits: Roth and traditional IRAs share a common base contribution limit that can change annually. In 2024 and 2025, that contribution limit is $7,000 annually, with an additional $1,000 available to individuals 50 or older.  However, Roth IRAs have an additional layer of contribution guidance that can reduce or eliminate your allowed contribution. See “Income Limits” below.
• Income Limits. Roth IRA contributions may be decreased or eliminated based on your adjusted gross income (AGI) and tax-filing status.
  • Single/heads of household: Phased out starting at $150,000; eliminated over $165,000.
  • Married couples filing jointly: Phased out starting at $236,000; eliminated over $246,000.
  • Married filing individual: Eliminated over $10,000. The phase-out is between $0 – $10,000.

How Does the Roth IRA 5-Year Rule Work?

There are several ways the 5-year rule applies to IRA accounts, but most commonly, it refers to how you can access your earnings after opening and contributing to your first Roth IRA.

In this case, the Roth IRA 5-year rule mandates that a tax and/or penalties be applied to any withdrawal from earnings before the account has been open for at least five years. Withdrawals from contributions can be made at any time without tax or penalty.

The clock starts ticking after the first contribution is made and ends on January 1 of the year the account reaches its fifth anniversary.  For instance, if you open and contribute to a Roth IRA account on December 3, 2024, the account will reach the five-year mark on January 1, 2029.

Further, the clock only applies to the first contribution made to your first Roth IRA. If you open another Roth IRA in the future, the clock is not reset unless that account is funded via a Roth conversion.

Whether or not you pay taxes, a penalty, or both will depend on your age and the age of the account. Here are some common scenarios.

Withdrawal from earnings before age 59 ½

• Withdrawals from earnings before the five-year mark are subject to taxes and penalties.
• Withdrawals from earnings after the five-year mark are subject to an early withdrawal penalty but not taxes.

Withdraw from earnings after age 59 ½

• Withdrawals from earnings before the five-year mark are considered qualified and not subject to penalties, but taxes may apply.
• Withdrawals from earnings after the five-year mark are considered qualified and are not subject to taxes or penalties.

Early Withdrawal Taxes and Exceptions

If you make an early withdrawal from earnings before the account is five years old, you’ll likely need to pay taxes on that amount. However, there are circumstances under which you may not need to pay a penalty. This includes:

• Withdrawals from contributions. You can make a withdrawal from contributions at any time without penalty or taxes.
• Birth or adoption expenses, up to $5,000.
• Disaster recovery, up to $22,000 after an economic loss due to a federally declared disaster.
• Domestic abuse victim distribution, the lesser of 50% of the account or $10,000 paid by the spouse to the abused party.
• Emergency personal expenses, up to the lesser of $1,000 or vested account balance over $1,000 for personal or family emergency costs. Available once per calendar year.
• First-time homebuyers, up to $10,000.
• Unreimbursed medical expenses exceeding 7.5% of your AGI.
• Health insurance premiums are paid while you’re unemployed.
• Higher education expenses, such as tuition and fees.
• Total or permanent disability or death of the account holder.

Does the 5-Year Rule Impact Conversions, Transfers, and Rollovers?

If you’re transferring or rolling funds from one Roth account to another, you won’t have to worry about the 5-year rule as long as one of those Roth IRAs is at least 5 years old.

Conversions are treated a bit differently, however, and are subject to their own 5-year rule.

Each Roth conversion has its own 5-year rule. For instance, if you make one Roth conversion in 2023 and another in 2024, the first conversion will meet the 5-year requirement in 2028 and the second in 2029. Withdrawals made before that date will be subject to penalty.

If you’re 59 ½ or older, you can withdraw from the converted amount before five years, though you may need to pay taxes on any earnings from that amount if it hasn’t been five years since the conversion.

The 5-Year Rule and Inherited IRAs

In general, the 5-year rule for inherited IRAs stipulates that you can access the inherited funds tax and penalty-free as long as the original account was open for at least five years. If the account has not reached five years, you’ll likely need to pay taxes on any earnings withdrawal.

Further, if the original account owner’s account held converted funds, any withdrawal from those funds within 5 years will be subject to income tax.

Planning for Withdrawals

If you’re considering withdrawing from your Roth IRA and the 5-year rule may apply, it’s important to consider the potential tax obligations and penalties that the withdrawal may trigger. These tips can help you determine if a withdrawal is the right move and how to prepare for any negative impact.

Talk to a financial advisor

One of the best things you can do before withdrawing funds from your Roth IRA is to speak to an expert who can evaluate your financial situation, identify potentially negative consequences of the withdrawal, and work to chart a path forward.

Holdoff on conversions if you think you’ll need access to funds

If you plan to convert a Traditional IRA to a Roth IRA but think you’ll need access to that account within the next five years, you may want to hold off. When you complete a conversion, you’ll have to pay taxes on the amount moved from the Traditional IRA to the Roth IRA.

Once in the new Roth account, the funds will be subject to the 5-year rule. Accessing them prior will trigger an additional income tax and, if you’re under the age of 59 ½, an early withdrawal penalty.

Track contributions and earnings

You can withdraw from contributions tax and penalty-free at any time, so keeping track of your contributions allows you to determine how much you can withdraw before hitting earnings, which may be taxed and/or penalized.

Understanding the Roth IRA 5-year rule is critical to avoiding unnecessary penalties that can impact your earnings.

FAQs

When does the 5-year period begin?

The 5-year period begins as soon as you make your first Roth IRA contribution. The period ends on January 1 of the year in which the anniversary falls, not the actual date the initial contribution was made.

For instance, if you made your first Roth IRA contribution on October 20, 2022, the 5-year period would end on January 1, 2027, not October 20, 2027.

Does the 5-year rule apply to contributions as well as earnings?

The 5-year rule does not apply to contributions. If you have a Roth IRA, you can withdraw from contributions at any time without tax or penalty. Earnings, however, are subject to the 5-year rule.  Withdrawals from earnings before the 5-year mark may be subject to taxes and/or penalties depending on your age.

Do I need to be 59½ to withdraw Roth IRA earnings tax-free?

No, you do not need to be 59 ½ to avoid taxes on withdrawals from Roth IRA earnings, but there are some circumstances under which you may need to pay taxes, penalties, or both.

• If you are under 59 ½ and your Roth account has been open for at least five years, withdrawals from earnings will be subject to taxes unless certain criteria is met:

*You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.

*You become disabled or pass away.

• If you are under 59 ½ and your Roth account has been open for fewer than five years, then taxes and penalties will be applied.