What is the Roth IRA 5-year rule? Important guidelines for withdrawing IRA earnings

What is the Roth IRA 5-year rule? Important guidelines for withdrawing IRA earnings
Younger investors can be heavily penalized for Roth IRA withdrawals if they don't abide by the 5-year rule.Korrawin Khanta / EyeEm/Getty Images
  • The Roth IRA 5-year rule refers to a waiting period imposed on certain types of account withdrawals.
  • The 5-year rule applies in three instances: withdrawing account earnings, converting a traditional IRA to a Roth, and inheriting a Roth IRA.
  • Unless you qualify for an exception, you're liable for income taxes and penalties if you violate the 5-year rule.

Roth IRAs offer significant tax breaks: The money grows tax-free within the account, and you don't owe income taxes when you take it out. But, as with most tax-advantaged vehicles, there are strings attached.

In the case of Roths, it's called the 5-year rule, and it applies to account withdrawals, or distributions as the IRS calls them. If you want to keep your distributions free and clear of taxes and tax penalties, you need to understand its ins and outs.

Technically speaking, three different 5-year rules apply to Roth IRAs. Here's what you need to know about each.

1. The 5-year rule for withdrawing earnings

First, a quick Roth refresher. Roth IRAs are individual retirement accounts that you fund with after-tax dollars. That means you don't get a tax deduction for contributions when you make them, but then you don't incur taxes on distributions when you take them (the opposite of the way traditional IRAs work).

At least, that's the general rule. But a key thing you need to know about withdrawing money from a Roth IRA is that there's a difference between taking out contributions you made to the account and taking out the account earnings — that is, any interest, capital gains, or other income generated by your investments.


You can withdraw sums equal to your contributions from a Roth IRA any time, tax- and penalty-free. But earnings are more complicated.

The 5-year rule imposes a waiting period on them. It states the Roth IRA has to be at least five years old before you can withdraw any of its earnings. Even then, you may have to pay taxes and/or penalties (generally 10% of the distributed sum) depending on your age and how long you've held the account.

Roth IRA withdrawals if you're under 59½

Since the IRS wants you to save Roth IRA funds for your retirement, it frowns on you withdrawing them too early. It defines "too early" as age 59½. In general, if you're younger than that, you will have to pay income taxes and the 10% early withdrawal penalty on any earnings you pull out of the account.

However, there are exceptions. They include:

  • You use the money (up to $10,000) to buy your first home
  • You use the money to pay for education expenses
  • You use the money to pay for expenses relating to a birth or adoption
  • You become disabled or pass away
  • You use the money to pay for unreimbursed medical expenses/health insurance premiums while unemployed
  • You take distributions in substantially equal periodic payments

Let's say you do meet one of these exceptions. Here's where the 5-year rule really comes into play.

  • If you're under age 59½ and you've had your Roth IRA open less than five years, you avoid that 10% penalty. You still owe income taxes in the earnings, though.
  • If you're under age 59½ and have had the account for five years or more, you avoid paying both taxes and penalties.

Roth IRA withdrawals if you're 59½ or older

If you've passed the magic age of 59½, things loosen up considerably. But not completely.

If you have had your Roth IRA for more than five years, you can withdraw earnings from your account for any reason without paying taxes or penalties.

If you've had the account for less than five years, the earnings portion of the withdrawal is taxable, but you don't have to pay penalties.

2. The 5-year rule for converting a Traditional IRA to a Roth IRA

The second 5-year rule applies only to funds that are part of a Roth conversion. A Roth conversion is when you roll over money from a Traditional IRA into a Roth IRA. You must pay income taxes on the rolled-over, or "converted," amount in the year you do the Roth conversion. That's why people usually only do a Roth conversion if:

  • They believe their tax bracket will be higher in retirement. Paying taxes on the conversion at their current tax rate is preferable to paying a higher rate later.
  • Their income is lower than usual this year. If their taxable income is lower than normal this year, they can convert some funds into a Roth with a lower tax impact.

The 5-year rule on Roth conversions requires you to wait five years before withdrawing any converted balances — contributions or earnings — regardless of your age. If you take money out before the five years is up, you'll have to pay a 10% penalty when you file your tax return.


One bright spot: The clock starts ticking on the first day of the year you do the conversion, no matter what date the conversion actually happened. For example, you could execute the conversion on Dec. 15, 2020, and the five years would be up on Jan. 1, 2025.

3. The 5-year rule for inherited Roth IRAs

The final 5-year rule applies to inherited Roth IRAs. Roth IRA beneficiaries can withdraw contributions from an inherited Roth account at any time (in fact, they're required to). But to withdraw earnings tax-free, the account must have been open for at least five years when the original account-holder died.

If the account hasn't been open that long, there are a few options:

  • Disclaim the inherited assets. You can choose not to accept the funds if you don't need the money or don't want to deal with the tax consequences.
  • Withdraw the money in a lump sum. You'll have to pay taxes on the earnings portion of the account all at once, but this might be better if you're in a low bracket now.
  • Withdraw funds annually based on your life expectancy. This option is only available to surviving spouses, minor children of the account holder, disabled or chronically ill people, and beneficiaries who are less than 10 years younger than the deceased (for example, a sibling). The beneficiary's life expectancy is based on the IRS Single Life Expectancy Table.
  • Roll the inherited funds into your own Roth IRA or a new Roth IRA account. This option is only available to surviving spouses.
  • Delay withdrawals. You can leave the money in the account until the 5-year mark has passed. The Setting Every Community Up for Retirement Enhancement (SECURE) Act mandates that, for most beneficiaries, inherited IRAs must be emptied within a decade. The beneficiary owes a 50% penalty on any assets left in the account at the end of the 10th year.

The financial takeaway

Roth IRAs can be an excellent source of tax-free income, but it's important to understand the nuances of the withdrawal rules — particularly the 5-year rule — in all its permutations. Flouting the rule can be costly, especially if you're under 59½. So plan carefully — otherwise, you can wind up owing avoidable taxes and penalties.

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