Roth IRA 5 Year Rule on Withdrawals

Roth IRA’s have become enormously popular in recent years especially with the conversion of traditional IRA’s to Roth’s.

Now that it seems as if nearly everyone has a Roth, let’s take a look at the rule’s withdrawals.  Sooner or later, we’ll all be doing it.

Before we get started, I recommend that you get advice from your CPA or tax advisor before taking any withdrawals from your Roth IRA. The rules on this are fairly complex and your individual circumstances will have a material affect on the outcome.

General rules on Roth IRA withdrawals

The primary advantage of Roth IRA’s is that you can withdraw money from the plan without having to pay taxes on the amount distributed. But this provision has two parts:

Contributions. Since there is no tax deduction when you contribute to a Roth IRA, there is no tax (or penalties) on the withdrawal of those funds even if you do so before reaching age 59 1/2. This is the simple part.

Earnings. The rules are very different in regard to any money you earn on your contributions to the plan. Since earnings accumulate tax free from the day you start receiving them, there will be tax consequences on early withdrawals.

The general rule is that you can withdraw earnings tax and penalty free if a) you have the plan for at least five years and are taking a qualified distribution, or b) you are at least 59 ½. However if you withdraw earnings prior to either event, the distribution will be fully taxable and subject to the IRS 10% penalty for early withdrawal of retirement funds.

Roth 5 Year Rule on Withdrawals

Our five years isn’t the IRS’s five years

There’s an important “glitch” in the five year rule.

Roth IRA 5 year rule withdrawals

It’s important to understand the 5 year rule on Roth IRA withdrawals.

According to the IRS, the five year waiting period begins January 1st of the tax year for which the Roth IRA contribution is made. As with all IRA’s you can make a contribution for a given tax year as late as the filing date (generally April 15th) of the following calendar year.

If you made your Roth contribution on April 15th of 2012 for the 2011 tax year, the IRS considers the plans start date for the purposes of the five year rule to be January 1 of 2011. It’s as if you’ve fast forwarded the start of the five year waiting period by 15 ½ months (January 1, 2011 through April 15, 2012). So if you’re counting down on the five years, you will only have to wait three years and eight and a half months in order to satisfy the waiting period.

The waiting period is based on the first contribution made, not on subsequent contributions, which is to say the age of your account—according to the IRS at least—is not affected by additional contributions.

There is a single waiting period, not a new one that pertains to each contribution.

The same goes for rollovers from one Roth IRA to another, the five year waiting period starts with the initial Roth account, and is not affected by the rollover date.

Just keep in mind, that you will also have to attain age 59 ½ before the waiting period is up in order to avoid taxes and penalties on the withdrawal.

Special rules for early distribution of Roth conversions. If you take distributions of a Roth IRA that is a conversion from a traditional IRA or other qualified plan, the penalties are stiffer.

Not only will you have to add the distribution of the earnings portion to your regular income for that year and pay the 10% early withdrawal penalty, but you will also be subject to the 10% additional tax on early distributions. That will be the regular tax liability plus 20%. And the penalty applies to each individual rollover based on when it was made. (I think they’re trying to tell us something with this.)

Another calendar glitch that works in your favor

Under current regulations, the IRS allows you to make a contribution to a Roth IRA of up to $5,000 ($6,000 if you’re 50 or older) per year, but if you’re just starting your plan, you can make more than one contribution in one calendar year.

Since the IRS allows you to make a contribution as late as April 15th of the following year you could make contributions to two tax years in the same calendar year.

Let’s say you’re new to the Roth world, and you want to fast forward your contributions.

You can make a contribution of $5,000 for the previous tax year if you do it by April 15th of the current year, then make another $5,000 for the current calendar year.  Just make sure you indicate what year your contribution is for when you make your contribution (you should be able to do this with the brokerage you use).

Now going forward, you wouldn’t be able to do more than a single contribution to any future tax years because you’ve already doubled up in the first calendar year. But you’d be starting your Roth account with $10,000 coming right out of the starting gate. And if you’re married, your spouse could do the same, giving you a combined total of $20,000.

That’s an excellent start to a plan that didn’t exist just a year earlier!

Source: IRS Publication 590

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Published or updated September 24, 2012.


  1. I don’t plan on withdrawing prior to retirement but if I retire before the correct age I definitely will be sure not to touch the earnings. I hope I have a taxable account by then though so my Roth can continue growing tax free.

  2. Is anybody able to explain why this rule exists? Honestly it just creates confusion for those unfamiliar with roth IRAs.

  3. Just like the government to make things unnecessarily complicated.

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