The 5-Year Rule: What You Need to Know About Roth IRA Withdrawals

When it comes to tax-free income in retirement, the Roth IRA is one of the most powerful tools available. But before you start withdrawing your hard-earned savings, there’s a critical rule you need to understand: the Roth IRA 5-year rule.

This rule can impact whether your withdrawals are tax-free or subject to taxes and penalties, even if you’re over age 59½. Many investors overlook it—until it’s too late.

In this post, we’ll break down what the 5-year rule is, how it applies in different scenarios, and how to avoid costly mistakes when withdrawing from your Roth IRA.

💡 What Is the Roth IRA 5-Year Rule?

The Roth IRA 5-year rule states that for your earnings to be withdrawn tax-free, your Roth IRA must have been open for at least five years. This "aging" period starts on January 1 of the tax year in which you made your first contribution—not when you made the contribution itself.

📝 Example:
If you opened and contributed to your Roth IRA in July 2022, your 5-year clock starts on January 1, 2022, and you will meet the rule on January 1, 2027.

🔍 Why the 5-Year Rule Matters

Not all Roth IRA withdrawals are created equal. Contributions, earnings, conversions, and inherited accounts each have different rules attached—and that’s where the 5-year rule gets complex.

To keep it simple, let’s look at three major scenarios where the 5-year rule applies:

1. Qualified Distributions (Earnings)

For your Roth IRA earnings to be tax-free, two things must be true:

1. You must be at least 59½ years old, and

2. Your Roth IRA must have been open for at least 5 years
   
   

📌 If both conditions are met, you can withdraw contributions and earnings tax- and penalty-free.

✅ Result: No tax. No penalty. You win.

2. Non-Qualified Distributions (Earnings Before 5 Years or Before Age 59½)

If you withdraw earnings before the 5-year period ends or before you reach age 59½, your withdrawal could be:

• Taxable

• Subject to a 10% early withdrawal penalty

However, there are exceptions to the penalty, including:

• Disability

• First-time home purchase (up to $10,000)

• Qualified education expenses

• Medical expenses over 7.5% of AGI

• Substantially equal periodic payments (SEPPs)
  
  

🚨 Reminder: Even if you avoid the penalty, you’ll still owe income tax on the earnings unless you meet the 5-year and age rules.

3. Roth IRA Conversions

Conversions have their own separate 5-year clock—one for each conversion.

Even if your Roth IRA is older than five years, converted funds must sit for five years before you can withdraw them penalty-free (unless you’re 59½ or older).

📝 Example:
You converted $20,000 from a Traditional IRA to a Roth IRA in 2023. Even if your original Roth IRA was opened in 2015, you must wait until 2028 to withdraw that converted amount penalty-free, unless you qualify for an exception or are over age 59½.

🔁 The Order of Roth IRA Withdrawals Matters

According to IRS rules, Roth IRA withdrawals are taken in this order:

1. Contributions (always tax- and penalty-free)

2. Conversions (penalty may apply if withdrawn before 5 years or age 59½)

3. Earnings (subject to the 5-year rule and age test)

✅ Pro Tip: Because contributions come out first, you can always access the money you put in—without tax or penalty.

⚠️ Mistakes to Avoid with the Roth IRA 5-Year Rule

• Assuming all Roth IRAs share the same clock: They don’t. Each conversion starts its own 5-year timer.

• Withdrawing earnings too early: You may owe both tax and a 10% penalty.

• Failing to track your contribution date: This can lead to miscalculating your 5-year window and triggering penalties.

📊 How a Financial Advisor Can Help

Understanding Roth IRA withdrawal rules can be confusing—especially when juggling multiple contributions, conversions, or retirement income sources. A financial advisor can help you:

• Track your 5-year rule timelines

• Plan withdrawals to avoid penalties

• Optimize your tax-free income strategy in retirement

• Coordinate Roth withdrawals with Social Security and other income sources

✨ What It Feels Like to Get It Right

Imagine having the confidence that every dollar you withdraw is 100% tax-free—because you timed it perfectly. No stress. No fear of penalties. Just pure, strategic income that supports your retirement lifestyle.

That’s the power of knowing the 5-year rule—and having a smart withdrawal plan built with your advisor.

📌 Next Step: Don’t Let the IRS Take a Bigger Cut Than Necessary

Let us help you build a tax-smart retirement strategy that keeps more money in your pocket—now and in the future.

Book a consultation today and start planning your Roth IRA withdrawals the right way.