Roth IRA Five-Year Rules: What You Need to Know

Roth IRAs can be a great way to save for retirement, but there are a couple of five-year rules that Roth IRA owners need to understand. And while they sound similar, they apply to two very different situations. The first rule applies to many more Roth IRA owners and determines whether your earnings can be withdrawn tax-free. The second rule is more specific and applies to certain Roth conversions and early withdrawals.

Let's break down the difference.

Rule #1: The Five-Year Rule for Tax-Free Roth Earnings

The first five-year rule comes into play when determining whether the earnings portion of a Roth IRA distribution can be withdrawn tax-free. Generally, if you're at least 59½ and at least five tax years have passed since you first funded a Roth IRA, your qualified Roth IRA withdrawals can be tax-free. Here's something important to remember: your five-year clock starts January 1 of the tax year in which you first contribute to, convert money into, or roll money into a Roth IRA.

Once that clock starts, it doesn't restart when you:

• Make additional contributions

• Open another Roth IRA

• Complete additional Roth conversions

Here are a few examples:

Scenario 1: You're 63 and funded your first Roth IRA two years ago. You take a distribution in 2026. Because your five-year period hasn't been met yet, the earnings portion of your withdrawal may be taxable.

Scenario 2: You're 64 and made your first Roth IRA contribution in November 2021. You take a distribution in September 2026. Because your five-year clock began January 1, 2021, you've met the five-year requirement. Assuming the other requirements for a qualified distribution are met, the withdrawal can be tax-free.

Scenario 3: You're 71 and first funded a Roth IRA through a conversion in 2017. You then completed additional Roth conversions from 2018 through 2025 and plan to do another one in 2026. Your five-year clock for this rule started January 1, 2017. The later conversions don't restart the clock.

Rule #2: The Five-Year Rule for Roth Conversions

The second five-year rule is much less common and works differently.

This rule applies to Roth conversions and early distributions before age 59½. It determines whether the 10% additional tax for early withdrawals could apply to converted amounts.

For example, imagine you're under 59½ and convert money from a traditional IRA to a Roth IRA. You generally don't pay the 10% early-withdrawal penalty simply because you completed the conversion. However, if you take money from that converted amount within five years of the conversion and you're still under 59½, the 10% additional tax may apply.

This rule is essentially designed to prevent someone from using a Roth conversion to get around the 10% early-withdrawal penalty. Without this rule, someone could convert money to a Roth and immediately withdraw it without facing the penalty that would have applied if they had simply withdrawn the money directly from the traditional IRA.

Each Roth Conversion Has Its Own Five-Year Clock

This is one of the biggest differences between the two rules.

With the first five-year rule, you generally have one five-year clock that begins when you first fund a Roth IRA. It doesn't restart every time you make another contribution or conversion.

With the second five-year rule, each Roth conversion has its own five-year period. So, if you make Roth conversions in 2024, 2025, and 2026, each conversion has its own five-year clock for purposes of the early-distribution penalty. And yes, this is true even if all of those conversions went into the same Roth IRA that you've had for years.

One Important Exception

The second five-year rule applies to distributions taken before age 59½. Once you're 59½ or older, this particular five-year conversion rule no longer creates the 10% early-distribution penalty.

Bottom Line

The two Roth IRA five-year rules may sound almost identical, but they serve different purposes:

Five-Year Rule #1: Determines whether you meet the five-year requirement for tax-free qualified Roth IRA earnings.

Five-Year Rule #2: Applies to Roth conversions and determines whether the 10% early-distribution penalty could apply when converted amounts are withdrawn before age 59½.

Understanding which five-year rule applies to your situation can help you avoid an unexpected tax bill or penalty. If you're considering a Roth conversion or withdrawal, it's always a good idea to review the rules carefully or consult with a qualified tax professional.