how the 5 year rule works
you can withdraw contributions to a roth ira at any time however to withdraw earnings from your roth without owing taxes or penalties you have to have held the account for at least five years which is the 5 year rule old you must also be at least 59 the 5 year rule only limits when you can withdraw your earnings from your roth ira not your deposits your earnings include the interest dividends capital gains and any other income your roth investments have accumulated you can withdraw contributions at any time because they were made with money that has already be subject to income tax 1the time period for the 5 year rule starts with your first contribution to a roth ira including if it is from conversion from a traditional ira another type of 5 year rule applies when you convert a traditional ira to a roth ira you ll need to wait five years to do with with no penalties each conversion has its own five year period but irs rules stipulate the oldest conversions are withdrawn first the order of withdrawals for roth iras are contributions conversions and then earnings if you break the 5 year rule by withdrawing earnings or converting funds from a roth ira too soon your withdrawal will be subject to taxes at your current ordinary income tax rate plus a 10 penalty 1this can be a large additional tax if you were in the 24 tax bracket you would lose 34 of your roth ira s earnings evaporate in taxes and penalties because you withdrew the earnings before five years inherited iras vs traditional iras vs roth irasthe 5 year rule applies to one of several options when beneficiaries take distributions from an inherited ira whether it s a traditional ira or a roth ira heirs are required to take annual allocations from the account known as required minimum distributions rmds beneficiaries who inherit an ira can take distributions of either contributions or earnings without a penalty however this distribution may trigger a taxable event depending upon the type of ira you inherit and your relationship to the deceased if the ira wasn t held for five tax years by the original owner and you take a distribution any earnings or interest on the contribution will be subject to tax 2with the passage of the secure act starting in 2020 non spousal beneficiaries of an ira must withdraw all funds from the account within 10 years of the original owner s death before the secure act beneficiaries could stretch out the distribution period and delay paying taxes on distributions an estate planning strategy known as a stretch ira spouses beneficiaries who are not 10 years younger than the decedent a minor child of the plan participant a disabled person or a chronically ill person have more flexibility under the secure act they can transfer the existing ira into their name and defer distributions 21under the 5 year rule the beneficiary of a traditional ira will not face the usual 10 withdrawal penalty on any distribution even if they make it before they are 59 income taxes will be due however on the funds at the beneficiary s regular tax rate the new owner of the ira may roll all funds over into another account under their name cash it out in a lump sum or a combination within the five year window recipients may continue to contribute to the inherited ira account when those five years are up however the beneficiary would have to withdraw all assets a roth ira is also subject to a five year inheritance rule the beneficiary must liquidate the entire value of the inherited ira by dec 31 of the fifth year after the owner s death no rmds are required during this five year period if the beneficiary is taking distributions from an inherited roth ira that has existed for longer than five years all distributions will be tax free further the tax free distribution may be made up of earnings or principal for beneficiaries of a fund that hasn t met that five year mark withdrawals of earnings are taxable but the principal remains untaxed explore all you options with taking distributions from an inherited roth ira choose one that best suits your situation frequently asked questions faqs 