{"id":676,"date":"2018-07-31T15:00:23","date_gmt":"2018-07-31T20:00:23","guid":{"rendered":"https:\/\/www.brandonrenfro.com\/?p=676"},"modified":"2022-07-14T14:40:13","modified_gmt":"2022-07-14T14:40:13","slug":"the-five-year-rules-of-roth-distributions","status":"publish","type":"post","link":"https:\/\/belongingwealth.com\/the-five-year-rules-of-roth-distributions\/","title":{"rendered":"The Five Year Rules of Roth Distributions"},"content":{"rendered":"\n
Roth IRA\u2019s are one of the most popular retirement accounts. Roth IRAs have many advantages over tax-deferred accounts, namely the ability to provide tax-free growth. The ability to provide tax-free growth is premised on making contributions with after-tax dollars. <\/span><\/p>\n\n\n\n As I\u2019m sure you are well aware, you must pay taxes on essentially each dollar you make. The Roth IRA allows you to pay that tax before you contribute. <\/span><\/p>\n\n\n\n\n\n\n\n Assume you make $100,000 and contribute $5,500 to an IRA. If that IRA is a Roth, you will owe income tax on the full $100,000 (ignoring all other tax implications). If it is a Traditional IRA you will only owe income tax on $94,500 because you can deduct the contribution.<\/span><\/p>\n\n\n\n This provides advantageous withdrawal options in addition to tax-free growth. Since you have already paid income tax on the contributions to a Roth IRA, you are allowed to withdraw your <\/span>contributions <\/b>at any time, for any reason, with no tax liability or early withdrawal penalty. Not so with a Traditional IRA.<\/span><\/p>\n\n\n\n The earnings in a Roth IRA however, in addition to early withdrawal penalties, are subject to the five year rule.<\/span><\/p>\n\n\n\n Most investors are <\/span>aware <\/b>of the Roth IRA five year rule, although few understand the details. In fact, there are actually multiple five year rules, each pertaining to a different circumstance.<\/span><\/p>\n\n\n\n I\u2019m going to explain the various five year rules and then apply them to an example.<\/span><\/p>\n\n\n\n\n\n As mentioned, you can withdraw Roth IRA contributions at any time without incurring an early withdrawal penalty or tax liability. <\/span><\/p>\n\n\n\n You must meet two conditions in order to withdraw earnings tax and penalty free. Meeting the two conditions makes the distribution a \u201cqualified distribution\u201d.<\/span><\/p>\n\n\n\n The first condition is that you must have held the Roth IRA for at least five years.<\/span><\/i><\/p>\n\n\n\n Second, you must be over 59&\u00bd, disabled, or a first-time homebuyer. Distributions made to the beneficiary of a deceased IRA owner also count.<\/span><\/i><\/p>\n\n\n\n Distributions that do not satisfy these conditions are \u201cnon-qualified distributions\u201d and are subject to income tax and early withdrawal penalties.<\/span><\/p>\n\n\n\n Satisfying the five year rule simply requires that you made a Roth contribution over five years ago. This is not a per-account or per-contribution rule. If you have made ANY Roth contributions to ANY Roth IRA that satisfy the five year rule then you have satisfied the five year rule for ALL contributions for ALL accounts.<\/span><\/p>\n\n\n\n The five year clock starts on January 1st of the year <\/span>for <\/b>which you make your first contribution. You can make contributions for a given year up until April 15th of the next year. You could make a contribution on April 15th for the preceding year, and the clock would start on January 1st of the preceding year.<\/span><\/p>\n\n\n\n You decide on March 5th of 2025 to make a Roth contribution for 2024. Assuming this is the first Roth IRA contribution you have ever made, your five year clock starts on January 1, 2024. You will satisfy five year rule on January 1, 2029.<\/span><\/i><\/p>\n\n\n\n Roth Conversions have a separate five year rule. This rule is quite different from the five year rule for contributions. <\/span><\/p>\n\n\n\n First, realize that you paid income tax on the conversion amount when you converted from a traditional retirement account. This means that you will not owe income tax a second time when you withdraw from the Roth IRA, regardless if you have met the five year rule or not. This is true whether the withdrawal is from principal or earnings. <\/span><\/p>\n\n\n\nFive Year Rule for Earnings on Roth Contributions<\/b><\/h2>\n\n\n\n
Satisfying the Five Year Rule<\/b><\/h2>\n\n\n\n
When Does the Five Year Clock Start?<\/b><\/h2>\n\n\n\n
Roth IRA Conversions<\/b><\/h2>\n\n\n\n