It's also important to remember that if you are taxed on distributions, you will be taxed only on gains. You can withdraw money you contributed to the account tax-free at any time since you made contributions with after-tax funds.
The five-year rule for initial Roth IRA contributions
To take tax-free distributions from a Roth IRA, you must not begin taking money out until at least five years have passed from the time you made your first Roth IRA contribution.
However, the clock doesn't start ticking on the day you put the money into your account. Instead it begins on the first day of the tax year in which you made your contribution. If you make your contribution on April 10, 2025, but designate it as a contribution for the 2024 tax year, then the clock starts ticking on Jan. 1, 2024, and the five-year period ends January 1, 2029.
The five-year rule supersedes other rules. That means that if you have met other requirements, but you did not make your contribution more than five years ago, you cannot take a tax-free distribution.
The five-year rule for Roth conversions
If you converted a traditional IRA or 401(k) to a Roth account, a different five-year rule applies.
If you withdraw money from a converted traditional account and you aren't yet 59 1/2, you will have to pay the 10% penalty for all early withdrawals. This includes paying the penalty on the amount that was converted, even though you were already taxed on the money when you did the conversion.
The five-year clock restarts with any new conversion that you do. Like other five-year rules, it starts ticking on Jan. 1 of the year you do the conversion.
It is important to understand both of these five-year rules so you can be sure you make qualified distributions and don't lose the tax break for Roth accounts. After all, you have worked hard to earn your retirement nest egg, and the last thing you want to see is the government eating into your distributions when you need them most.
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