Roth IRA 5 Year Rules – EXPLAINED!

In my “Reasons To Open a Roth IRA” video series…
I did a video explaining the 5 year rules of Roth IRAs. See here. I had SO many questions on that I had to do a second looking directly at the tax law in the Internal Revenue Code (IRC). See here.

Believe it or not, sometimes it’s actually easier to explain via the written word than through visual media so I will attempt to do that in this email.

First and foremost, you must understand there are TWO ways you can fund a Roth:
1. Contributions – i.e., you write a check and send it to your Roth IRA custodian (Vanguard, Schwab, USAA, etc.)
2. Conversions – You have money in a tax deferred account, an IRA, 401k, 403b, TSP and you want to move that money into your Roth.


For a contributory Roth, you have access to your contributions at ANYTIME. Literally ANYTIME you want you can withdraw your principal.

So, say for the last 3 years you’ve contributed $15k to your Roth IRA. Your account is now worth $20k. Your daughter needs braces and you don’t have the cash anywhere else. You call up your custodian and say “send me a check for $6k.” That money is yours tax and penalty free, regardless of how old you are, regardless of how long ago you made the contributions. After you take that distribution you have $14k in your Roth.

Two years goes by, you’ve made no further contributions, now your Roth is worth $16k. However, you need to get a car for your kid to drive. You’re looking at a 2015 Jetta with 40k miles on it. Reliable car. And the price is right at $14k.

So you tap into your Roth to pay for the vehicle. In this case, $9k of your distribution will be free of ANY TAX or PENALTY because that was the remaining amount of your contributions. But $5k, which is your growth, will be subject to a 10% PENALTY if you are under 59.5. ALSO, that $5k will be subject to TAX because you haven’t had the account for 5 years.

Remember, for a contributory Roth, if you are under 59.5 distributions of gains will ALWAYS be taxed AND penalized. ALWAYS.

Distributions of your contributions will NEVER be taxed or penalized.

Distributions of gains if you are OVER 59.5 will NEVER be penalized.

Distributions of gains if you are OVER 59.5 will be taxed if you have not had the account for over 5 years.


When you move money from an IRA/401k/403b/TSP to a Roth it’s called a conversion. You pay tax on the converted amount; no penalty, just income tax.

But unlike the contributory Roth, the conversion Roth has different 5 year rules. Let’s start with you being over 59.5

In this case you ALWAYS have access to your conversion amount (principal) without taxes or penalties. But you do not have access to any gains unless this specific conversion amount was done more than 5 years ago.

Example, Joe is 60 years old. He moves $25k from his IRA to his Roth. When Joe is 63 his account has grown to $30k. He has access to the $25k without penalty or tax. He will pay tax on the $5k should he take a distribution because this SPECIFIC Roth conversion has not been open for more than 5 years. But he will NOT pay a penalty on the $5k should he decide to take it out…only taxes.

When Joe is 66 he does ANOTHER $25k Roth conversion. Same rules apply as above but now the FIRST conversion he did, the entirety of it, is free and clear for him to do what he wants, with no taxes or penalties.

Just remember, once you’re over 59.5 you no longer have to worry about ANY penalties for taking distributions from your Roth. At this stage it’s only taxes you need to be concerned with. If the account has not been opened for 5 years, you will pay tax on your GAINS, but again, ONLY your gains.

Okay, now Jane is 50 and she does a Roth conversion of 25k.

When she is 53 she considers taking $10k out. That $10k automatically comes from principal so it’s not taxed…but it is penalized because she is under 59.5 and the the account has not been opened 5 years. Fun, right???

In this case she decides to leave the account alone and not touch anything because she doesn’t want to pay the 10% penalty.

Fast forward 3 more years when she is 56. Now, that account is worth $30k. $25k is her principal and $5k is growth. She now has unlimited access to the $25k, her initial converted amount without penalty. But if she touches the $5k of growth she will have BOTH taxes and penalties because she is under 59.5.

All right, to wrap this up as cleanly as I can.

For conversion Roth, just remember if you are
… Under 59.5 TAX and PENALTY on any gains.
… Over 59.5 NO penalty on anything but there will be tax if the account has NOT been opened for 5 years.

… Under 59.5 No tax but PENALTY on principal if the converted amount has not been opened for 5 years.

It’s confusing, no two ways around that. But when it comes to your specific situation the first thing you should do is figure where on the 59.5 age bracket you are. Over 59.5 you know there are NO PENALTIES. Start there.

Under 59.5, what type of Roth is it, contributory or conversion? How long has it been opened, five years or less? Start there.

Clear as mud, no?

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