Roth IRAs and the Five-Year Rule

By on August 23, 2018
Categories: RETIREMENT

One of the most attractive aspects of the Roth Individual Retirement Account is that you can take withdrawals tax-free.

The more the Roth IRA grows over time, the better your eventual tax break.

There are rules, however, that dictate who is eligible to withdraw from a Roth without triggering taxes.

One key requirement for tax-free withdrawals is the five-year rule. Investors must have funded their Roth IRA for five years before tapping into their account without tax consequences.

In most cases, the investor must also be at least 59 ½ when a distribution happens. Exceptions to this rule include taking the money out due to a disability and being a first-time homebuyer.

What many investors don’t appreciate is that the five-year rule can be whittled down to a smaller waiting period.

Facts About the Five-Year Rule

Here are some things you should know about the five-year rule:

1. The five-year requirement starts on January 1 of the year you make your first Roth IRA contribution. So if you make your initial contribution to a Roth on Dec. 31, 2018, the five-year clock would start on January 1, 2018.

2. You can get the five-year requirement to start even earlier if you make a Roth contribution for what can be called a carryback contribution.

Here is what I mean:  let’s say you are filing your taxes on April 15, 2019. Through that date you can make a Roth contribution for the 2018 tax year. So contributing to a 2018 Roth in April 2019 would set the five-year Roth clock to Jan. 1, 2018.

3. When spouses inherit an IRA, they can treat it as their own. If the spouse already has a Roth, he/she can use whichever account is older to satisfy the five-year requirement.


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