The Two 5-Year Roth Rules Explained

This episode explores the two different five-year rules for Roth IRAs instituted by the IRS to prevent people from abusing them.

The first five-year rule applies to earnings on Roth contributions and determines whether those distributions can be taken tax-free.

The second rule concerns Roth conversions and lets you know whether conversion principles can be accessed penalty-free.

David explains that, for the purposes of the five-year rule, the clock starts the first time any money is contributed to a Roth IRA by either contribution or conversion.

Once the five-year rule has been met, it’s been satisfied for good.

Remember: any recent contribution to a Roth IRA can count as qualified tax-free distributions, even if they’ve been in the account for less than five years.

David shares that Roth 401k plans have their own five-year rule, which is counted separately from a traditional Roth IRA.

In case you’re unable to make a Roth contribution due to income limitations, you can make a non-deductible contribution to an IRA and then do a Roth conversion.

Don’t forget that there aren’t income limits for IRA contributions.

Dave discusses the fact that “the ordering rules for Roth IRA stipulate that withdrawals of after-tax contributions are made first, then conversions, and finally, earnings.”

The Roth conversion five-year rule lets you know if you can access your converted principal penalty-free.

The Roth contribution five-year period, on the other hand, lets you know if you can access your Roth earnings tax-free.

Mentioned in this episode:

David’s books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

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