5 Things You Need to Know About the Roth IRA Five-Year Rules
Here are 5 things every Roth IRA owner needs to know about the five-year rules.
1. Yes, there are two five-year rules
One thing that makes the Roth IRA distribution rules so confusing is the fact that there are actually two five-year rules you need to understand to properly execute tax- and penalty-free Roth IRA distributions. One five-year rule applies for tax-free distributions of earnings, and another applies for penalty-free distributions of converted funds.
2. The five-year rule for tax-free distributions of earnings starts with your first Roth IRA conversion or contribution and never restarts
This rule applies in the aggregate to all your Roth IRAs. It also is not necessarily five full years. For example, if you make a prior-year Roth IRA contribution in March of 2026 for 2025, your five-year clock for tax-free distributions of Roth IRA earnings starts January 1, 2025.
3. The five-year rule for penalty-free distributions of converted funds applies separately for each conversion
While a distribution of converted funds is never taxable, the 10% early distribution penalty can apply if a five-year holding period is not satisfied. This five-year rule is only an issue if you are under age 59½. It applies separately to each conversion that you do. It also may not be five full years. For example, if you convert on December 31, 2025, you can take penalty-free distributions on January 1, 2030.
4. Beneficiaries are subject to the five-year holding period for tax-free distributions of Roth IRA earnings
If a Roth IRA owner has not satisfied this five-year rule, the beneficiary must finish it out. A spouse beneficiary can use the more favorable of their own or their deceased spouse’s five-year holding period. The five-year rule for penalty-free distributions of converted funds is never an issue for beneficiaries because all IRA distributions due to death are penalty-free.
5. The Roth IRA owner must track the five-year rules
Ultimately, it is up to the Roth IRA owner to keep good records and ensure that they are not violating either of the Roth IRA five-year rules. The taxation of Roth IRA distributions is determined in the aggregate, with all of an individual’s Roth IRAs being considered and ordering rules applied. Contributions come out first, then conversions, and finally earnings. Custodians do not necessarily have all the information to determine if the Roth five-year rules are satisfied.
By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC
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