Roth IRAs and the Five-Year Rule

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The five-year rule is an important consideration when deciding when to open your first Roth IRA.  In addition to reaching age 59 ½, five years must pass from the time that your first Roth IRA is opened before any of the earnings in the Roth IRA can be withdrawn without incurring the 10% federal early withdrawal penalty – in addition to state penalties.[1]  The five-year clock runs from January 1 of the tax year for which you are making your Roth contribution, regardless of how many other Roth IRAs you later open.  So if you made a Roth contribution for the 2012 tax year on April 15, 2013, the five-year clock runs from January 1, 2012 – a head start of sorts on the five-year clock.[2]  Note that Roth contributions– as opposed to earnings - can be withdrawn, penalty-free, at any time.[3]  

The 5-year rule is particularly important for those who have, or will have, a Roth 401(k) account, but have yet to open a Roth IRA.  If that person retires at age 65, and intends, as most do, to roll their Roth 401K) account into a Roth IRA, he or she will need to wait five years before making penalty-free withdrawals from the Roth IRA.   Also, unlike a regular IRA, which can sometimes be rolled into a regular 401(k) account, a Roth IRA cannot be rolled into a Roth 401(k) account.

The five-year clock is not aggregated for Roth conversions or Roth 401(k) accounts: Each Roth conversion has its own five-year clock.[4]  Also, each Roth 401(k) account has its own five-year clock as well,[5] but that clock is not carried over if the Roth 401(k) account is rolled into an individual Roth IRA; instead, the clock for that particular Roth IRA will govern.   So, if you have a Roth IRA that has satisfied the five-year period, and a Roth 401(k) is rolled into that Roth IRA, then that Roth 401(k) is deemed to have also met the five-year clock, regardless of whether or not the funds were in the Roth 401(k) for five years.[6]   The rules can be confusing, but the bottom line is:  opening your first Roth IRA as soon as possible is a good idea.



[1] I.R.C. § 408A(d)(2)(B)

[2] Treas. Reg § 1.408A-6

[3] I.R.C. § 408A(d)(4)(B)

[4] Treas. Reg. § 1.408A-6

[5] Stephen J. Krass, The 2012 Pension Answer Book 27-162 (Walters Kluwer 2012)

[6] See Id. at 27-100