Saving in a Roth retirement account (IRA) allows you to withdraw your money over time tax-free. But it’s important to understand the rules of these retirement savings accounts to ensure you can take full advantage of the tax benefits.
Here’s what you need to know about the five-year Roth IRA rule, which determines when earnings can be withdrawn tax-free.
What is the five-year Roth IRA clock?
You can always withdraw your original contributions from a Roth IRA—and without penalty. But there is a five-year rule that applies to income: The account must be five years old when you withdraw. You also need to be at least 59 ½ years old, otherwise you may incur early withdrawal penalties. There are exceptions, such as if you become disabled or withdraw from a Roth IRA to buy your first home.
The five-year clock specifically starts on Jan. 1 of the tax year when you make the first contribution to any Roth IRA. If you open your account and make your first contribution on December 31, 2026, the five-year clock starts on January 1, 2026, putting a year on the countdown. In fact, a March 2027 contribution to your Roth IRA can still start the clock on January 1, 2026, if it’s a 2026 tax year contribution. (You can make contributions for a year until the next year’s tax filing deadline).
Why is the date important for taxes and punishments
If the withdrawal is ineligible, you will receive a 10% penalty and the distribution will be treated as ordinary income. People invest in Roth IRAs primarily to avoid tax withdrawals like ordinary income, but withdrawing before crossing the five-year time limit results in that designation. Other exceptions apply, but it’s important to do your research before opting out.
The clock only starts when you donate. For example, a person who opened a Roth IRA 10 years ago but makes his first contribution in the 2026 tax year must wait until January 1, 2031, to withdraw earnings from his Roth IRA safely.
What savers should check before withdrawing earnings to a Roth IRA
One of the most important things to check is the tax year of your first Roth IRA contribution. This is when the timer starts. You can use brokerage statements, old account records or Form 5498 to find this information. Income limits still determine whether you can contribute to a Roth IRA, but the maximum contribution to all IRAs combined is $7,500 per year through 2026. That number rises to $8,600 a year for people age 50 or older.
While some exceptions allow you to withdraw money before the five-year countdown, it’s important to make sure the expenses are eligible before taking out those distributions. That way, you can avoid the 10% penalty charge and ensure that withdrawals are not considered ordinary income.
Roth IRAs offer tax benefits to savers, but keeping a five-year discount in mind can keep you safe from surprise taxes.
