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What to know about the Roth IRA 5-year aging rule

Key takeaways

  • Roth IRAs allow for after-tax contributions and potentially tax-free withdrawals in retirement.
  • Contributions can always be taken tax- and penalty-free.
  • But Roth IRAs must meet the 5-year aging rule before withdrawals from earnings can be taken tax- and penalty-free.
  • Failing to meet the 5-year rule can result in taxes and penalties.

A Roth IRA can be a great way to put money away for retirement, letting you save and invest dollars you've already paid taxes on today, and potentially freeing you from worry about taxes in retirement when you withdraw the money. 

But many Roth IRA account owners may not understand the 5-year aging requirement, also known as the 5-year rule, which can have a big impact on withdrawals from these accounts. Falling afoul of this rule can result in taxes or penalties, and possibly both.

Read on to find out more.

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Roth IRAs explained

A quick refresher: Unlike a traditional IRA, which is funded with pretax money where you may receive a tax deduction for contributions depending on income, a Roth IRA does not provide tax deductions on contributions. While contributions are made with money you've already paid taxes on, earnings can potentially grow tax-free, with no obligation for required minimum distributions (RMDs), which are withdrawals you must take or face penalties beginning at age 73. RMDs do apply to traditional IRAs.

You can withdraw your contributions from a Roth IRA tax-free and penalty-free at any time. The same does not apply to account earnings, however, which must meet the 5-year rule.

What is the 5-year aging rule?

The 5-year rule for Roth IRAs means that at least 5 years must elapse between the beginning of the tax year of your first contribution to a Roth account and withdrawal of earnings. If fewer than 5 years have passed before you make a withdrawal of earnings, the withdrawal is considered a nonqualified distribution and may be subject to either taxes or penalties (or both).

Once the 5-year rule has been met, and the account owner is 59½ or older, they may make what's known as a qualified distribution of earnings exempt from both taxes and penalties.1

Note: The 5-year aging requirement applies to all Roth IRAs, even if the account holder is 59½ or older. In addition to withdrawals from originally owned Roth IRAs, it covers inherited Roth IRAs based on when the original owner made the first contribution. A separate 5-year aging rule covers conversions from traditional IRAs to Roth IRAs.

You can also contribute to a Roth IRA for the prior tax year up until the tax filing deadline of the current tax year. So if you contributed in April for the prior tax year, the aging requirement might, in practice, be only a bit more than 3 years.

Roth conversions and the 5-year rule

The Internal Revenue Service (IRS) requires a waiting period of 5 years before withdrawing balances converted from a traditional IRA to a Roth IRA, or you may pay a 10% early withdrawal penalty on the conversion amount in addition to the income taxes you pay in the tax year of your conversion. (There is an exception to the penalty for withdrawals if you are age 59½ or older.)

But the clock starts on January 1 of the year you do the conversion—no matter when during the year it happened. So if you converted in December, the aging requirement might, in practice, be only a bit more than 4 years.

Important to know: The 5-year rule is counted separately for each conversion. The same rules apply to so-called backdoor Roth IRA conversions.

Read more about Roth IRA conversions in Viewpoints: Why consider a Roth conversion now?

What about inherited Roth IRAs and the 5-year rule?

The 5-year aging rule applies to inherited Roth IRAs as well, and rules around them can be complicated. To make qualified withdrawals, it must be 5 years since the beginning of the tax year when the original account owner made the initial contribution, even if the new owner is 59½ or older.

Like inherited traditional IRAs, beneficiaries of Roth IRAs must take RMDs, although they would be tax-free assuming the 5-year aging rule is met.1 Withdrawal of earnings may be subject to income tax if the 5-year rule is not met, although penalties never apply for withdrawals due to death (as is the case for withdrawals from any inherited account).

What are the penalties if you don't meet the 5-year rule for Roth IRAs?

If you're under 59½, you'll pay a 10% early withdrawal penalty to the IRS for nonqualified withdrawal of earnings prior to the 5-year aging requirement. You may also owe tax at your ordinary income tax rate on nonqualified withdrawals of earnings.

What other rules may apply to Roth IRAs?

Exceptions to the Roth IRA 5-year aging requirement

Some exceptions to the 5-year rule may apply, allowing you to make withdrawals without paying a penalty (but not taxes). These include withdrawals up to $10,000 made for a first home purchase, if you become permanently and totally disabled, or for educational expenses.

Roth IRA ordering rules

Distributions from your Roth IRA that are considered nonqualified—meaning they haven't met the 5-year aging rule and other conditions—may be fully or partially taxable. In fact, there is a set order in which Roth assets are distributed, and that order determines the taxable amount. Generally, regular contributions are withdrawn first, followed by converted and rollover amounts. Earnings on contributions are distributed last.

Understanding how much you have of contributions, converted or rolled over amounts, and earnings will help you determine the potential tax consequences of withdrawing from your Roth account.

Roth IRA contribution limits

Roth IRAs have the same contribution limits as traditional IRAs. In 2023 those limits are $6,500, or $7,500 for those 50 or older. However, your annual income may reduce or eliminate your ability to contribute that amount to the Roth IRA. Your contribution limit begins to phase out at $138,000 in adjusted gross income if you file taxes as a single person, $218,000 if you are married and file jointly, and starting with your first dollar if you are married filing separately.

Roth IRAs can be an important addition to your retirement savings plan that can help you meet your retirement goals by providing tax-free income. Always consult a tax or financial advisor to understand the implications of Roth IRA withdrawals. By understanding the 5-year rule you can minimize the pain of penalties and taxes.

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1. For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them).

For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them).

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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