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Understanding the Roth IRA 5-Year Rule: What Retirees Must Know to Avoid Penalties Thumbnail

Understanding the Roth IRA 5-Year Rule: What Retirees Must Know to Avoid Penalties

Active Vs. Passive Financial Planning Investing

We love the Roth IRA—and most of our clients do too. What’s not to love about tax-free growth and tax-free withdrawals in retirement? But there’s one important detail that trips people up far too often: the 5-year rule. 

If misunderstood, the 5-year rule can lead to unexpected taxes and penalties, even when you thought your Roth withdrawal would be tax-free. 

Let’s break it down simply—because when you understand how the 5-year rule works, you can use it to your advantage and protect more of your hard-earned savings. 

Wait—What Is the Roth 5-Year Rule? 

At its core, the IRS requires that a Roth IRA must be open for at least five years before you can withdraw earnings tax-free—even if you're over 59½. 

But here’s where it gets tricky:  There are actually multiple versions of the 5-year rule, each applying to different types of Roth contributions and accounts. 

We’ll walk you through them, one at a time, with examples to help clarify when each one applies. 

1. The Roth IRA Contribution 5-Year Rule

This is the one most people are familiar with. To withdraw earnings from your Roth IRA tax-free, both of the following must be true: 

✅ You're at least 59½
✅ Your Roth IRA has been open for at least five tax years

Good news:
The 5-year clock starts on January 1 of the tax year in which you made your first Roth IRA contribution—not the actual date of the deposit. That means even a December 31st contribution starts the clock as if it was made on January 1. 

Pro tip: You can contribute for the prior tax year up until Tax Day, which can help start your 5-year clock even earlier. 

2. The Roth Conversion 5-Year Rule 

Each Roth conversion you make (from a traditional IRA or 401(k) to a Roth IRA) has its own 5-year holding period. 

Why this matters:  If you’re under 59½ and withdraw converted funds before five years have passed, you’ll likely owe a 10% early withdrawal penalty—even though the funds were already taxed during the conversion. 

Example: Ben, age 55, converts $10,000 from his traditional IRA into a Roth. Two years later, he pulls out $6,000. Because he hasn’t met the 5-year rule and he’s under 59½, he owes the 10% penalty. 

3. The 5-Year Rule for Designated Roth Accounts (Roth 401(k)s) 

This version applies to Roth contributions inside employer-sponsored plans like a Roth 401(k). 

Here’s what’s different: 

  • Each Roth 401(k) plan has its own 5-year clock  
  • You can’t withdraw just your contributions to avoid the penalty—distributions are pro-rata, meaning they include both contributions and earnings 

Example: Fred contributes $20,000 to a Roth 401(k) at age 58. By 61, his account grows to $23,000. He withdraws $10,000, but because he hasn't met the 5-year holding period, the earnings portion is still taxable—even though he's over 59½. 

4. The Roth-to-Roth Rollover 5-Year Rule 

This one can sneak up on people. 

  • Rolling a Roth 401(k) into a Roth IRA? The Roth IRA’s 5-year clock applies.  
  • Rolling one Roth IRA to another? The earliest Roth IRA’s clock applies.  
  • Rolling a Roth 401(k) to another Roth 401(k)? The older plan's start date generally carries over. 

Bottom line: Just because you’ve had Roth money somewhere for five years doesn’t mean all new Roth accounts inherit that clock. It’s important to track your start dates. 

Key Takeaways: How to Use the 5-Year Rule to Your Advantage 

✅ Start the clock early – Even small contributions count toward the 5-year window
 ✅ Know which 5-year rule applies – Contributions vs. conversions vs. employer plans
 ✅ Don’t withdraw too soon – Especially with recent conversions
 ✅ Track dates carefully – Your tax-free income depends on it
 ✅ Work with a financial advisor – The rules are simple, but execution isn’t 

If tax-free income is part of your retirement strategy—and it should be—understanding these rules is non-negotiable. A well-planned Roth strategy can add a huge boost to your long-term financial flexibility and legacy planning. 

 🎥 Want to see real examples and visual breakdowns? Watch our full video on the 5-Year Rule here.


This commentary reflects the personal opinions, viewpoints and analyses of the Seaside Wealth Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Seaside Wealth Management, Inc. or performance returns of any Seaside Wealth Management, Inc. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Seaside Wealth Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.