Roth IRAs first arrived over twenty years ago. A lot has changed since 1998. That was the year that Google was founded and an electronic pet called a Furby was one of the most popular Christmas gifts. However, some things haven’t changed so much. Impeachment is once again all over the news and here at the Slott Report we are still being asked many questions about how the five-year rules for Roth IRA distributions work. We probably get more questions on this topic than just about any other.
How the Rules Work
A good deal of the confusion about the Roth IRA distribution five-year rules stems from that fact that there are two separate rules that each work differently.
There is one for penalty-free distributions. It applies only if you are under 59½ years old and only to conversions. This five-year holding period will restart with every conversion you do.
The other five-year rule is used to determine if a Roth distribution of earnings is a qualified distribution and income tax-free. This five-year holding period starts when your first Roth IRA account is established. It does not restart for each Roth IRA contribution or conversion.
Why You Should NOT Care