The Roth IRA was established by the Taxpayer Relief Act of 1997 and named after its chief legislative sponsor, Senator William Roth of Delaware. The Roth IRA enables individuals with earned income to contribute after-tax (nondeductible) money to the retirement account. If the rules are followed, the money grows tax-free. Unlike a traditional IRA, qualified withdrawals from a Roth IRA do not incur a tax liability.

Like much of our tax code, however, the Roth IRA rules are complicated. One wrong move can cost a retirement saver thousands of dollars in unnecessary taxes and penalties. One such requirement is the 5-year rule.

Actually, there are two 5-year rules with Roth IRAs. One applies to contributions made to a Roth IRA. The other applies to Roth IRA conversions and rollovers. Because both rules involve a 5-year waiting period, it’s easy to confuse the two. There are, however, significant differences between the rules.

1. Roth IRA Contribution 5-Year Rule: Helps answer whether you’ll pay taxes on the distribution of earnings (not contributions).

2. Roth IRA Conversion 5-Year Rule: Determines whether you’ll pay the 10% penalty on a distribution.

In this article and podcast, we’ll look at the 5-year rule that applies to Roth IRA contributions.

Roth IRA Distribution Rules

It’s important to understand that a Roth IRA may contain three categories of funds: (1) contributions, (2) conversions, (3) and earnings. Contributions represent the money a saver contributes to a Roth IRA. Conversions represent money in a Roth IRA that was converted from a traditional IRA or 401k. Conversions can be further divided into conversions that triggered taxes (e.b., converting a traditional IRA) and conversions that didn’t trigger taxes (e.g., conversions of an after-tax IRA). And earnings represent the dividends, interest, and capital gains on investments in the account.

With this backdrop, there are three key distribution rules for Roth IRAs:

1. Distributions of contributions are never subject to tax or penalty. A Roth IRA account holder can withdraw contributions at any time for any reason without tax or penalty. This feature makes a Roth IRA a reasonable option for emergency funds, so long as the money is invested conservatively.

2. Qualified distributions of earnings are also tax and penalty-free. From our friends at the IRS, a qualified distribution from a Roth IRA is one that meets the following requirements:

  • It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
  • The payment or distribution is:
  • Made on or after the date you reach age 59,
  • Made because you are disabled (defined earlier),
  • Made to a beneficiary or to your estate after your death, or
  • One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).
  • Made on or after the date you reach age 59,
  • Made because you are disabled (defined earlier),
  • Made to a beneficiary or to your estate after your death, or
  • One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

(We’ll focus on the 59-year requirement for the remainder of this article. But keep in mind that this aspect of the rule can be met in other ways as noted above.)

This rule raises an important question. If a Roth IRA contains contributions, conversions and earnings, how do we know how to allocate a partial distribution? Do distributions get allocated on a pro-rata basis, or in some order? Once again the IRS answers this question for us, in rule 3.

3. Distributions are deemed to be made first from contributions, then from amounts converted (taxable conversions first, then non-taxable conversions), and finally from earnings. Because the distribution of contributions never triggers taxes or penalties, this order of distribution favors the taxpayer.

Note that the IRS treats all Roth IRA accounts as one account when applying these rules.

5-Year Rule–Roth IRA Contributions

Now to the five-year rule relevant to qualified distributions. Here’s what you need to know:

1. The five-year clock starts as of January 1 of the tax year in which the contribution applies. This means a contribution on April 15th for the previous tax year starts the clock as of January 1 of the previous year.

2. Once the 5-year rule is satisfied for contributions, it’s satisfied for all future contributions. In other words, there is not a separate 5-year rule for each contribution and each Roth IRA account.

3. The 5-year rule must be satisfied even if you are 59 1/2 or older.

Applying these rules to the four key scenarios:

Over 59 1/2 + 5-Year Rule MET–No tax or penalty

Over 59 1/2 + 5-Year Rule NOT MET–Tax but no penalty

Under 59 1/2 + 5-Year Rule MET–tax and penalty

Under 59 1/2 + 5-year Rule NOT MET–tax and penalty


Let’s look at some examples to see how the 5-year rule on Roth IRA contributions works in practice.

Example #1: A 50-year-old contributes $100 to a Roth IRA. At age 58 he contributes $6,500. At age 60 the Roth IRA has a balance of $8,000, representing $6,600 in contributions and $1,400 in earnings. At that time the retiree withdraws all $8,000. The distribution would not be subject to tax or penalty because the 5-year rule had been met (first contribution was made 10 years ago) and he is 59 1/2 or older.

Example #2: A 58-year-old contributes $6,500 to a Roth IRA. It is his first Roth IRA contribution. At age 60 the Roth IRA has a balance of $8,000, representing the $6,500 contribution and $1,500 in earnings. The retiree withdraws $6,500. There would be no tax or penalty on the withdrawal because it would represent a distribution of his $6,500 contribution based on the ordering rules established by the IRS.

Example #3: Same as example #2, except our 60-year-old withdraws the entire $8,000. In this case, he would pay tax on the $1,500 earnings because the 5-year rule had not been met. Because he is 59 1/2 or older, there would be no penalty applied to the distribution of earnings.

As with all things related to taxes, it is important to seek professional advice before making decisions about your retirement accounts.

Podcast of this Article:

Curious whether a Roth IRA is right for you? Check out this article and podcast on choosing between a traditional and Roth IRA.


  • Rob Berger

    Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at