While Roth IRAs are very popular as a retirement savings vehicle due to their tax-free growth treatment, they also have several unique rules associated with them to ensure that their favorable tax status is not abused. In particular, there are two different 5-year rules associated with Roth accounts to prevent them from being taken advantage of; the first 5-year rule applies to Roth contributions and determines whether earnings will be tax-freewhile the second 5-year rule applies to Roth conversions and determines whether conversion principal will be penalty-free.

Each of the 5-year rules are measured from the beginning of the tax year for which they apply, which means in reality tax-free earnings or penalty-free conversion principal may be accessible in less than 5 years in certain circumstances. And because the Roth rules aggregate all accounts together for the purposes of determining the tax treatment of various distributions, it's necessary to track the various 5-year rules and the amounts they're associated with, regardless of whether they are held separately or mingled together into a single account.

Ultimately, being able to effectively navigate the various Roth 5-year rules creates several planning opportunities as well. For some, taking advantage of the Roth conversion 5-year rule is a way for those well under age 59 1/2 to tap their IRA funds "early" without an early withdrawal penalty. For others, the reality is that the Roth conversion 5-year rule is a moot point anyway, because they already meet another exception to the early withdrawal penalty (e.g., already being over age 59 1/2). However, in all cases, the 5-year rule for contributions must be met before any Roth earnings can actually be tapped tax-free; fortunately, though, because any first-time contribution or conversion can start the clock, clients who are concerned about the 5-year rule can make a contribution to a Roth (or to a traditional IRA and then convert it) to start the time window now, and ensure they'll never need to worry about it in the future!

5-Year Rule For Roth Contributions

The 5-year rule for Roth contributions is used to determine whether a withdrawal of growth will be tax-free as a "qualified distribution" from a Roth IRA. In order to be a qualified distribution, two requirements must be satisfied. First, under IRC Section 408A(d)(2)(A), the distribution must be made either: on/after the date the IRA owner turns 59 1/2;  after death of the IRA owner (i.e., to the estate or a beneficiary); after becoming totally disabled (under the Social Security definition of "total disability"); or for qualified first-time homebuyer expenses (up to a $10,000 limit and subject to other limitations). The second requirement, in addition to meeting one of the preceding tests, is that the distribution must meet the Roth contribution 5-year rule (also known as the "nonexclusion period" under IRC Section 408A(d)(2)(B)).

The 5-year rule essentially states that five tax years must pass from when the first contribution is made to (any) Roth IRA, until a qualified distribution can be made. Because the measurement is based on tax years, this means that a contribution to a Roth IRA as late as April 15 of 2014 will still count as a contribution for the 2013 tax year (in essence, it counts as though the contribution was made January 1st of 2013), which means the first year of a potential qualified distribution would be 2018 (because the five years that passed would have been 2013, 2014, 2015, 2016, and 2017). Notably, this means that a "5-year" qualified distribution could actually be made after less than 3 years and 8 months, as a contribution on April 14 of 2014 (made in 2014 but for 2013) would allow for tax-free distributions as early as January 1st of 2018.

Notably, under Treasury Regulation 1.408A-6, Q&A-2, for the purposes of this 5-year rule the clock starts the first time any money is funded into any Roth IRA, whether by contribution or conversion. There is not a new 5-year clock for each Roth contribution, nor for each Roth account that is held. All Roth IRAs (but not Roth 401(k)s) are aggregated together to determine whether the 5-year rule is met for any/all of them (which indirectly means that rollovers from one Roth IRA to another do not change or reset the 5-year requirement). In the case of rollovers from a Roth 401(k), any years in the Roth 401(k) are not added to the years for the Roth IRA; thus, if the individual did not otherwise have a Roth IRA already, the rollover from a Roth 401(k) begins a new 5-year period, even if the Roth 401(k) itself had already satisfied the 5-year requirement (per Treasury Regulation 1.408A-10, Q&A-4(a)).

The fact that the 5-year requirements are aggregated across IRAs effectively means that once the 5-year rule has been satisfied once for a taxpayer (i.e., if you've already had a Roth for at least 5 tax years), it's been satisfied for good; in turn, this means that recent contributions may actually be eligible for withdrawal as a qualified distribution even if they've been in the account for less than 5 years, as long as the taxpayer overall has met the 5-year requirement with respect to any Roth IRA.

Bear in mind, though, that regardless of whether the 5-year rule is met, for the distribution to be qualified, it must still also satisfy the first part of the test (a distribution made after 59 1/2, death, disability, or under the first-time homebuyer rules).

5-Year Rule For Designated Roth Accounts Under A 401(k) Or Other Employer Retirement Plan

In the case of a Designated Roth Account under a 401(k) or other employer retirement plan, the 5-year rule again applies to determine eligibility for a qualified distribution. However, under Treasury Regulation 1.402A-1, Q&A-4(b), the 5-year rule for an employer retirement plan is counted separately from the 5-year rule for any/all Roth IRAs. Thus, even if the 5-year rule has already been satisfied for qualified distributions from a Roth IRA, a Roth 401(k) still has to satisfy its own 5-year period.

In addition, each employer plan is subject to its own 5-year rule, in the event that someone has multiple Roth accounts under multiple employer retirement plans. Although if one Roth employer retirement plan is directly rolled into another - e.g., if the balance of one Roth 401(k) is rolled into another Roth 401(k) - then again under Treasury Regulation 1.402A-1, Q&A-4, the 5-year period is based on whichever plan has been around longer (the original plan or the new one being rolled in to). Thus, once a designated Roth account under an employer retirement plan has satisfied the 5-year rule, it can continue to be satisfied with a new designated Roth account as long as the 'old' funds are rolled into the new plan. And if a "new" plan has already satisfied the rule, any old Roth employer plans rolled in will have already satisfied the rule as well.

On the other hand, when a designated Roth account from an employer retirement plan is rolled into a Roth IRA, the years in the Roth employer plan do not count towards the Roth IRA. Instead, under Treasury Regulation 1.408A-10, Q&A-4(a), for a Roth IRA it's the original 5-year rule for the Roth IRA that counts. And if there was no existing Roth IRA and the rollover from the Roth 401(k) creates the account for the first time, that starts a new 5-year clock for the IRA, even if the 'old' Roth 401(k) had satisfied its own 5-year rule. Again, any years in the Roth 401(k) (or other Roth employer retirement plan) do not carry over and get tacked onto the Roth IRA.

The Second 5-Year Rule, For Roth Conversions

As the name implies, the second 5-year rule applies not to (new) Roth contributions, but to Roth conversions from traditional pre-tax retirement accounts, and determines whether Roth conversion principal will be penalty-free.

To meet the 5-year rule for Roth conversions, again the measuring period is five tax years, which essentially means any Roth conversion is deemed to have occurred as of January 1st of that year (Treasury Regulation 1.408A-6, Q&A-5(b)). Notably, since since conversions must occur by December 31st in a given year, their 5-year period will always start in the calendar year in which the conversion occurs; for instance, any conversion between January 1st and December 31st of 2013 will count as a 2013 conversion, but anything in 2014 will count as a 2014 conversion (by contrast, a new contribution as late as April 15th of 2014 could still be counted towards the 2013 tax year).

Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once. When withdrawals occur from conversion amounts, they are deemed to be withdrawal on a first-in, first-out basis under IRC Section 408A(d)(4)(B)(ii)(II), which effectively means the oldest conversions (most likely to have finished their 5-year requirement) are withdrawn first, and the most recent conversions are withdrawn last. (Overall, the ordering rules from Roth IRAs stipulate that withdrawals are after-tax contributions first, conversions second, and earnings third.)

Intention Of The 5-Year Rules

The purpose of the 5-year rule on Roth contributions is relatively straightforward - to require that tax-free growth for retirement purposes be done for the long-term, which means the account must be maintained for at least 5 years (in addition to meeting one of the other requirements).

To understand the purpose of the 5-year rule for Roth conversions, an example of what would occur if it wasn't there might help.

Example 1. Jeremy is 40 years old and would like to tap the $50,000 of funds in his traditional IRA. If he takes a withdrawal now, he will be subject to ordinary income, and a 10% early withdrawal penalty. If Jeremy converts his IRA to a Roth IRA, he will also be required to report the amount as ordinary income; however, he can now take a withdrawal of his "after-tax" principal from his Roth IRA (the conversion amount) without an early withdrawal penalty. The end result: Jeremy could entirely circumvent the IRA early withdrawal penalty by simply doing a Roth conversion first and taking the money thereafter, so the 5-year conversion rule is designed to prevent this!

Example 2. Continuing the prior example, if Jeremy completes his conversion and waits 5 years, he will be eligible to withdraw his Roth conversion principal without any early withdrawal penalty; this is true because he has met the 5-year requirement for conversions, even though he would only be age 45 at the time. Thus, while the 5-year conversion rule prevents individuals from outright dodging the early withdrawal penalty from their IRAs, it does allow them to potentially gain access to their IRAs prior to age 59 1/2, albeit with a 5-year waiting period! (Though notably, any gains on Jeremy's conversion would still be taxable, as even if he has met the 5-year requirement for conversions and contributions, he has not met the 59 1/2, deceased, or disabled requirement to receive tax-free qualified distributions from his Roth IRA.)

Accordingly, it's also worth noting that because the 5-year rule for Roth conversions merely leaves the withdrawal of conversion principal potentially subject to the early withdrawal penalty, any other exceptions to the early withdrawal penalty can still shelter the Roth conversion amount from the penalty. Thus, withdrawals within 5 years of conversion by someone who is already over age 59 1/2 are not subject to the early withdrawal penalty, regardless of the 5-year conversion rule, simply because being over age 59 1/2 itself is an exception to the penalty!

Roth Strategies To Manage The 5-Year Rules

Because of the different purposes of the 5-year rules, effective techniques for managing and planning around them are different as well.

In the case of the 5-year rule on Roth contributions, the easiest way to manage the rule is simply to start the clock as early as possible, since any first amounts placed into a Roth IRA start the clock. For many, they have already started (or entirely satisfied) their 5-year requirement with prior Roth contributions. For those who have never chosen to make a Roth contribution - or perhaps couldn't, due to the income limitations - an alternative is to do a conversion from a traditional IRA to start the clock; even just a modest $100 conversion is enough to open the time window. For those who have no IRA funds to convert, they can even create an IRA just for the purposes of doing a conversion, as there are no income limits on traditional IRA contributions (the income limits only determine whether the contribution will be deductible or not). However, those looking to do a (nondeductible) traditional IRA contribution and subsequent Roth conversion may wish to wait a year to avoid the risk of the step transaction doctrine.

In addition, it's notable that because distributions are deemed to come from principal first and earnings second, even withdrawals from a Roth contribution within the 5-year time window will not necessarily trigger any income taxation, unless the total distributions exceed all prior contributions. However, it's also important to bear in mind that even if the withdrawal is principal and not subject to ordinary income taxation, if it is a conversion amount within the 5-year time window, the withdrawal may be subject to early withdrawal penalties even if it is not otherwise taxable. On the other hand, as noted earlier, if the individual is otherwise exempt from the early withdrawal penalty (e.g., by being over age 59 1/2), the withdrawal of conversion principal is penalty-free  (over 59 1/2) and tax-free (as it was already taxed at conversion). Thus, for those who are already over age 59 1/2 (or totally disabled), the Roth conversion 5-year rule is essentially a moot point, and only the 5-year rule for contributions remains relevant.

Another notable situation where the rules may overlap is after the death of a Roth IRA owner. As death is an exception to the early withdrawal penalty, any beneficiaries taking distributions from a Roth IRA will always enjoy penalty-free treatment (regardless of whether it's principal or earnings, and regardless of whether the 5-year rule for conversions has been met or not). On the other hand, death does not eliminate the 5-year contribution rule for earnings to be tax-free! Thus, beneficiaries taking withdrawals from a recently opened Roth IRA (if there were no other Roth accounts to start the 5-year clock) may find that the earnings are still taxable until the 5-year time window has passed from when the original Roth owner established the account; on the other hand, because of the favorable ordering rules, beneficiaries taking RMDs will be tapping tax-free and penalty-free principal anyway, so this issue would generally only apply if the beneficiaries were liquidating most/all of the Roth IRA shortly after inheriting it (and before the original 5-year contribution time window had been satisfied).

For convenience purposes, because the Roth rules aggregate together all Roth accounts under IRC Section 408A(d)(4)(A), there is no need to keep Roth contributions and conversions in separate accounts, or to otherwise try to separate out multiple types of contributions. The aforementioned ordering rules (principal first, then conversions on a FIFO basis, then earnings) apply in the aggregate across all accounts. So at the most, accounts should only be kept separate if it is necessary/helpful for tracking and accounting (though notably, conversions should be kept separate if there is an expectation they might be recharacterized and there is a desire to just recharacterize the specific gains/losses and assets associated with that particular conversion).

The bottom line, though, is simply this: it's important to remember that there are two separate 5-year rules, each with their own requirements and stipulations. The Roth conversion 5-year rule is about accessing penalty-free conversion principal (and is irrelevant if the individual already meets one of the other exceptions to the early withdrawal penalty), while the Roth contribution 5-year rule is about accessing tax-free Roth earnings (which are assumed to be extracted last, anyway).

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  • Karl frank

    Thanks, Michael, for a great conversation and a very interesting planning point with your 40 year old client. I’ve run into issues with the aggregation rules before and there are a lot of mistakes made by well-intentioned people. An important planning point, 401k money, Roth or otherwise, is excluded from aggregation rules. For example, a self-employed person transfers IRAs into 401ks (Roth or otherwise) and leaves out an IRA with after-tax basis. Then converts the basis IRA to a Roth and benefits from a much smaller “aggregation.” Good stuff!

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  • Carol

    This is a great article. It adds vivid clarity to the distinctions and thinking underlying the two five year rules, which are not clear from reading government publications such as Pub 590. Since Roth classification can be achieved now in so many ways — directly through contributions, via conversions from traditional IRAs and from 401k rollovers — this type of clarity is all the more important to planners and clients. I state this need in coincidence as I just had yesterday a conversation with a colleague who was talking about ‘the five year rule’, lumping together the contribution and penalty together in error. Thanks again.

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  • WDS

    Excellent, informative article. I have a simple (naive) followup question: Regarding the 5-year conversion rule, does the 5-year clock restart if a Roth IRA is rolled over from one account at a given institution/company to another account at a different instition/company? e.g., if I had a Roth IRA with Bank of America for 3 years, but rolled that over to a Roth IRA at another investment firm where it remained for another 3 years, is the clock not at 6 years, or only 3 years because I moved the funds?

    • http://www.kitces.com/ Michael Kitces

      The 5-year clock for Roth IRA earnings to be tax-free is a per TAXPAYER rule, not per account or institution. So it doesn’t matter than you roll the Roth IRA from one institution to another, the 5-year rule transcends the change in IRA custodians.

      Or in your specific example, 3 years of the Roth IRA at Bank of America and another 3 years of the Roth IRA at another investment firm is indeed 6 years. :)
      – Michael

      • Rob

        Does it make any difference if you are going from your employer’s Roth 401K to your own self directed Roth IRA ?

      • Dean

        Great article. I am 62 and opened a new Roth IRA in 2012 and funded it with a rollover from a Roth IRA opened in 2009. Because of your article, I know this meets the 5 yr rule. But, I also had a Roth 401(K) funded in the past 2 years and recently rolled it into the 2012 Roth IRA.
        If I take a 100% distribution in 2015 from the 2012 Roth IRA will the distribution be tax free?

  • S

    Excellent. You are one of the few “experts” who have been able to fully explain all the rules for Roth withdrawals, at all ages. It’s amazing how poorly many highly qualified people and financial websites fail to explain ALL the aspects of Roth contributions and withdrawals. It’s like to them, only some of the rules matter to most people, so they can skip the rest. You don’t do that, which is why you deserve credit. And I have to admit, even though I’m a boomer, I think the younger generations are a lot more logical in how they explain financial rules, including the tricky 5 year conversion rule after you turn 59 1/2, and why it’s not applicable.

  • Matt

    This is by far the best, most comprehensive summary on Roth IRAs that I’ve come across. Thanks for putting this together.

    • http://www.kitces.com/ Michael Kitces

      Thanks Matt, hope it helps! :)
      – Michael

  • Steve…

    I have an interesting scenario. One spouse has a Roth IRA. When that spouse dies, ownership of the Roth IRA is claimed by the surviving spouse under the rule for surviving spouses.
    What happened to the 5 year clock in this situation? Does the surviving spouse start a new 5 year clock, or does the original clock apply? Then if the surviving spouse dies, when does the 5 year clock start for the heir.

    • judith foreman

      No new rollover it’s your to get. Point blank you are the ownership of it. It’s like a death policy and you are the beneficiary its your to get.

  • Bryan


  • CSDan

    Many thanks, Michael for putting this together! Comprehensive and detailed. I just turned 59.5 and have had a Roth IRA for at least 10 years. So, I’ve satisfied the 5-year rule. Now, can I keep contributing to my Roth IRA every year forward (within the annual contribution limits) and letting it grow, while also withdrawing part or all of it at any time from this point forward tax free? It seems like that is too good of a deal to pass up if I can do that!

  • James

    Hi Michael. Thanks for the clear explanation of this topic. Could you describe which Federal tax forms come into play when executing the 5 year conversion rule? I converted money from a Traditional IRA to a Roth IRA back in 2010 and am planning on withdrawing the principal from the Roth IRA early next year. How should I have declared the conversion in 2010 (want to make sure I did it correctly) and then how do I declare the penalty-free withdrawal on the 2015 Federal tax form?


  • 401khomer

    Great article! if you roll over a 401K (say 100K) to a roth ira (and paying the tax) but later pull out the 401K contribution (not earnings) to make a down payment on a first time home purchase do you pay a penalty or new taxes on this ab=mount because it breaks the 5 year rule?

    I know roth ira contributions aren’t taxed if you withdraw them since its post tax money, but does that apply to conversion contributions if pulled out prior to 5 years?


  • Ryan

    I need some clarification. If I roll over a Roth 401k to a Roth IRA for the purposes of taking a distribution for the first time home buyer benefit of avoiding the 10% penalty, with less than the 5 year waiting period I have to pay full taxes on the entire amount? If I had just taken the distribution from the Roth 401k and only taken the 10% penalty and no taxes Id be ahead of the game.

    • KRose

      I guess no one ever replied to you and this is the question that I need answered. I can’t see to find it anywhere. I am first time home buyer. I recently rolled over my 401K from an old employer to a roth IRA. Now I would like to withdraw for purchasing a home. However, it is still not clear to me if because it was previously in a 401K for more than 5 years if that qualifies..?

      • http://www.kitces.com/ Michael Kitces

        Roth contributions that were originally contributed to a Roth (not from a conversion, just from a contribution) are ALWAYS available tax-free and penalty free. That’s true whether the funds were contributed directly to the Roth IRA, or were contributed to a Roth 401(k) and then rolled over to a Roth IRA. There’s no penalty associated with the principal, so the first-time homebuyer exception is moot.

        In the case of withdrawing EARNINGS from a Roth (i.e., you got all of the contributions, and still want more) you DO need to satisfy the EARNINGS 5-year rule. That 5-year rule from a Roth IRA is measured JUST for when you had a Roth IRA, and the Roth 401(k) time does not tack on.

        In other words, you put $5,000 into a Roth 401(k). It sits there for 7 years. You move the now-up-to-$7,000 to a Roth IRA (which is your first Roth IRA ever). The first $5,000 is tax-free and penalty-free. The last $2,000 will still be taxable (failed the tax-free earnings test because not 5 years in the new account) though there will be no early withdrawal penalty. However, if you had ALREADY had another Roth IRA (that was more than 5 years old) and rolled the Roth 401(k) into it, you’d have already met the 5-year test for tax-free earnings so the first-time homebuyer exception would work for the earnings.

        I hope that helps!
        – Michael

  • Joshua

    I would like to explore a question in regard to the “growth” of a Roth. I contributed $5000 3 yrs ago to my Roth IRA, and through a series of poor investment choices, now have value of $2500. If I were to withdrawal those funds now, would I be penalized? I have not met a five year requirement, but I also have no growth. Could you please explain how this will be treated?
    Joshua S.

    • http://www.kitces.com/ Michael Kitces

      Withdrawals of original contributions to a Roth are always tax-free and penalty free, and withdrawals are always assumed to come from contributions first (and growth second).

      So your withdrawals would simply be a tax-free and penalty-free return of your principal. That’s it.

      Bear in mind, though, that once you withdraw, contributing again will be subject to the annual contribution limits, so money you take out can’t always easily be put back in, especially if you’re already making ongoing contributions as well.

      To the extent you close out the ENTIRE Roth so there is NOTHING left, you can claim a loss on the Roth. But it is a miscellaneous itemized deduction subject to the 2% of AGI floor, and adjusted out entirely for AMT purposes, so there may not be much value to doing so.

      I hope that helps a little!
      – Michael

  • kevin

    If you converted 10,000 into 2 roth iras in 2003, can you take out 15,000 of one of them prior to age 591/2 without penalties? In other words can you aggregate the total of converted roths and take a distribution from one that exceeds the amount that was converted in that one?kpd645

  • Laura

    I own a Roth IRA account and I invest in a Roth 401K with my existing employer. I don’t think employers typically allow withdrawals from Roth 401K (or any 401K) until you leave employment. (unless you want to borrow and return it). Withdrawals from Roth IRAs from the contributions only are not taxed or penalized. My question is: If a person over several years has contributed $5000 to a Roth IRA and $5000 to a Roth 401K, can the person withdraw $10,000 from the Roth IRA, and from IRS perspective, it is considered tax free and penalty free since your combined contribution to both Roth accounts was $10,000? This is an attempt to work around the employer restriction of withdrawing from the Roth 401K account.

  • john

    I have a question on taxes for earnings related to 5 year rule for conversion. I am over 59 1/2 and have roth accounts funded by contributions started long before 5 years ago and they have earnings. I believe I could withdraw all of the roth without taxes from this roth. If I do a $10,000 conversion in 2014 and in 2015 the earnings on that roth conversion are $100 and I withdraw all of my roth accounts both contributions and conversions. I understand that all of my contributions are tax free.

    My question is will I be subject to tax on all of my roth earnings including the earnings on my roth contributions or will I be subject to tax only on the $100 earnings from the conversion which did not meet the 5 year rule?

    • http://www.kitces.com/ Michael Kitces

      If you are over age 59 1/2 and have your Roth accounts funded more than 5 years, your earnings will not be subject to tax. Period. It doesn’t matter the source, the time horizon, or anything else at this point. You’ve met the requirements for tax-free earnings from a Roth, and that’s that. You could convert a million dollars today and take out the growth tomorrow, you’ve already met the age 59 1/2 and 5-year requirements for tax-free earnings from a Roth.
      – Michael

  • Mike

    If I have an existing Roth IRA over 5 yrs old then if I roll over a Roth 401k, the 5 yr rule is met, but if I convert a traditional IRA or 401k to Roth IRA, the 5 yr clock will start with each conversion, even if rolled over into the existing Roth IRA?

  • pilot

    I am 60 years old and am planning to convert my balance in my company’s 401k plan over to a Roth 401k account within the company plan this year. I will be taxed on that conversion this year-2014. If I pull the funds out before 2019 (5 year rule), will I be taxed on the withdrawal? If I am, what happens to the taxes I paid on the conversion?

  • Bob

    Michael what a great article and explained very well with the two 5 year rules. I had a question
    that I can’t seem to find an answer anywhere. For the past 10 years or so I have been consistently converting 10,000 a year from an IRA to a Roth. After my first 5 year waiting period I have always have at least 10,000 I could take out penalty free for whatever every year. In some years I didn’t take out the full 10,000 but generally most of it. For 2014 I have available 20,000, 10,000 from 5 years previous (year 2009) and another 10,000 from years accumulated prior to 2009 where I didn’t take out my maximum 10,000 available.

    Now in 2014 I also have qualified educational expenses for my son of 15,000 which I withdrew an offsetting 15,000 from my Roth IRA. In addition I also took out 10,000 for myself assuming I would have 20,000 to work with penalty free not including the 15,000. My tax program is showing me that the 15,000 for education is going against the 20,000 available thus making 5,000 subject to a 10% penalty. (15,000 + 10,000 = 25,000 -20,000 = 5,000) This doesn’t
    seem correct to me as everything I read shows qualified educational expenses are not subject to the 5 year rule. I also understand there is a FIFO rule so I’m not sure which rule you would apply first. I have read where the first time home purchase, disability and other reasons seem to be called qualified but education is called an exception. Seems the qualified may be treated different than the exceptions, but is very unclear on what I have read.

    I can negate the 5,000 penalty by making a 5,000 contribution prior to April 15 15 for the 2014 tax, but would prefer to avoid if possible. (contributions first then conversions) I just want to double check as it doesn’t seem correct. I was thinking if someone only made a conversion in 2013 that money could be taken out in 2014 for qualified education, so it doesn’t follow to me that the FIFO rule should be applied for Education. Could be a nuance of the Roth, who knows thanks

  • Dan

    This is helpful but I have one other question for the case of a non-spouse beneficiary younger than 59 who inherits an IRA that had been converted to a Roth less than five years earlier. Is the taxable portion all of the earnings since the original (non-Roth) IRA was created or just the amount earned between the conversion to a Roth and the distribution to the beneficiary? If the former, then all of the earnings up until the time of the conversion would be taxed twice – once to the person who held and converted the IRA and once to the beneficiary. That seems to be what is on the 1099 but doesn’t seem right.

  • ferd

    Best discussion of these issues I have read. Thanks for posting.

  • Payam

    Very well written article! Best explanation of the 5-year rule I have found so far.

    Example 1 in this post leaves out a very important qualification though: suppose that the $50K in Jeremy’s traditional IRA came entirely from none-deductible contributions, some of which were made within the last 5 years. Further suppose that for whatever reason there are no earnings in this $50K, maybe market fluctuations have resulted in $50K contributions over the last 10 years to result in a balance of $50K today or maybe Jeremy invested his traditional IRA funds in a very low-risk, low-return asset, knowing that he would convert it to Roth later and only after conversion would he switch to higher-return assets that can grow tax free. As per IRS publication 590 (http://www.irs.gov/publications/p590/ch02.html#en_US_2013_publink1000231064) Jeremy is allowed to convert the entire amount to a Roth IRA and subsequently withdraw the entire amount tax free and penalty free: “You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount).” In Jeremy’s case the no part of the the conversion amount needed be included in income when he converted, as such no part is subject to taxes or penalty upon distribution.

    Based on this, I think this sentence under managing the five-year rule section of the post deserves some clarification: “even if the withdrawal is principal and not subject to ordinary income taxation, if it is a conversion amount within the 5-year time window, the withdrawal may be subject to early withdrawal penalties even if it is not otherwise taxable.” -> but would not be subject to early withdrawal penalties if the entire withdrawal can be attributable to conversion funds that were not subject to taxes at the time the conversion happened.

    • Wayne Smith

      I think you may have answered my question but I’m hoping I may double check.

      I had a Traditional IRA that was funded 100% with non-deductible contributions. I immediately converted it into a Roth and there were basically no earnings. Inside the Roth there have been some earnings. In the same year (this year), I find I need to withdraw the contributions (not the earnings). I’m being told different things about whether I can remove the principal penalty free given I converted it to a Roth. Can I withdrawn the money penalty free? Thanks.

      • http://www.kitces.com/ Michael Kitces

        No, you cannot withdraw the principal penalty-free. Or at least, not merely because it was a Roth conversion. You are subject to the 5-year rule.

        If there is ANOTHER reason you can avoid the early withdrawal penalty on the principal – e.g., because you’re already over age 59 1/2 – that would work.

        Basically, if you would have been subject to the early withdrawal penalty from your IRA in the first place, you’re still subject to it from the Roth IRA, because the Roth conversion has not aged by 5 years.
        – Michael

        • Wayne Smith


          Thanks for the response.

          To clarify, you note if I would have been subject to the early withdrawal from the IRA in the first place I would under the Roth. I guess that’s my point. My contributions were 100% with after-tax money and my understanding is that the principal could be withdrawn anytime, penalty free, for this reason. Isn’t the above post saying the same is true even if it was a conversion?

          I am thinking I could re-characterize the conversion and get my principal back? I’m not talking earnings. I’m talking 100% non-deductible contributions.

  • Wayne Smith

    If the Roth conversion came from traditional IRA funds that were NOT tax deductible, is the 5 year rule off the table? That is, I need to tap some Roth IRA funds that I converted from my IRA earlier this year but my IRA was non-deductible due to income level. Thanks.

  • scottp

    Thank you so much for this excellent and concise summary of the rules! I’m particularly thankful because it corrects the bad advice I just received from a Vanguard associate, regarding my ability to withdraw my Roth IRA conversion money, penalty- and tax-free, to help pay for a house I’m buying. In a nutshell, I opened my Roth IRA with a conversion of $30,000 in traditional IRA money in Dec 2014. I listed it as an early distribution, exception applies, and paid tax on this “income” in Apr 2015, but no penalty. As I understand it, being only 57.5, and with no exception applying to me, I have to wait until Jan 1 2019 to take that money both tax- and penalty-free. However, seeing as I turn 59.5 in July 2017, I could take it then without penalty, AND without tax on the portion of the $30k that is considered my own “contribution”. Hopefully I have that right. (My Vanguard associate believed I could take it immediately, without tax or penalty. At least she provided the caveat, “I’m not a tax professional”.) So, here’s where I get confused — how does one know what portion of the money in their Roth account is characterized as “contribution” and what portion is “earnings”? Keep in mind that this $30k was converted from a traditional IRA, which itself was created by a conversion from a company 401(k), and so any history of which portion came from where is (seemingly) lost.

  • Brian

    First, thank you for all of the great information. I still have a question if you are able to help: I have $101,000 in a 401K account now from a previous job. I want to withdraw about half of that and was thinking that the penalties would be much less if I did so from a Roth IRA. If I roll the entire 101,000 into a Roth IRA and then withdraw 25,000 from the Roth IRA almost immediately, what would my penalty be (for rolling into the Roth IRA and for the withdraw)? Thank you again for your help.

    • http://www.kitces.com/ Michael Kitces

      You’ll pay income taxes on the Roth conversion. If you’re not already over age 59 1/2 (or otherwise exempt from the early withdrawal penalty), you’ll pay a 10% early withdrawal penalty on the withdrawal from the Roth IRA because you haven’t met that 5-year rule.

      Which means you’ll have the EXACT same outcome either way. You’re going to pay income taxes (as a withdrawal or a conversion) and you’re going to pay an early withdrawal penalty (from the 401(k) or for taking from a Roth conversion without waiting the 5-year period).

      That’s actually the whole point of these rules – to make the outcomes the same. You’d have to wait at least 5 years from the conversion to get to that conversion principal penalty-free.
      – Michael

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Michael E. Kitces

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Wednesday, September 9th, 2015

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