The Roth IRA Five-Year Clock: The Date That Decides Whether Earnings Come Out Tax-Free

# The Roth IRA Five-Year Clock: The Date That Decides Whether Earnings Come Out Tax-Free

A Roth IRA withdrawal carries a critical date: the start of the five-year holding period. Miss this timing, and your tax-free earnings disappear.

Here's how it works. Roth IRAs let you withdraw contributions anytime without taxes or penalties. But earnings inside the account face restrictions. To pull out earnings tax-free, two conditions must be met. First, you must be age 59½ or older, disabled, or dead. Second, your account must have been open for at least five tax years.

The five-year clock starts on January 1 of the year you open your first Roth IRA, not on the date you fund it. This matters. If you open and fund a Roth on December 15, 2024, your five-year window started January 1, 2024. You hit the five-year mark on January 1, 2029. If you funded it on January 2, 2024, the same January 1, 2029 date applies.

This rule applies per account holder, not per account. Open multiple Roth IRAs in 2024? The five-year period runs from 2024 for all of them. Rolling over a traditional IRA into a Roth starts a new five-year clock, though only on the converted amount.

The penalty for breaking the rules stings. Withdraw earnings before five years pass and before age 59½, and you pay ordinary income tax on the earnings plus a 10 percent early withdrawal penalty. A person in the 24 percent tax bracket pulling out $5,000 in earnings faces $1,700 in taxes and penalties combined.

Roth conversions deserve special attention. Each