Roth Contribution - 5yr rule

14 Replies

I found several descriptions regarding this rule - below is one description.

What is the Five Year Rule?

An investor can withdraw his or her contributions to a Roth IRA at any time without tax or penalty. But, that is not the same case for any earnings or interest that you have earned on your Roth IRA investment. In order to withdraw your earnings from a Roth IRA tax and penalty free, not only must you be over 59 ½ years-old but your initial contributions must also have been made to your Roth IRA five years before the date when you start withdrawing funds. If you did not start contributing in your Roth IRA five years before your withdrawal, your earnings would not be considered a qualified distribution from your Roth IRA because of its violation of the five year rule.

I understand I can withdraw contributions without penalty but what of the earnings test.

My question centers around the "five years before the date when you start withdrawing funds." This relates to the interest and earnings. If I am 59 1/2 and meet that part of the rule, is the earnings like FIFO (first in first out)?

Ex: ROTH opened in 2012

2012 contribute $5k, earnings $500.

2013 contribute $5k, earnings $700.

2014 contribute $5k, earnings $1k

2015 contribute $3k, earnings $1,100

2016 contribute $0, earnings $1,150

2017 contribute $0, earnings $1,160

These are all hypothetical numbers.

So now my principal is $18k and "earnings" as stated for each yr.

Does this mean I can only withdraw without penalty in 2017, $500 because it is now 5 yrs later and meets this 5 yr or can I withdraw more earnings because it's the "account" that was opened 5 yrs ago?

Thanks

hello

@Daria B.  

Go Gators! I don;t think I can answer your question but I am certainly interested in the answer. I "converted/transfered/rolled over" a Roth 401k to a Roth IRA at one of the big Banks. They told me I could not withdraw funds for 5 years. They did not put any more rules on it and it was into a stock investing account which makes (and losses) money daily. I have not withdrawn any thing from it yet but I did recently transfer from the Roth to a Self Directed Roth. That was in 2017 so I don't have the tax 1099 yet to see if it was classed in any unusual manner. Perhaps @Steven Hamilton II can help us out?

Cheers, Buddy

@Buddy Holmes

Exactly! I also transferred my traditional holdings both (traditional and Roth) from Schwab to MidlandIRA to invest in RE. I know my transfers have no consequence because it was a like-kind transfer.

However, I would like to contribute - and I want to find out about withdrawals of earnings. The example I gave was for withdrawal of earnings and wondering "which" earnings I could withdraw.

Originally posted by @Steven Hamilton II :

The general rule is 5 years OR 59 1/2.

 I know but how is the 5 years interpreted? Account open for 5 years and any or all earnings can be withdrawn or are the earnings based on 5 years? See my original example.

the 5 years is from when you initially open the account. You can withdraw all the contributions. You contributed 18k in your example, you can withdraw all 18k with no penalties. The earnings your 18k contributions made, (around)~6k will have penalties if you try to withdraw them.

Basically the $ you put in has no penalties when you take it out, but the $ that was made has penalties.

If you want no issues, just take out the 18k contribution

Originally posted by @Derrick Dill :

the 5 years is from when you initially open the account. You can withdraw all the contributions. You contributed 18k in your example, you can withdraw all 18k with no penalties. The earnings your 18k contributions made, (around)~6k will have penalties if you try to withdraw them.

Basically the $ you put in has no penalties when you take it out, but the $ that was made has penalties.

If you want no issues, just take out the 18k contribution

Ok I got that thanks.

What of the earnings, when can they be withdrawn without penalties?  

I took mine out for one time withdrawal for first home purchase. I took out 10k (maximum) after it was open for 5 years with no penalties/taxes.

It's a retirement account and there are special circumstances where you can take out the earnings early like my situation or school expenses, but for the most part you have to wait until 59 1/2.

Originally posted by @Buddy Holmes :

@Steven Hamilton II

So that is 5 years from the original opening of the Roth IRA or...?

Cheers, Buddy

 I'm not sure we're getting the answer. I am now assuming that as long at the 59 1/2 has been reached and the account has been open for at least 5 years (and 1 day..maybe) that "ANY" earnings up to that point would not be a penalty when withdrawn. In my simple example, the $5,610 in earnings I can withdraw and there would be no penalty.

@Daria B.

A distribution is qualified if the Roth IRA owner satisfies two conditions. First, the Roth IRA owner must meet a five-year waiting period for distributions. This period begins on the first day of the taxable year
(January 1 for most taxpayers) for which the Roth IRA owner makes his first Roth IRA contribution (Treas. Reg. 1.408A-6, Q&A 2). The second condition is that the IRA owner meet one of the following penalty tax exceptions (IRC Sec. 408A(d)(2)(A)).

Age 59½ or older

Disability

Death

First-time homebuyer

ILLUSTRATION: Ben made his first Roth IRA contribution in 2009. On March 12, 2014, he attained age 59½. In December 2014, Ben decided to take a total distribution from his Roth IRA, which includes basis and earnings. Ben files his taxes on a calendar-year basis. Ben's distribution is tax-and penalty-free because he meets the requirements for a qualified distribution—he is age 59½ and his five-year period was satisfied on January 1, 2014.

Five-Year Period
Each Roth IRA owner has one five-year period starting with the first Roth contribution ever made by the individual--—the five-year period is not redetermined for each Roth IRA that an individual owns. Also, if the entire account balance of a Roth IRA is distributed and the IRA owner later makes contributions to a Roth IRA, the five-year period for qualified distributions does not start over with the subsequent contribution.