Five-Year Rule
The IRS requirement that a Roth IRA must have been open for at least 5 tax years before earnings can be withdrawn tax-free, even after age 59.5.
Understanding Five-Year Rule
There are actually two separate five-year rules for Roth accounts. The first (for contributions) means earnings on contributions can't be withdrawn tax-free until the account is 5 years old. The second (for conversions) means converted funds can't be withdrawn without a 10% penalty for 5 years. The 5-year clock for contributions starts January 1 of the first year you contribute to any Roth IRA.
Why This Matters for Retirement: Understanding Five-Year Rule is essential for making informed decisions about tax-free retirement income strategies. Whether you are evaluating an IUL policy, planning Roth conversions, or comparing retirement vehicles, this concept directly affects your outcomes.