What is the Roth IRA 5-Year Rule, or Seasoning Period?

What are the contribution and income limits for Roth IRAs?

For 2024, the maximum contribution limit to a Roth IRA is $7,000, or $8,000 if you are 50 or older. However, your ability to contribute depends on your modified adjusted gross income (MAGI). The contribution limit phases out at higher income levels:

• Single filers: Phase-out range is $146,000 to $161,000.
• Married filing jointly: Phase-out range is $230,000 to $240,000.

You can learn more on our chart detailing 2024 contribution and income limits.

How does a Roth conversion affect the 5-Year Rule?

When completing a Roth conversion – moving from a traditional IRA to a Roth IRA – the converted funds must also adhere to the five-year rule. Each conversion starts its own five-year clock. This means if you convert funds in 2024, those converted funds cannot be withdrawn tax- and penalty-free until 2029, unless you meet the other qualifying criteria.

What are the penalties and taxes for early withdrawals?

If you withdraw funds from your Roth IRA before the five-year period ends and you are younger than 59½, you will typically owe taxes and a 10% early withdrawal penalty on the earnings portion. Contributions can still be withdrawn penalty-free at any time.

Are there exceptions to the Roth IRA 5-Year Rule?

Certain exceptions allow you to withdraw earnings without penalties, even if the five-year rule is not met:

• First-time home purchase: Up to $10,000.
• Qualified education expenses: For you, your spouse, children, or grandchildren.
• Significant medical expenses: If they exceed a certain percentage of your adjusted gross income.
• Disability: If you become disabled.

How do inherited Roth IRAs work?

If you inherit a Roth IRA, the five-year rule may still apply to earnings withdrawals. Beneficiaries can generally withdraw contributions tax- and penalty-free at any time. If the original owner had not satisfied the five-year rule, the beneficiary must wait until the period is met to withdraw earnings tax-free.

While waiting for the five-year period to end, can you use the money in your Roth IRA for investments?

Whether it’s in stocks, bonds, and mutual funds, or maybe you have an Equity Trust account and you’re investing in alternative assets like real estate, rentals, rehabs, wholesaling, private company investments, or gold and silver, cryptocurrency, or another alternative investment option, you may use those funds to invest at any time.

Yes, you must keep the money in your Roth IRA for five years, but you can continue to invest that money into those alternative or traditional investments. You just must keep all the assets in the account for five years before you start taking money out to avoid the IRS penalties and taxes.

Understanding the Roth IRA 5-Year Rule

Understanding the Roth IRA five-year rule is crucial for effective retirement planning. By knowing when you can withdraw your contributions and earnings tax- and penalty-free, you can better manage your retirement funds and avoid unnecessary penalties. Make sure to consider the contribution limits, conversion rules, and exceptions to ensure you maximize the benefits of your Roth IRA.