What is the five-year waiting rule for Roth IRAs?

By Denise Appleby AAA
A:

There are two five-year waiting periods that apply to Roth IRAs. However, in both cases, the waiting period for a Roth IRA begins on the first day of the applicable calendar year. How this rule applies to you depends on the circumstances.

To clarify, let's look at the rule in detail:

  1. For the five-year waiting period to determine whether a Roth IRA distribution is qualified (that is, tax and penalty free), the five-year period begins the first day of the first year for which any of your Roth IRAs were funded. For instance, if you converted your Traditional IRA to a Roth IRA in November 1998, your five-year period begins January 1, 1998. Or, if you made a regular contribution to your Roth IRA for 1998, which could occur any time between January 1, 1998, and April 15, 1999, your five-year period begins January 1, 1998. If you establish other Roth IRAs after that first Roth IRA, your five-year period for those new Roth IRAs still begins January 1, 1998, regardless of when those new Roth IRAs are established. A qualified distribution from your Roth IRA is tax and penalty free and there is only one five-year waiting period, which begins with your first Roth IRA. If your Roth IRA distribution is qualified, you need not be concerned with the other five-year period.

  2. The other five-year waiting period applies only if the distribution is non-qualified. For this purpose, there is a separate five-year period for each Roth IRA conversion, and each one begins the first day of the year in which the conversion was made. For instance, if you converted your Traditional IRA to a Roth IRA in 1998, the five-year period for those converted assets begins January 1, 1998. If you later convert other Traditional IRA assets to a Roth IRA in 2003, the five-year period for those assets begins January 1, 2003. To determine whether you are affected by this five-year rule, you need to consider whether the distribution being made from your Roth IRA includes Roth conversion assets and, if so, what year those conversions were made. For this purpose, the ordering rules must be used.

To read more about IRA distributions and applicable penalties, read Tax Treatment Of Roth IRA Distributions, Avoiding IRS Penalties On Your IRA Assets and Introductory Tour Through Retirement Plans.

This question was answered by Denise Appleby
(Contact Denise)

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