Five-Year Rule (IRAs)

The “5-year rule” refers to several IRS timing rules that affect when IRA funds can be withdrawn tax- and penalty-free. It’s most commonly associated with Roth IRAs, but it also applies to conversions and certain inherited IRAs. Below is a concise guide to how these rules work and when they matter.

Key takeaways

• For Roth IRAs, contributions can be withdrawn anytime tax- and penalty-free; earnings require the account to be at least five tax years old (and meet another qualifying condition) to be withdrawn tax-free.
• Each Roth conversion has its own five-year clock to avoid an early-withdrawal penalty on the converted amount.
• Inherited IRAs have different timing rules that changed for most non-spouse beneficiaries under the SECURE Act (effective 2020).
• Breaking the applicable five-year rule can result in ordinary income tax on earnings plus a 10% early-withdrawal penalty.

How the Roth 5-year rule works

• Contributions: You may withdraw your direct Roth IRA contributions at any time tax- and penalty-free because they were made with after-tax dollars.
• Earnings: To withdraw earnings tax- and penalty-free, two requirements must be met:
• The Roth IRA must be at least five tax years old (counting from the first taxable year for which you made a contribution to any Roth IRA you own), and
• You must meet a qualifying condition (most commonly being age 59½, disability, death, or a first-time home purchase up to a $10,000 lifetime limit).
• If you withdraw earnings before the five-year rule is satisfied (and no other exception applies), the earnings are subject to ordinary income tax and a 10% penalty. For example, in the 24% tax bracket an early withdrawal of earnings could effectively cost ~34% after taxes and penalty.

Roth conversions: a separate five-year rule

• Each conversion from a traditional IRA to a Roth IRA starts its own five-year period for the purpose of avoiding the 10% early-withdrawal penalty on the converted amount.
• The ordering rules for Roth withdrawals are: contributions first, then conversions (on a first-in, first-out basis by conversion year), then earnings. This matters when you take distributions before all conversion five-year periods have passed.
• Note: Taxes on the conversion itself are due in the year of conversion; the five-year rule affects only the potential 10% penalty on early withdrawal of the converted amount.

Inherited IRAs and timing rules

Rules for beneficiaries differ by when the original account owner died and by beneficiary type.

Before the SECURE Act (pre-2020)

• Beneficiaries often used a stretch strategy to take required minimum distributions (RMDs) over their life expectancy, potentially spreading out tax liability. One option for some accounts was a five-year rule for distribution timing.

Under the SECURE Act (deaths in 2020 and later)

• Most non-spouse beneficiaries must withdraw all funds from an inherited IRA (traditional or Roth) within 10 years of the original owner’s death. There are no RMDs during that period for many beneficiaries, but the account must be emptied by the end of year 10.
• Eligible designated beneficiaries—spouses, a minor child of the decedent (until they reach majority), disabled or chronically ill persons, and beneficiaries who are not more than 10 years younger than the decedent—generally have more flexibility and may be able to take distributions over their lifetime or delay RMDs.

Tax treatment for beneficiaries

• Inherited Traditional IRA: Distributions are generally taxable to the beneficiary at their ordinary income tax rate. The usual 10% early-withdrawal penalty does not apply to beneficiaries in most cases.
• Inherited Roth IRA: If the original owner satisfied the five-year rule before death, distributions to beneficiaries are tax-free (both contributions and earnings). If the Roth was less than five years old at the owner’s death, earnings distributed to the beneficiary may be taxable while principal remains tax-free.

Short FAQs

Q: Does being age 59½ waive the Roth five-year rule?
A: No. Even at age 59½, earnings are tax-free only if the Roth IRA has met the five-year requirement (or another qualifying exception applies).

Q: What is the 2-out-of-5 rule?
A: A separate rule for home sales: to exclude capital gains on a primary residence, you generally must have lived in the home two of the five years before the sale.

Bottom line

The five-year rules affect when Roth earnings or converted amounts can be withdrawn without tax or penalty and also influence inheritance timing for IRAs. The rules are nuanced—especially for conversions and inherited accounts—so review your situation carefully or consult a tax or financial advisor to determine the best withdrawal strategy.

Sources: IRS Publication 590-B (Distributions from Individual Retirement Arrangements).