Rocket Dollar Knowledge Base

What is the Roth IRA 5-year withdrawal rule?

The Roth IRA 5 year rule allows you to withdraw investment earnings or Roth Conversions without penalty if you keep the earnings in an account for at least 5 years after contributing.

 

What should I keep in mind?

  • The 5-year rule begins on January 1 of the calendar year you made your first contributions (not opening an account) to any Roth IRA. After this, you can withdraw investment earnings (distributions) tax-free.
  • You can always withdraw contributions from your Roth IRA at any time. Investment earnings must remain until cleared by the 5 Year Roth Rule.
  • If you withdraw Roth investment earnings early, before the 5-year period, you will incur a 10% tax penalty.
  • You can always withdraw your Roth contributions, as you have already paid taxes on them.

Does this apply to Roth IRA Conversions?

Can I do this for my Roth dollars in my Solo 401(k)?

  • Yes, you can also do this inside your Rocket Dollar Solo 401(k)
  • Make sure your plan allows for in-service distributions
  • Remember that the 5-year rule does not carry over to a new Roth IRA. If you open a new Roth IRA, rollovers will be subject to the same waiting period (even if your Roth 401(k) where the money is coming from has existed for over 5 years). If your other Roth IRA has already existed for 5 years, you can distribute investment earnings that just came from the old Roth-401(k).

 

The above is not meant to be tax advice. Weigh all decisions and consult a tax professional or financial advisor before making a financial decision.

 

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