Maybe the best thing about having a Roth IRA vs. a traditional IRA is your ability to withdraw money from it without having to pay taxes. However, as is the case with most things concerning the IRS, there are some rules you must follow if you want to reap the benefits of such an amazing perk. And one of the most important is the 5-year rule.

To unlock tax-free income in retirement, you actually need to follow two different 5-year rules, plus the IRS ordering rules for withdrawals. Here, we’ll explore those 5-year rules, ordering rules, how inherited Roth IRAs work, and which penalty exceptions apply if you fail to follow said rules.

The two Roth IRA 5-year rules

The 5-year rule for Roth IRAs just means you must wait five years from a certain point in time before you can take those tax-free and penalty-free distributions. Often, people taking distributions from their Roth IRAs are already complying with the 5-year rule without even knowing it. 

However, there are two 5-year rules in play when it comes to Roth IRAs: one that pertains to earnings and another that pertains to conversions.

1) The 5-year rule for earnings

Roth IRA earnings are tax-free only when the withdrawal is a qualified distribution. That means both of the following are true:

• At least five tax years have passed since the first Roth IRA contribution was made
• You also trigger a qualifying event, such as reaching age 59 ½, disability, death, or a first-home purchase, with a $10,000 lifetime maximum for this purpose

When the clock starts: January 1 of the tax year of your first Roth IRA contribution, regardless of which Roth IRA you use later. Multiple Roth IRAs are treated as one for this earnings clock.

Example: You first contributed on April 2, 2020. Your 5-year period began January 1, 2020. If you are 59 ½ or older, any earnings withdrawn on or after January 1, 2025 are generally tax-free.

2) The 5-year rule for conversions

Each Roth conversion has its own 5-year period to avoid the 10% early distribution tax. Withdrawing conversion dollars within five years while under age 59 ½ can trigger a 10% penalty on the taxable portion of that conversion. The 5-year period for each conversion starts on January 1 of the conversion year.

Examples:

• Convert on December 17, 2025. That conversion is treated as if it was made January 1, 2025. The penalty period ends January 1, 2030.
• Convert on March 3, 2026. That conversion is treated as if made January 1, 2026. The penalty period ends January 1, 2031.

Roth IRA ordering rules

When you take money out of a Roth IRA, the IRS forces you to take distributions in this order:

1. Regular contributions
2. Conversion and rollover amounts, by year converted
3. Earnings

This order matters because contributions come out first and are always tax- and penalty-free, which often lets people access what they put in without even touching earnings.

Inherited Roth IRAs and the 5-year rule

For inherited Roth IRAs, the owner is treated as having died before the required beginning date. Most non-spouse beneficiaries who inherit in 2020 or later must empty the account by the end of the 10th year after the year of death, unless they are an eligible designated beneficiary, including:

• Spouse
• Certain minors
• Disabled or chronically ill individuals
• Not more than 10 years younger than the decedent

Withdrawals of contributions from an inherited Roth are tax-free. Withdrawals of earnings are generally tax-free if the original owner’s five-year waiting period has already been completed. If the Roth was less than five years old at the time of withdrawal, earnings may be taxable to the beneficiary.

Spouses have additional options available to them when it comes to the inherited Roth IRA. 

• Roll the inherited IRA into their own IRA
• Treat the inherited IRA as a beneficiary IRA
• Treat the inherited IRA as the decedent IRA

There are rules for each of these options, so it’s best to consult a financial advisor when you inherit a Roth IRA.

Exceptions to the 10% early withdrawal penalty

The following are exceptions to the 10% early withdrawal penalty, but they don’t make non-qualified earnings tax-free. Common IRA exceptions include:

• Qualified higher education expenses, up to a certain threshold
• First-time home purchase, up to $10,000 lifetime
• Unreimbursed medical expenses above the deductible threshold for your adjusted gross income (AGI)
• Health insurance premiums while unemployed, if you meet IRS conditions
• Disability or terminal illness
• Death
• Domestic abuse distributions and certain emergency expenses, under SECURE 2.0

Quick reference table

Common mistakes to avoid

• Treating penalty exceptions as if they make earnings tax-free. Tax-free earnings still require a qualified distribution.
• Forgetting that each conversion has its own 5-year clock.
• Ignoring the ordering rules, which can keep many withdrawals on the tax-free contribution layer.
• Misreading inherited Roth IRA timelines and beneficiary categories under the SECURE Act.

Talk with an advisor

Timing withdrawals, conversions, and beneficiary choices can change your tax result. A financial advisor or tax professional can help you apply these rules to your situation.

Frequently asked questions about the 5-year rule for Roth IRAs

When does the 5-year clock for Roth earnings start?

On January 1 of the tax year of your first Roth IRA contribution. It applies across all your Roth IRAs.

Do conversions get their own 5-year period?

Yes. Each conversion has a separate 5-year period that matters for the 10% penalty if you are under 59 ½. The period starts January 1 of the conversion year.

I am 59 1/2 but opened my first Roth three years ago. Are my earnings tax-free?

Not yet. You need both the 5-year period AND a qualifying event like reaching age 59 ½ for the withdrawal to be qualified.

What is the order of Roth withdrawals?

Withdrawals are taken from contributions first, then conversions, and then earnings. This order often lets you access contributions tax- and penalty-free.

Do education or medical costs make earnings tax-free?

No. Those are penalty exceptions. If a withdrawal is not qualified, the taxable portion can avoid the 10% penalty, but income tax may still apply to earnings.

How does the first-time homebuyer rule work with a Roth IRA?

Up to $10,000 of earnings can be part of a qualified distribution when the 5-year period is met. Contributions are always available to withdraw.

I inherited a Roth IRA. Do I have to take annual withdrawals?

Most non-spouse beneficiaries must empty the account by the end of year 10. Whether annual withdrawals are required depends on beneficiary type under current IRS guidance. Spouses and other eligible designated beneficiaries have different options.

If the original Roth was opened less than five years ago, are inherited earnings tax-free?

Not necessarily. Earnings may be taxable to the beneficiary until the original owner’s 5-year period has run.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. Investing involves risk, including possible loss of principal.

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