Roth withdrawal questions
I know these questions are going to seem a bit silly but I just want to clarify….
I know there is a five-year rule on deposits into a Roth. There is also a rule that someone can withdraw what they contributed with no penalties. How do these two rules fit together? In other words, if a person contributes to a Roth this year and needs to withdraw the funds in two years, can they pull out their original investment with no penalties but are required to leave any earnings for the five years from the date of the original contribution or face taxes and penalties (if under 59 1/2)?
Also, are the gains required to be held for five years? In other words, a contribution is made for $5,000 and earns $250 in earnings the first year. The second year, the $5,250 grows to $5,550 and so on. After year five, could the owner withdraw the entire $5,550 or must they wait until year six to take out the $250 in gains (meeting the five year rule for those funds)?
Permalink Submitted by Alan - IRA critic on Thu, 2025-04-03 18:02
Regular Roth contributions can be withdrawn anytime without tax or penalty, and come out first. If earnings are withdrawn before 5 years and age 59.5 the earnings are subject to tax and penalty. It’s up to the taxpayer to keep track of their Roth IRA basis so they can report NQ distributions on Form 8606 even though many of these distributions are non taxable.
There is no need to track gains, only contributions. But once the contributions have been withdrawn the rest are gains. Gains do not have separate 5 year holding requirements as the first Roth contribution starts the one 5 year holding period for all Roth IRAs that might be owned.
Conversions are more complex because in addition to the 5 year holding period above (plus being 59.5) for earnings to be tax free, each year’s conversions start a new 5 year holding period for the conversion to be withdrawn without the 10% penalty, even though the distribution of conversions is always income tax free. All of these separate 5 year holding periods for conversions end at 59.5 even if not completed.
Some taxpayers never make a regular contribution, just conversions. In such a case the first conversion starts both a 5 year holding period for gains to be qualified and a 5 year holding period for that conversion to be withdrawn without penalty.
Would have been nice if these holding periods were of different lengths because people are confused over which 5 year period is being discussed when a question comes up.
Regarding your second paragraph, I assume this taxpayer is under 59.5. As such any gains would be taxable and subject to penalty if withdrawn before 59.5 regardless of whether the first Roth was opened over 5 years back or not. Therefore, if the taxpayer is not yet 59.5, only the 5000 can be withdrawn without tax.