Roth IRAs are extremely popular, and why wouldn’t they be? Tax-free earnings over a lifetime can add up to a serious chunk of change. However, in order to receive those tax-free earnings, rules must be followed and timeframes must be met. Despite the ubiquity of Roth IRAs, there is confusion around what those rules and timeframes are. In order to maximize Roth benefits, it is imperative to understand the central guidelines around the ever-present 5-year windows. In fact, there are two primary Roth IRA clocks to consider.
Clock #1 - Penalty-Free Distributions from Roth Conversions
The first 5-year clock only applies to Roth IRA conversions and if the account owner is under age 59 ½. If the account owner is already over 59 ½ (or as soon as they reach 59 ½), this rule can be ignored. When a traditional IRA is converted to a Roth, the under-age-59 ½ account owner must wait 5 years before they can take penalty-free distributions (assuming no exception to the 10% penalty applies). We are not talking about earnings yet – only avoiding the 10% penalty on distributions of converted dollars. This 5-year clock will restart for each conversion that is done.
