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IRA Financial Blog

The Five-Year Roth Rule – Episode 395

Adam Talks

In today’s episode of Adam Talks, Adam Bergman, Esq. discusses the five-year Roth rule, which is key for taking tax-free distributions during retirement.

The Roth IRA Five-Year Rule Explained

On this episode, IRA Financial founder, Adam Bergman, discusses the five-year rule for Roth IRAs and Roth 401(k)s. He explains that Roth IRAs were created in 1997 to encourage savings and allow after-tax contributions without a tax deduction. To qualify for tax-free withdrawals, the Roth IRA must be open for at least five years, and the individual must be over 59 and a half years old. Early withdrawals before that age may incur a 10% penalty. There are also income limitations for Roth IRAs, but a backdoor option allows individuals with any income to make after-tax contributions and convert them to Roth.

The five-year rule also applies to conversions from pretax IRAs to Roth IRAs. If a conversion is done before 59 and a half, the individual must wait until that age and satisfy the five-year rule to withdraw the converted amount tax-free. If the conversion is done after 59 and a half, the five-year rule only applies to the earnings on the conversion. Bergman emphasizes that the five-year rule starts ticking for contributions as soon as money is deposited into a Roth IRA.

Each conversion has its own separate five-year window, but once the rule is satisfied for an account, it applies to all Roth IRAs. The speaker advises young clients to start the clock by making small contributions to a Roth IRA. They also mention that Roth 401(k)s have separate five-year windows. Understanding the five-year rule is crucial for both contributions and conversions.

Bergman concludes by highlighting the significance of understanding the five-year rule for maximizing the benefits of Roth accounts and utilizing funds in a tax-efficient manner. He encourages listeners and viewers to check out the podcast and YouTube channel, IRA Financial, for more informative content on various Self-Directed IRA and 401(k) topics. The goal is to provide valuable information and updates regularly. Overall, the five-year rule is essential to consider for tax-free withdrawals and to take advantage of the benefits of Roth accounts.

To learn more, listen to the podcast!


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