I’m 70, but explain it like I’m 5. How does the 5-year Roth rule apply to me?

Withdrawal rules from Roth IRAs often confuse taxpayers because there are actually two separate 5-year clocks that apply to Roth IRAs. I’ve written on this topic before in “At 65, Does the 5-Year Roth Rule Matter?” and if you’d like a complete explanation, I recommend that article.

For most people though, here is how to think through the 5-year rules of Roth distributions. This article intentionally simplifies the process. I have linked to articles with more complete information to provide the full explanation.

Tax-Free

If the following two sentences are true:

1. “A Roth IRA of yours has been set-up for at least 5 years.”
2. “The payment or distribution is: Made on or after the date you reach age 59½.”

Then, your distribution is tax-free as a qualified distribution.

If one or more of those two sentences is false, then read the article “The Role of a Roth IRA in Early Retirement” to see if you can use contribution basis to make a tax-free penalty-free withdrawal.

Penalty-Free

If this sentence is true “You have reached age 59½,” then you do not need to track the age of your Roth conversion.

If that sentence is false, then you will need to track the age of your Roth conversions and monitor the 10% recapture rule. You can read the article “How Roth Conversions Affect Your Contribution Basis” for more information about tracking and using the age of your Roth conversions.

Examples

Martha is 70 years old and funded her Roth IRA for the first time ten years ago. Her Roth IRA distributions are tax-free and penalty-free.

Polly is 60 years old and funded her Roth IRA for the first time three years ago. Because her Roth is less than five years old, she will need to use her contribution basis to calculate what (if any) tax is owed. However, she does not need to track the age of her Roth conversions, because she is over age 59 1/2. Additionally, all her Roth IRA distributions will be penalty-free, because she is over age 59 1/2. See “How Do You Report Withdrawals from Roth Contribution Basis?”

Lucy is 50 years old and funded her Roth IRA for the first time ten years ago. She will need to use her contribution basis, including the age of her Roth conversions, to calculate what (if any) tax is owed because she is younger than 59 1/2. She will also need to review the exemptions list to see if a penalty is owed, again because she is younger than 59 1/2.

I hope this simplified article and examples help!

Photo by Serghei Savchiuc on Unsplash. Image has been cropped.