Roth IRAs and the “5-Year Clock”

Since a Roth IRA is a retirement vehicle, your Roth contributions are subject to the IRS distribution rules. You may only take qualified distributions from a Roth income tax and penalty free. To be deemed “qualified,” two requirements must be satisfied:

This seems pretty cut and dry but misunderstandings about the “5-year clock” are not uncommon – a lot of Roth IRA owners are unsure when their “5-year clock” really began.

With respect to Roth IRAs, your 5 year clock begins on January 1st in the year you opened and funded your first Roth IRA. For purposes of this rule, if you make your first Roth IRA contribution but subsequently remove it, your 5-year clock has not yet begun. To illustrate, assume you made your first Roth IRA contribution on August 1, 2015, but later decide to remove that contribution and its earnings on March 1, 2016. Also assume you make a contribution on February 1, 2016 to that same Roth IRA. When does your “clock” begin? Under this fact pattern, your Roth IRA clock will begin January 1, 2016, not 2015.

Roth IRA conversions have a separate and distinct clock. For example, if you funded your first Roth back in 2010 and converted one of your traditional IRAs to a Roth this year that newly converted Roth IRA has its own 5-year clock that began this year on January 1, 2016.

What if you inherit a Roth IRA? An inherited Roth IRA has its own clock too. The 5-year clock for any Roth IRA you inherit carries over from the decedent.