The Roth IRA is a retirement savings vehicle that allows you to make tax-free withdrawals if you follow the rules. The five-year rule states that it takes five years to be invested in a Roth IRA account before you can withdraw any of the earnings from your IRA contributions without paying taxes. This five-year period begins when money is deposited into a Roth IRA for the taxpayer, and includes both direct contributions and converted amounts. Inherited Roth IRAs also have their own five-year rule, which starts with the original owner of the account and when they made their first contributions.
You may qualify for an exception to the five-year rule if you are disabled or if you inherit the Roth IRA after your death. You can also use your Roth IRA to pay for higher education expenses for yourself, your spouse, a child, or a grandchild. However, keep in mind that your ability to contribute to a Roth IRA is based on your modified adjusted gross income (MAGI). If you inherit a Roth IRA from someone other than your spouse, you have a couple of options for withdrawing funds.
There is also a separate five-year rule that applies only to those who convert other types of retirement accounts to Roth IRAs. This means that if you use the Roth IRA backdoor strategy every year, your Roth contributions are actually conversions and you can't withdraw them for five years without penalty.The Roth IRA rewards those who are willing to accept deferred gratification by not granting you an upfront tax cut, but rather giving you tax-free treatment of your income and earnings, as long as you keep your investments in the account. But the distribution of Roth IRA earnings is taxable, because Max was under 59 and a half years old and did not meet any other test to exempt profits from taxes.So it's also worth noting that since the 5-year rule for Roth conversions simply leaves the withdrawal of conversion principal potentially subject to the early withdrawal penalty, any other exception to the early withdrawal penalty can still protect the Roth conversion amount from the penalty.