What is the Roth IRA 5-year withdrawal rule?

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The Roth IRA, a 5-year rule, allows you to withdraw investment earnings or Roth Conversions without penalty if you keep the gains in an account for at least five years after contributing.

What should I keep in mind?

  • The 5-year rule begins on January 1 of the calendar year you made your first contributions (not opening an account) to any Roth IRA. After this, you can withdraw investment earnings (distributions) tax-free.
  • You can always withdraw contributions from your Roth IRA at any time. Investment earnings must remain until cleared by the 5 Year Roth Rule.
  • If you withdraw Roth investment earnings early, you will incur a 10% tax penalty before the five years.
  • You can always withdraw your Roth contributions, as you have already paid taxes on them.

Does this apply to Roth IRA Conversions?

  • Yes. The rule is the same, on January first of the year, you made your Roth Conversion. After this, you can withdraw those dollars tax-free.
  • You can read more about Roth Conversions here.

Can I do this for my Roth dollars in my Solo 401(k)?

  • Yes, you can also do this inside your Rocket Dollar Solo 401(k)
  • Make sure your plan allows for in-service distributions
  • Remember that the 5-year rule does not carry over to a new Roth IRA. If you open a new Roth IRA, rollovers will be subject to the same waiting period (even if your Roth 401(k) where the money is coming from has existed for over five years). If your other Roth IRA has already lived for five years, you can distribute investment earnings that just came from the old Roth-401(k).

The statements above shouldn't be taken as tax advice. Weigh all decisions and consult a tax professional or financial advisor before making a financial decision.

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