What is the Roth IRA five-year rule and how does it work in 2025?

There are actually multiple five-year rules for Roth IRAs, and confusing them is a common mistake.

Rule 1 - Five-year rule for tax-free earnings (contributions): To withdraw earnings completely tax and penalty-free, two conditions must be met: (1) you are 59 1/2 or older (or meet another exception), AND (2) at least 5 tax years have passed since your first Roth IRA contribution to any Roth IRA. The clock starts January 1 of the tax year of your first contribution. So a contribution made on April 1, 2024 for the 2023 tax year starts the clock on January 1, 2023, and satisfies the 5-year rule on January 1, 2028.

Rule 2 - Five-year rule for conversions: Each Roth conversion has its own 5-year clock for the 10% early withdrawal penalty (not for income tax). If you convert traditional IRA funds to a Roth and withdraw the converted amount before age 59 1/2 and before 5 years, you owe the 10% penalty on the converted amount. This prevents people from converting and immediately withdrawing to avoid the penalty. After age 59 1/2, this rule is irrelevant.

Rule 3 - Five-year rule for inherited Roth IRAs: Beneficiaries must wait 5 years from the original owner's first Roth contribution for earnings to be distributed tax-free. If the original owner had the Roth for 6 years before death, the rule is already satisfied for the beneficiary.

Withdrawal ordering rules: Roth IRA distributions come out in this order: (1) contributions (always tax and penalty-free), (2) conversions (FIFO, taxable portion first), (3) earnings (subject to the 5-year rule and age 59 1/2 requirement). Most people can withdraw their contributions at any time without worrying about these rules.

Practical tip: Open and fund a Roth IRA as early as possible, even with a small amount, to start the 5-year clock. This is especially important for young adults or anyone considering future Roth conversions.