I know Roth IRA withdrawals are tax-free after age 59½ as long as you’ve had a Roth for a five-year period. What I don't know is how that five years is calculated.
First of all, there's no waiting period when it comes to withdrawing amounts you have contributed to a Roth. If you put in $5,000 today, you can reclaim it tomorrow tax- and penalty-free. You’ve already paid tax on the money—which is why there's no deduction for Roth contributions.
The five-year rule comes into play only when you withdraw earnings, and you dip into earnings only after all contributions have been withdrawn. Plus, five years isn't really five years. It begins on January 1 of the year for which you make the IRA contribution (even if it's before the tax-filing deadline in the next calendar year).
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Say you open your first Roth this month and make your 2015 contribution before the tax-filing deadline of April 18, 2016. The five-year period would end on December 31, 2019, after less than four years. After that, you can withdraw earnings tax-free if you’re age 59½ or older. For Roth IRAs opened with contributions (as opposed to converting a traditional IRA to a Roth), as soon as your first Roth passes the five-year test, so do ones you opened later.
The rules are different if you convert a traditional IRA to a Roth. In that case, you have a separate five-year period for each conversion, and that clock starts ticking on January 1 of the year you make the conversion. Withdrawals of converted amounts are always tax-free (you paid taxes when you made the conversion) and are penalty-free if made after you're older than 59½ or the conversion passes its five-year test.
When you do withdraw money from a Roth IRA, the IRS considers the first withdrawals to be from contributions; any withdrawals after that are considered to be from conversions, and then the last withdrawals are considered to be from earnings. For more information about Roth IRAs, see Reap the Rewards of a Roth IRA. See IRS Publication 590-B, Distributions from Individual Retirement Arrangements, for details about the tax rules.
-
What Is a Qualified Charitable Distribution (QCD)?Tax Breaks A QCD can lower your tax bill while meeting your charitable giving goals in retirement. Here’s how.
-
Embracing Generative AI for Financial SuccessGenerative AI has the potential to reshape how we approach learning about and managing our personal finances.
-
Getting Out of an RMD Penaltyretirement When your brokerage firm miscalculates your required minimum distributions, you have recourse.
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
-
It’s Not Too Late to Boost Retirement Savings for 2018
retirement Some retirement accounts will accept contributions for 2018 up until the April tax deadline.
-
How to Correct a Mistake on Your RMDs from IRAsretirement If you didn't take out the correct required minimum distribution because your brokerage firm made a mistake, the IRS may show some leniency.
-
Making the Most of a Health Savings Account Once You Turn Age 65
Making Your Money Last You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.
-
Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing
IRAs Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.
-
Make the Most of the New Military Retirement Plan
retirement The government is offering a new retirement option so that service members who leave the military before qualifying for a pension can still receive some benefits.
-
How Changes in Income Affect Medicare Premiums
Medicare Medicare beneficiaries can see their premiums go up if their income rises, although for some that increase will be only temporary.
