What Are the Two Roth 5-Year Holding Period Rules?

A Roth Individual Retirement Arrangement (IRA) is a retirement savings account funded with after-tax dollars. This structure allows for tax-free growth on investments and tax-free withdrawals during retirement. To realize the full benefit of tax-free withdrawals on investment earnings, account holders must meet specific conditions laid out by the Internal Revenue Service (IRS), including the 5-year rule. Failing to adhere to this timeline can result in unexpected taxes or penalties.

The Two Distinct 5-Year Rules

A point of confusion for many savers is that there are two separate 5-year rules that apply to Roth IRAs. These rules govern different types of funds within the account and have entirely different starting points and purposes. Misunderstanding this distinction can lead to financial missteps, particularly when taking distributions before retirement age.

Rule for Tax-Free Earnings (Qualified Distributions)

The first 5-year rule determines whether the investment earnings in your Roth IRA can be withdrawn completely tax-free. For a withdrawal of earnings to be considered a “qualified distribution,” it must meet two tests. The first is that the account owner must have a qualifying event, such as reaching age 59½, becoming permanently disabled, or using the funds for a qualified first-time home purchase (up to a $10,000 lifetime limit).

The second test is the 5-year holding period. This clock starts on January 1 of the tax year for which the very first contribution was made to any of your Roth IRAs. For instance, if you opened and funded your first Roth IRA for the 2022 tax year, even if you made the contribution in April 2023, your 5-year clock officially began on January 1, 2022. This “forever rule” is established once and applies collectively to all Roth IRAs you own; it does not restart with subsequent contributions or if you open a new one later.

Rule for Penalty-Free Conversions

The second 5-year rule applies to funds moved from a traditional IRA or pre-tax 401(k) into a Roth IRA through a conversion. This rule determines if the converted principal can be withdrawn without a 10% early withdrawal penalty if the account owner is under age 59½. It was implemented to prevent using conversions as a loophole to access pre-tax funds early without penalty.

Each conversion event starts its own 5-year holding period, beginning on January 1 of the year the conversion was executed. For example, if you converted funds in June 2023, the 5-year clock for that specific amount started on January 1, 2023. If you perform another conversion in 2025, that new amount will have its own separate 5-year clock.

IRS Ordering Rules for Withdrawals

To apply the two 5-year rules, you must understand the sequence the IRS uses to determine which money comes out of a Roth IRA first. This is a fixed rule, not a choice, that dictates the tax and penalty consequences of any distribution. The IRS views all of an individual’s Roth IRAs as a single account for this purpose, so the withdrawal order is always the same.

The first dollars withdrawn are always a return of your regular, direct contributions. Because these are made with after-tax money, they can be withdrawn at any time, for any reason, completely free of taxes and penalties. After all direct contributions have been withdrawn, the next accessible funds are converted amounts, withdrawn on a first-in, first-out (FIFO) basis. Finally, after all contributions and converted principal have been taken out, the last dollars to be distributed are the investment earnings. This ordering rule means the 5-year rules only become a factor after you have depleted your direct contributions.

Application to Inherited Roth IRAs

When a beneficiary inherits a Roth IRA, the 5-year rules carry over from the original owner and are not reset. This impacts whether the beneficiary’s distributions of earnings are subject to income tax.

If the original account owner had satisfied their 5-year holding period for qualified distributions, the rule is also considered met for the beneficiary. In this case, any earnings the beneficiary withdraws will be tax-free, although they must still follow separate rules for emptying the account, such as the 10-year rule for most non-spouse beneficiaries.

If the original owner had not met their 5-year holding period, the beneficiary must continue tracking that original clock. For example, if the owner opened their first Roth IRA in 2023 and passed away in 2025, the beneficiary would need to wait until 2028 to withdraw any earnings tax-free. The separate 5-year rule for conversions also carries over, and the beneficiary must respect the individual clocks for any converted funds to avoid potential penalties if they are under 59½.

Interaction with Roth 401(k) Plans

The timing rules for Roth IRAs can interact with those for Roth 401(k)s when funds are moved from a workplace plan to a personal IRA via a rollover. A Roth 401(k) has its own 5-year rule for qualified distributions, but this clock does not always transfer directly to a Roth IRA.

If you roll over a Roth 401(k) into an established Roth IRA that already has its 5-year clock running, the existing Roth IRA’s clock governs all the funds. For instance, if your Roth IRA’s 5-year period began in 2018 and you roll over your Roth 401(k) in 2024, the entire account balance is considered to have met the holding period. This allows for immediate access to qualified distributions from the rolled-over money, assuming an age or other trigger is also met.

A different outcome occurs if the rollover from a Roth 401(k) is used to open your very first Roth IRA. In this scenario, the holding period from the Roth 401(k) does not carry over. Instead, a new 5-year clock for the Roth IRA begins on January 1 of the year the rollover occurred. This is an important distinction, as it can reset the waiting period for accessing earnings tax-free.