This episode explores the two different five-year rules for Roth IRAs instituted by the IRS to prevent people from abusing them.
The first five-year rule applies to earnings on Roth contributions and determines whether those distributions can be taken tax-free.
The second rule concerns Roth conversions and lets you know whether conversion principles can be accessed penalty-free.
David explains that, for the purposes of the five-year rule, the clock starts the first time any money is contributed to a Roth IRA by either contribution or conversion.
Once the five-year rule has been met, it’s been satisfied for good.
Remember: any recent contribution to a Roth IRA can count as qualified tax-free distributions, even if they’ve been in the account for less than five years.
David shares that Roth 401k plans have their own five-year rule, which is counted separately from a traditional Roth IRA.
In case you’re unable to make a Roth contribution due to income limitations, you can make a non-deductible contribution to an IRA and then do a Roth conversion.
Don’t forget that there aren’t income limits for IRA contributions.
Dave discusses the fact that “the ordering rules for Roth IRA stipulate that withdrawals of after-tax contributions are made first, then conversions, and finally, earnings.”
The Roth conversion five-year rule lets you know if you can access your converted principal penalty-free.
The Roth contribution five-year period, on the other hand, lets you know if you can access your Roth earnings tax-free.
Mentioned in this episode:
David’s books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code
PowerOfZero.com (free 3-part video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David’s Tax-free Tool Kit at taxfreetoolkit.com
