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Investor Insights Blog|What is the Roth IRA 5-Year Seasoning Period?

Roth IRA

What is the Roth IRA 5-Year Seasoning Period?

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If you’ve researched a Roth IRA as a potential retirement savings vehicle, you might have heard of a s mysterious “Roth IRA five-year seasoning period.” What exactly is a seasoning period, and how does it play into your decision to use Roth IRA for retirement investing?

What You Need to Know About the Roth IRA Seasoning Rule

The Roth IRA five-year seasoning rule means you have to wait five years after first contributing to the account and reach the age of 59½ before you can start taking tax- and penalty-free withdrawals from your Roth IRA. The seasoning period starts January 1 in the year in which you make your first Roth IRA contribution.

The five-year seasoning period is specific to Roth accounts: Roth IRAs, as well as Roth 401(k)s in some instances. It does not apply to traditional IRAs or 401(k)s.

Hypothetical examples

An investor who’s 40 years old makes a contribution to a Roth IRA in the amount of $6,000.

This investor has to attain the age of 59½ and the account has to season for five years before he can start taking qualified distributions. By the time he’s 59½, he would have already met that five-year seasoning period.

Where this really comes into play is for those getting close to the age of 59½, or are over the age of 59½. So for example, let’s say we have a 60-year-old who has never had a Roth IRA before in her life. And she sets up a Roth IRA and makes a contribution of $7,000.

She’s going to have to wait until she’s 65 years old before she can start taking tax- and penalty-free withdrawals from the earnings or from the growth on that Roth IRA.

Some Roth account withdrawals can be made any time

Now, whatever amount she contributed to the Roth IRA – in this case, $7,000 – that principal amount can be withdrawn at any time tax- and penalty-free, but any growth above and beyond the $7,000 must stay in there for five years. Even though she’s 59½ or older, the account has to season for five years.

Remember, that waiting period starts in the year in which the investor made the first dollar contribution.

What if you already opened a Roth IRA? Do you still have to wait 5 years?

An interesting part of the five-year seasoning rule that many people don’t know: If you already have a Roth IRA with another financial institution and it’s already seasoned, and then you decide you want to open and contribute to a Roth IRA at another firm such as Equity Trust, you’re already seasoned. The Roth IRA seasoning period started with the account at the other financial institution.

Video: Roth IRA 5-Year Seasoning Rule

 

Do funds from Roth IRA conversions need to be seasoned?

The five-year seasoning rule also applies to amounts that are converted from a traditional IRA to a Roth IRA (taking money from a tax-deferred traditional IRA, paying the taxes and converting the into a Roth account). Whatever amount you convert over into your Roth, that specific amount has to season on its own for five years. And you also have to attain the age of 59½ to take tax- and penalty-free withdrawals.

Roth conversion example

A 60-year-old has $100,000 in a traditional IRA and $100,000 in a Roth IRA that, let’s say is already seasoned. He converts the traditional IRA money into the Roth, for a total of $200,000 in the account.

The $100,000 that’s already seasoned can be withdrawn at any time tax and penalty free, but for the additional $100,000 that he converts into the account, he’ll have to wait five years before he starts taking withdrawals.

What happens if you withdraw from your Roth IRA before the seasoning period ends?

If you take the money out before the five-year seasoning period ends and you’re younger than 59½, you’ll owe ordinary income taxes on your growth and a 10-percent premature withdrawal penalty: a potentially significant price.

Access to the funds during the seasoning period

Another common question we receive: While you’re waiting for the five-year seasoning period to end, can you use the money in your Roth IRA for investments? Yes.

Whether it’s in stocks, bonds, and mutual funds, or maybe you have an Equity Trust account and you’re investing in alternative assets like real estate, rentals, rehabs, wholesaling, private company investments, or gold and silver, cryptocurrency, or another alternative investment option, you may use those funds to invest at any time.

Yes, you have to keep the money in your Roth IRA for five years, but you can continue to invest that money into those alternative or traditional investments. You just have to keep all of the assets in the account for five years before you start taking money out in order to avoid the IRS penalties and taxes.

Learn more about how a Roth IRA works – access your free guide now

1

Can I transfer funds from a previously established retirement plan into an Equity Trust self-directed IRA?

It is possible to transfer funds from an IRA you hold at another custodian or a retirement plan from a prior employer, provided the tax environments are the same. A traditional IRA held by another custodian needs to have its funds transferred to a traditional IRA. A Roth IRA needs to have its funds moved to a Roth IRA. Our retirement account specialists can help you determine what type of account you need to open at Equity Trust to move your funds in an approved manner.

2

When I roll over funds from an employer-sponsored or qualified retirement plan, do they need to go directly into a traditional IRA?

No. Per IRS guidelines, rollovers from a qualified plan can be rolled over into a traditional or Roth IRA. If the rollover is made directly to the Roth IRA, the transferred amount is subject to income taxation but avoids the 10-percent early distribution penalty. You should consult with your plan administrator regarding the permissible withdrawal options allowed under the tax-qualified plan.

 

 


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