When does the 5-Year Roth IRA Clock Start?

January 12, 2010

I recently fielded the following question from one of our clients:

“I opened my Roth IRA on September 5th, 2005 .   Can I withdraw the contributions now or do I have to wait until September 6th 2010 so that they will not be taxable or subject to penalty?”

Qualified distributions from a Roth IRA are not included in the recipients gross income, nor are they subject to the 10% penalty for early withdrawal.

The actual contributions themselves can be withdrawn any time with out tax or penalty.  There is a 5-year holding period from the time of the first contribution into a Roth IRA until the time in which you may be able to withdraw the earnings on those funds without being subject to income taxes and a 10%  penalty.    In addition to satisfying the 5-year rule, in order to avoid the penalty and the tax, you must also satisfy one of the following:  (1)  the distribution must also occur on or after the date that you become age 59 1/2, (2) at or after your death, (3) the distribution is due to a disability, or (4) in conjunction to a first-time homebuyers purchase (up to $10,000).

Contrary to what one might think, the 5-year clock does not start based on the date that you actually made the contribution, but rather the tax year you made the contribution.  The tax code deems all contributions made during a year as made on January 1st of that year.  In the above example, the initial contribution is deemed to have been made on January 1st, 2005.  Therefore, the taxpayer must wait until January 1, 2010 in order to be able to remove any earnings on those contributions without being subject to the 10% early withdrawal penalty.

The good news is that any withdrawals are first assumed to come from contributions and then earnings.  Therefore, no amount is included in gross income until all of the after-tax contributions have been withdrawn. Generally, if an individual receives a distribution of earnings from a Roth IRA that is included in income, they will also be subject to the 10% additional tax for early distributions.

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.