Five Year Rule for Roth as I Close In On 59.5

[Sandi_k]

So, I know that the 5 Year Rule for Roths require that for access to the *growth*, I need to let the money "season" for 5 Years - or until age 59.5 - whichever is LONGER.

How do you determine which was a contribution vs. a growth dollar?

Let's say next year in April 2025 (after I turn 59.5), I want to withdraw $5k from the Roth. So I look at my Roth balance from March 2020. Would the $5k then be deemed seasoned, as long as I had MORE than $5k in the Roth as of April 2020?

[dandarc]

How long ago was your very first Roth IRA opened? That's the 5 year rule that applies once you reach age 59.5.

There's another 5 year rule for traditional to Roth conversions that only applies if you're under 59.5 and/or your very first Roth IRA opened less than 5 years ago.

Unless you've only recently opened your first Roth IRA, what you've written here will be a qualified distribution and no tax or penalty will be owed. This seems like the most likely case.


But if you really haven't opened a Roth IRA before April 2020 and then withdraw in April 2025, then it would be a non-qualified distribution and the ordering rules would apply:
https://www.irs.gov/publications/p590b#en_US_2023_publink100089915

Contributions first, then conversions First in First Out (and within each conversion the Taxable portion of the conversion first, then the non-taxable portion), finally earnings.

[MDM]

Let's say next year in April 2025 (after I turn 59.5), I want to withdraw $5k from the Roth. So I look at my Roth balance from March 2020.

And can stop there.

If you opened your first Roth IRA for tax year 2020, that five year clock started Jan. 1, 2020.  It will hit five years on Jan. 1, 2025.  After you reach 59.5, all your Roth withdrawals will be tax and penalty-free.

See Two 5-Year Rules For Roth IRA Contributions & Conversions and the Treatment of distributions chart.

[Sandi_k]

How long ago was your very first Roth IRA opened? That's the 5 year rule that applies once you reach age 59.5.

I opened it in ~ 2005. But the rule is contributions can come out whenever; growth has the age 59.5, OR 5 years, whichever is longer.

There's another 5 year rule for traditional to Roth conversions that only applies if you're under 59.5 and/or your very first Roth IRA opened less than 5 years ago.

Not applicable.

Unless you've only recently opened your first Roth IRA, what you've written here will be a qualified distribution and no tax or penalty will be owed. This seems like the most likely case.

I'm not explaining this well, I think. Fidelity doesn't keep more than 10 years of info on file in the archived statements. So if I look at 2014 records, it gives me a number. I don't know which of it was contributions, and which of it is earnings growth.

So if I wanted to take out contributions, how would I know how much that is?


But if you really haven't opened a Roth IRA before April 2020 and then withdraw in April 2025, then it would be a non-qualified distribution and the ordering rules would apply:
https://www.irs.gov/publications/p590b#en_US_2023_publink100089915

Contributions first, then conversions First in First Out (and within each conversion the Taxable portion of the conversion first, then the non-taxable portion), finally earnings.
[/quote]

[Sandi_k]

Let's say next year in April 2025 (after I turn 59.5), I want to withdraw $5k from the Roth. So I look at my Roth balance from March 2020.

And can stop there.

If you opened your first Roth IRA for tax year 2020, that five year clock started Jan. 1, 2020.  It will hit five years on Jan. 1, 2025.  After you reach 59.5, all your Roth withdrawals will be tax and penalty-free.

See Two 5-Year Rules For Roth IRA Contributions & Conversions and the Treatment of distributions chart.

Thank you!

And if I wanted to withdraw contributions prior to age 59.5, and Fidelity doesn't have those 18 year old records...I guess I gotta go through my records to determine how much was contribution, and hope I get close...?

[lhamo]

Let's say next year in April 2025 (after I turn 59.5), I want to withdraw $5k from the Roth. So I look at my Roth balance from March 2020.

And can stop there.

If you opened your first Roth IRA for tax year 2020, that five year clock started Jan. 1, 2020.  It will hit five years on Jan. 1, 2025.  After you reach 59.5, all your Roth withdrawals will be tax and penalty-free.

See Two 5-Year Rules For Roth IRA Contributions & Conversions and the Treatment of distributions chart.

Thank you!

And if I wanted to withdraw contributions prior to age 59.5, and Fidelity doesn't have those 18 year old records...I guess I gotta go through my records to determine how much was contribution, and hope I get close...?

Correct -- neither Fidelity nor Vanguard track your contributions.

What I did was to go back through all my tax files and find the original forms that documented my contributions each year (I think form 8606?  Or maybe a 5*** something).  Then I added them all up.  I had a Roth 403b that I maxed from 2008-2015, so my contribution number is quite high (close to 200k) and I have four more years until 59.5, so it was worth doing the extra legwork to see how big the pot I can draw on without penalty/taxes is.  Calmed the IBL the f down, too, which was the biggest benefit.  I don't intend to pull those funds unless I ABSOLUTELY need to, but it is good to know I have the buffer if I need it.

If/when you do a withdrawal (i did a small one last year when I was trying to set up a HELOC to buy a property and needed to generate some income for the process), there is another form you fill out to indicate that you are pulling contributions.  Part of that form is stating how much you have in total contributions.  I have no idea if the IRS actually bothers to look back and see if you were telling the truth....

[secondcor521]

Your IRS custodian sends a Form 5498 to you and to the IRS each year in which you make contributions.  The total of all those (minus any withdrawals, but you don't have any withdrawals yet) represents the contributions which you can withdraw without tax or penalty before 59.5.  (The rules can be more complex than this; see Instructions for Form 8606 Line 22.)

If you pull all the contributions, then you could pull conversions next, but it sounds like you don't have any.  (Conversions should be reported on Form 8606 Part II.)

Earnings come out last.

If you withdraw funds prior to 59.5, then the IRS expects you to complete Part III of Form 8606.

Theoretically, between Form 5498s from your IRA custodians and Form 8606s you've filed, I think the IRS has all of the information needed to track and calculate if you've done things right.  I have no idea if they enforce this stuff.  I suspect it is a low enforcement priority because, in the big scheme of things, it's not that many people, and not that much money.  They might check it if they did a full audit, or they might have implemented some basic sanity checks.

[secondcor521]

How long ago was your very first Roth IRA opened? That's the 5 year rule that applies once you reach age 59.5.

I opened it in ~ 2005. But the rule is contributions can come out whenever; growth has the age 59.5, OR 5 years, whichever is longer.

MDM and dandarc are correct and you are mistaken.  If your Roth is more than 5 tax years old (it is), and you are over 59.5 (you will be next April), then all distributions are qualified.  From IRS Pub 590-B:

"You don't include in your gross income qualified distributions....

...

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

It is made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit.
The payment or distribution is:
Made on or after the date you reach age 59½,"

-- https://www.irs.gov/publications/p590b#en_US_2023_publink100089543

You can also look at the flowchart in Figure 2-1; it's pretty easy to follow.

(I think there are similar statements found in the instructions for Form 8606 Part III; you wouldn't even fill out Form 8606 Part III for any distributions you made after 59.5 next April.)

[Sandi_k]

How long ago was your very first Roth IRA opened? That's the 5 year rule that applies once you reach age 59.5.

I opened it in ~ 2005. But the rule is contributions can come out whenever; growth has the age 59.5, OR 5 years, whichever is longer.

MDM and dandarc are correct and you are mistaken.  If your Roth is more than 5 tax years old (it is), and you are over 59.5 (you will be next April), then all distributions are qualified.

I understand that. I meant NOW - I am not yet 59.5
 

[Sandi_k]

Your IRS custodian sends a Form 5498 to you and to the IRS each year in which you make contributions.  The total of all those (minus any withdrawals, but you don't have any withdrawals yet) represents the contributions which you can withdraw without tax or penalty before 59.5.  (The rules can be more complex than this; see Instructions for Form 8606 Line 22.)

If you pull all the contributions, then you could pull conversions next, but it sounds like you don't have any.  (Conversions should be reported on Form 8606 Part II.)

Correct - I don't have any conversions, as I've never had a traditional IRA. But I have done MBD contributions (starting in 2019), as well as "regular" Roth contributions.

We have also been doing conversions for DH from his SEP-IRA, but it's easier for him. He's now over 59.5. And yes, we've been filing the 8606 - I caught an error from 2021, when the accountant forgot to file one.

Thanks!