RETIREMENT PLANNING
If you’ve considered opening a Roth IRA but haven’t yet made the move, there’s one very compelling reason to get started now—and it goes beyond the customary tax and investment benefits that a Roth IRA may offer.
The Roth five-year rule limits your flexibility in using earnings from your Roth IRA until five years after your first contribution (and a qualified event, such as reaching age 59½).
That’s why it’s important to open a Roth IRA sooner rather than later—even if you start with a minimal contribution—just to get the clock running. (See: Investing $50 a month could add up nicely for your retirement).
While the money you deposit into your Roth IRA can be withdrawn at any time for any reason without taxes or penalties, the five-year rule applies to any money you may have earned on your investments within the Roth IRA. However, it’s up to you to monitor your account to determine whether you are tapping into your contributions or withdrawing earnings from your Roth IRA.
So, if you’d like the option of using your Roth IRA earnings without incurring taxes or penalties to cover important expenses such as retirement costs (after age 59½), a first-time home purchase (maximum $10,000 lifetime limit), or to provide tax-free income to your beneficiaries, the sooner you open a Roth IRA, the sooner you would be able to take advantage of those options.
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The five-year period starts with the tax year of your first contribution, but you can make that contribution as late as the mid-April tax filing deadline in the following year. In other words, a tax time Roth IRA contribution made before the April 2025 deadline could be credited as a 2024 contribution, which would slice a year off the wait. Be aware that this must be designated as a carryback contribution; otherwise, an April contribution would be credited to the current year.
A tax-year-2024 account start would mean that the earnings from your Roth IRA could be used for qualified purposes beginning in 2029.
If, over time, you open multiple Roth IRAs in addition to your original account, the five-year period start date for all of them would revert back to that of your first account. If you’ve had a Roth IRA since 2019, and then open another in 2024, you wouldn’t have to wait to start making qualified withdrawals of the earnings in your 2024 account (assuming you are age 59½ or meet one of the other requirements). Your five-year waiting period would have already elapsed. (Roth IRA conversions made prior to age 59½ have a separate five-year holding period related to the 10% penalty being applied if you withdraw the conversion amount from the Roth IRA). For more on the five-year rule, see the IRS Publication 590-B.
Keep in mind, if you open more than one Roth IRA, you can contribute a total of $7,000 in 2025 cumulatively to all the accounts.
If you’re leaning toward opening a Roth IRA—and you hope to tap into the earnings from your investments at some point in the next several years—the best time to take the leap and start the clock may be right now. (See: Benefits of Roth IRAs go well beyond retirement)
The information provided is not intended as a source for tax, legal or accounting advice. Please consult with a legal and/or tax professional for specific information regarding your individual situation.
