A Closer Look at the Roth IRA Five-Year Waiting Period
By Alayna Drope, CIP, CHSP
When does the five-year waiting period start for purposes of a Roth IRA qualified distribution?
The five-year waiting period for Roth IRA qualified distributions begins for all of the individual’s Roth IRAs on January 1 of the first taxable year for which the Roth IRA owner makes a regular contribution or conversion contribution to any Roth IRA.
If a Roth IRA owner makes a prior-year contribution, the five-year period begins January 1 of the year for which the contribution was made. For example, if the contribution was made in 2020 for 2019, the five-year period would begin January 1, 2019, because the contribution was made for 2019.
If a Roth IRA owner has multiple Roth IRAs, does each account have its own five-year period?
Roth IRA owners who have multiple Roth IRAs do not have to meet multiple five-year periods. There is only one five-year period for each IRA owner over their lifetime. Therefore, even if a Roth IRA owner distributes his entire account balance and later makes contributions to a new Roth IRA, the five-year period does not start over with the new contribution.
There are certain contributions that when made to a Roth IRA and removed properly, are deemed as never having been made for purposes of the five-year period. A Roth IRA contribution that is removed as an excess, revoked, or recharacterized to a Traditional IRA cannot be used to start the five-year waiting period.
What happens to the five-year period when a Roth IRA owner dies?
Along with inheriting the Roth IRA from the deceased Roth IRA owner, a Roth IRA beneficiary inherits the deceased owner’s acquired years in the five-year waiting period for purposes of the inherited Roth IRA assets. The five-year waiting period for a nonspouse beneficiary’s inherited Roth IRA is determined separately from her own Roth IRAs. If a Roth IRA beneficiary has met the five-year period for her personal Roth IRAs, this does not cross over to her inherited IRA.
A spouse beneficiary, however, determines the five-year period for qualified distributions by using the earliest five-year period of all her own Roth IRAs, including the Roth IRA she inherited and is deemed to have treated as her own. Therefore, if the deceased Roth IRA owner had met the five-year period for his Roth IRA(s), the spouse beneficiary can use the deceased owner’s five-year period for all of her own Roth IRAs, even if she had not met the five-year period on her own. If the spouse beneficiary had already met her five-year period but the deceased owner had not, she can use her five-year period on the inherited IRA she treats as her own.
Are Roth IRA owners allowed to take distributions from their Roth IRAs if their five-year period hasn’t been met?
Roth IRA owners can access their Roth IRA assets at any time. The five-year period is only used to determine if the distribution is qualified, meaning the entire balance of the Roth IRA could be taken tax and penalty free. Roth IRA owners and beneficiaries can take distributions before meeting the five-year period, but any non-contributory portion of the distributions may be subject to tax and/or penalty.
