Why is age 5 so important for your Roth IRA. Well, there is a little discussed rule around Roth IRAs. We know that they grow tax free. We know that we can take contributions out at any time without penalty. We also, know that at age 59 ½ we can start taking from either our IRA or our Roth accounts.
But what most people miss is the 5 year clock on Roths. The Roth rules say that to take distributions tax-free and penalty-free, your Roth account has to have been open for at least 5 years. That means when you turn 59 ½ your account also has to be at least 5 years old. I’ve been asked by clients if the clock resets each time they make a contribution; or does each contribution have its own 5 year clock. The answer is no. The clock starts when the account is first opened.
In 99% of cases, the clock is a non-factor. But if you are 55 or older and start your Roth IRA, you will not be able to take distributions penalty free at 59 ½. Check with your advisor when planning your retirement distributions.