Nevertheless, you still have until April 15th of the following calendar year to make a Roth IRA contribution.Īs a result, you decide to make your initial contribution for the 2011 tax year. The tax year, however, is the time period between January 2nd of one year and April 15th of the following calendar year (at least for Roth IRA purposes).įor example, let's say you open a Roth IRA in March 2012.īecause you didn't have a Roth IRA in 2011, you never made a contribution for the 2011 calendar year. Well, the calendar year is exactly what it sounds like - the time period between January 1st and December 31st of any given year. So what's the difference between the tax year and the calendar year? Well, as previously stated, it's not enough to simply open an account, you also must fund it before the clock starts ticking.įor instance, if you sign up for a Roth IRA account December 15th, but you don't actually put any money into it until June 1st, your 5 year countdown starts when you fund the account in June.Īnd once your 5 year countdown starts, you need to wait five tax years, NOT five calendar years to meet the 5 year rule requirement. So what are the particulars of this rule? This is widely known as the Roth IRA 5 year rule. The Roth IRA rules for withdrawal state that you must open and fund your Roth IRA for a period of 5 tax years before you can withdraw earnings, rollover funds, or conversion funds tax and penalty-free. So let's learn more about these two rules. If you withdraw any funds from your account other than your original contributions before meeting these milestones, you're making an "early withdrawal" in the eyes of the IRS.Īnd early withdrawals usually trigger a tax liability. Unlike your original Roth IRA contributions, you can NOT withdraw investment gains, rollover funds, or conversion funds tax-free and penalty-free unless you first meet two conditions - reach age 59 ½ and meet the 5 year rule requirements. However, under the Roth IRA rules for withdrawal, if you want to withdraw any of the remaining $45,000 in your account, you will likely owe income taxes and a 10% early withdrawal penalty. Under these rules (and still using the example above), you can withdraw up to $40,000 before facing any income tax liability or an early withdrawal penalty.īecause your original contributions total $40,000. Well, unlike most retirement accounts such as your 401k, 403b, or Traditional IRA, you make contributions to your Roth IRA with after-tax dollars (non-deductible contributions).Īs a result, you can withdraw those funds without penalty since you already paid income taxes on them before you made your contribution. If for some reason you need to withdraw $5,000, you can do so tax-free and penalty-free even though you have yet to reach age 59 ½.
Over the past ten years, you've contributed $40,000 to your Roth IRA.
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Regardless of your age or the circumstances surrounding the withdrawal, you can always remove original contributions from your account without having to pay income taxes or an early withdrawal penalty.įor example, let's say you're 45 years old. Unlike your Traditional IRA or your 401k, where the IRS taxes you for making any type of withdrawal, you can withdraw your original Roth IRA principal contributions tax-free and penalty-free at any time for any reason.