The Rules of a Five Year IRA Withdrawal

by Deborah Barlowe

Introduced in 1998, a Roth IRA is a retirement savings account designed to allow an investor to withdraw his savings on a tax-free basis after he turns 59 1/2. As of the time of publication, the Internal Revenue Service allows a person under 50 to contribute up to $5,000 of his after-tax earned income to a Roth IRA while individuals aged 50 or above may contribute up to $6,000. Whether the IRS views a person's withdrawal from a Roth IRA as tax-free depends on why the investor withdrew funds, his age and when the taxpayer established his retirement account. The five year rule does not apply to traditional IRAs.


Because an investor contributes post-tax dollars to his Roth IRA, the IRS allows him to access his principal at any time without taxing the funds he receives. If a person withdraws some or all of his principal from his Roth IRA, the IRS does not require him to include the amount he receives in his gross income.

Qualified Distribution

Similar to its treatment of a person's withdrawal of principal, the IRS does not require a taxpayer to record qualified distributions from his Roth IRA in his gross income, meaning the distributions are tax-free. The IRS views a withdrawal from a Roth IRA as a qualified distribution if a taxpayer makes the withdrawal at least five years after he established his retirement account. For an investor to receive a qualified distribution, the IRS further requires he satisfy at least one of the following criteria: he is at least 59 ½, disabled or is purchasing a first home as discussed in IRS Publication 590. The IRS views disbursements made to a deceased investor's beneficiary or estate as qualified distributions as well.

Tax Year vs. Calendar Year

When identifying the age of a person's Roth IRA, the IRS distinguishes between a tax year and a calendar year. The IRS allows a taxpayer to make a contribution to his Roth IRA in a given year up until the following year's due date for federal taxes, typically April 15th. For the purpose of aging an account, the IRS considers January 1st of the tax year during which an investor made his first contribution to his Roth IRA as the date he established his account. If an investor makes an initial contribution of $3,000 to his Roth IRA on April 1st, 2012, for instance, the IRS considers the contribution as made in tax year 2011 and assigns the account an opening date of January 1st, 2011.


If an account owner receives a distribution from his Roth IRA before his account is five years old, the amount he withdraws is subject to federal income taxes and an additional 10 percent punitive tax. The IRS will levy taxes against withdrawals that include interest earned by funds deposited into a Roth IRA if the withdrawal is not a qualified distribution as well.

About the Author

Deborah Barlowe began writing professionally in 2010. With experience in earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor’s degree in hotel administration from Cornell University.

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