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The 5 Year Rules For Roth IRAs

Retirement Funding

Today we're tackling a topic that's super important but often confusing. The five year rules for Roth IRAs. Trust me, you're going to want to get this right for your retirement planning. But first, let me introduce myself. My name is Warren Berger and I'm the owner of Luminary Financial Advisors. We're located in Cocoa Beach, Florida and serving people across the country. We help people create and implement tax efficient retirement plans. So first things first. What's a Roth I R a? Well, it's a type of retirement account where you put money in that you've already paid taxes on the best part, your money grows tax-free and you can also take it out, but only if you follow certain rules. Alright, let's dive into the first five-year rule. This one's all about when you first put money into your Roth i r a. If you've got to wait five years from that point before you can take out any earnings without paying taxes.

And here's a little tip. The clock starts ticking on January 1st of the year. You made that first contribution. So if you started your Roth I r A in say December of 2023, your five-year countdown actually started on January 1st, 2023. That means that you can start taking money out tax free on January 1st, 2028. I often tell people that it might make sense to get something into a Roth account as early as possible, even a hundred dollars just to get that five year clock started. So down the line, the rule won't be an issue for you. Now, the second five-year rule is for Roth conversions. If you've moved money from a traditional I R A to a Roth I r a, that's called a conversion. Each conversion has its own five-year countdown. So if you do this more than once, you'll have multiple five-year clocks ticking at the same time.

It can get complicated, so keep track of those dates. One thing to keep in mind here is that once you turn 59 and a half, the second rule no longer applies, and all you have to worry about is satisfying Rule number one, speaking of age 59 and a half, you've got to be at least age 59 and a half years old to take the money out without penalties. Even if you've waited those five years, if you're younger, you might get hit with a 10% penalty on the earnings and nobody wants that. There are some exceptions to these rules. For example, if you're buying your first home, you can take out up to $10,000 without those penalties. There are also exceptions for things like medical expenses and college tuition, but remember, these are general guidelines always, and I mean, always talk to your C P A or your financial advisor to get advice that's tailored for your situation. And if you've inherited a Roth I r a, there's a five-year rule for that too. If the person who left you the Roth I r a had it for at

Least years, you're good to go. You'll be able to get tax-free withdrawals from that account. Otherwise, you may be subject to taxes until you meet that requirement. This gets tricky as there may be required. Minimum distributions that need to be met as part of the Secure Act 2.0 potentially forcing you into a taxable event. These rules are still evolving, so make sure you speak to your accountant if you find yourself in this situation. So to wrap it all up, understanding these five-year rules can really help you make the most of your Roth I r A. It applies to your own contributions, any conversions you've made, and even Roth IRAs you might inherit. I hope this has been helpful. If you'd like to get some help with your personal financial situation, I have a link to my personal calendar below. Or you can go to luminary financial advisors.com to set up a complimentary call with me. Whether or not we decide to work together, I'll always make sure that you get pointed in the right direction. I also have links below to some checklists and flowcharts to help you on your financial journey. And finally, check out the link to our Facebook group called 10 Years to Retirement. Thanks for watching and I'll see you next time.