Podcast Episode - The Ultimate Roth Five Year Rule Masterclass

This Suze School episode is a Masterclass on the two types of five year rules surrounding Roth retirement accounts.  Knowing which is which, will help you avoid penalties and making mistakes when you need to take money from a Roth retirement account.

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Podcast Transcript:

Suze: September 14, 2025. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen. Suze O here, and you get out that Suze notebook right here and right now because this is a little bit of a master class on the five-year rule when it comes to Roth IRAs, both contributory Roths as well as converted Roths.

And I'm only dealing with Roth IRAs today, everybody, just so you know. Are you ready?

There are two different types of Roth retirement accounts, and a Roth retirement account, as you better know by now, is an account that is funded with after-tax dollars. And it grows and it grows, and if you meet certain rules, you can take out everything tax-free later on. And it is those rules known as the five-year rule that screws everybody up.

So let's first begin with a contributory Roth. What is a contributory Roth? Just as its name says, you contribute to it with after-tax dollars every single year. It's not coming from another account. It is coming from your pocket into this account. And the money that you contribute is known as your original contributions.

Now while that money sits in there, obviously it's growing and growing. The growth of your original contributions is known as earnings, and it is your earnings that the five-year rule applies to, not your contributions. Let me give you an example.

You are 38 years of age, and you put in $7,000 with after-tax money — you contribute it to your Roth IRA. At 39, you do the same thing. At 40, you do the same thing. You have contributed $21,000 and over those three years, the account is worth $28,000. That $7,000 difference is the money that your contributions earned.

The five-year rule says you can take out any of your original contributions without taxes or penalties regardless of your age or how long the account has been open. So you are 40 years of age and you need money, and where do you get that money from? Your Roth, and that Roth has only been open for three years. But in this example, you can take out up to $21,000 of your original contributions without taxes or penalties, regardless of age or how long the account has been open.

But Suze, it says there's a five-year rule. Listen to me. The five-year rule does not apply to your contributions. It only applies to earnings. So in this case, you cannot take out your earnings until the account has been opened for five years and you are 59 and a half years of age. If both of those things have been met, then you can take it all out income tax and penalty-free. Period. Done.

Right, but you're saying to me, OK, but what if I don't start a contributory Roth until I'm 58? Then what? You're 58, you contribute $8,000 a year at 58, 59, and 60. All right. And now you have contributed $24,000 and over those three years it's now grown to $30,000. And you want to take out all $30,000 because you think you're over 59 and a half. Can you? No, you cannot without taxes.

Now, once — you listen closely — once you become 59 and a half or older, the 10% penalty for age absolutely goes away. So you could if you wanted to. Doesn't matter. You could take out up to the $24,000 just like if you were younger. However, to access the $6,000 in this case of earnings, you would have to wait until you were 62 — five full years — to take out the earnings. Otherwise, you're going to pay ordinary income tax on the earnings. Obviously there's no age 10% penalty, but you are going to owe ordinary income tax on that $6,000.

Does that make sense? So the five-year taxation rule applies to earnings and how long the account has been open. I hope that's clear to all of you.

Now let's go to conversions. Conversions, again, are when you convert from a taxable account to an after-tax account. I think the best way for you to understand conversions is to use examples, but before I give you an example, I want you to know that there isn't just one five-year rule. There are two, and this is what you have to understand.

The first five-year rule will be based on your very first Roth IRA opening, and that will determine when earnings can be withdrawn tax and penalty-free, provided you are 59 and a half or older. I'm going to give you an example of that in a second. The second five-year rule applies to each Roth conversion and governs when you can withdraw that specific converted amount penalty-free if you are under 59 and a half. Every Roth conversion has its own five-year time clock.

And you have to know the difference. So I'm going to give you examples now, but just keep that in mind — what I just said to you.

You're 57 and you do your very first Roth conversion in 2025. You do not have a Roth IRA. You've never opened up any type of Roth prior to this. This is going to be your first Roth and your very first Roth conversion.

So you're 57 again and you do your first Roth conversion in 2025. In 2027 you are going to be 59 and a half. Once you are 59 and a half, you can take out the amount of money that you converted — no tax and no penalty — because that's attached to your age. But your earnings aren't tax-free until 2030. Why? Because the account has not been open for at least five years.

So once you attain 59 and a half, you can take out your conversion money, no tax, no penalty. But earnings, in this example, you can't take out until 2030.

Now let me give you another example. You've listened to me, and you opened up a Roth years ago and it has already met the five-year requirement. You're 57 and you do your very first Roth conversion, but you already had another Roth for five years. At 59 and a half in the year 2027, everything is going to be tax-free — conversions and earnings. No penalty. No penalty because you're already now 59 and a half. No taxation on any of it, including the earnings. Why? Because your Roth converted account takes on the time frame of your very first Roth IRA that you opened.

I know I have said to you — and it is true — every time you convert a Roth, it has its own five-year clock. Absolutely true. But if you already have a Roth IRA that had been open for five years, every conversion takes on the five-year clock of your very first Roth IRA that you opened.

That's where the confusion is, everybody. You think your Roth IRA has its own time clock, and it does, but it also will take on the time clock of the very first Roth IRA that you opened. And it is this time clock that allows you, once you are 59 and a half years of age or older, that determines when your earnings can be withdrawn tax and penalty-free.

But the key is you have to be 59 and a half or older. That's why if you converted at the age of 57, but you already had a Roth for five years, at 59 and a half — in just two and a half years — everything is tax-free: conversion and earnings.

That is why I've always said to you — actually, I haven't said it to you, I've begged you — I've begged you on my hands and knees, everybody, to open up a Roth IRA whether you're going to fund it or not. I don't care if you put $1 in it. I don't care how you get that $1 in it. But if you open a Roth IRA and fund it with just $1, that is the Roth IRA that is going to follow you and your time clocks for the rest of your life.

Every conversion — your five-year time clock is going to be attached to the very first Roth that you have opened when it comes to being able to withdraw your earnings tax and penalty-free, provided you are aged 59 and a half or older.

Let me give you another example though. Maybe you're 40 and you convert $20,000 into a brand new Roth. You can't touch that conversion for five years without a 10% penalty, and you can't touch the earnings until you're 59 and a half and the Roth has been open for five years.

So let's just say — however, notice that I said you can't touch that conversion for five years without a 10% penalty. Remember, you have already paid taxes on it. The 10% penalty in this case is not attached to age. It is attached to how long the Roth IRA you just converted to has been open.

Now in this case here, this is where the second five-year rule applies. Because when it comes to a conversion and you wanting to touch the converted amount, what's key here is that this five-year time clock is not attached to the first Roth IRA you ever opened. It is in this particular case that every single converted Roth has its own five-year time clock.

And you cannot touch the money that you originally converted for at least five years — assuming you're under 59 and a half — without a 10% penalty. Do you see? So it's very important. So again, this situation does not use the clock from your original Roth IRA even if you opened it up years ago. If it hasn't been opened for five years, you can withdraw that $20,000 — you're not going to pay taxes on it because you already did — but you're going to have to pay a 10% penalty.

Are you understanding when it's taxed and when it's not?

If you really want to make your life really simple with a converted Roth, simply open up a Roth IRA today and get that five-year time clock moving. And remember when you do convert, just leave the amount you converted alone for at least five years to avoid the 10% penalty if you are under 59 and a half.

Just know those two things and your life will be pretty simple.

Now I hope that has cleared it up for you. What are some of the biggest mistakes, really, that all of you make?

Believing that you can take out a conversion anytime — you can't, if you're under 59 and a half. Forgetting that earnings come out last, and they aren't tax-free until five years plus 59 and a half have been met. You're waiting too long to open a Roth IRA — because even that $1 gets your clock going. And you're mixing up the two rules: one for earnings and one for conversions. Don't confuse them.

So I hope I haven't confused you more.

KT: Hi everybody, it's KT! She, she confused me, but I'm here. She's been so good. I've been listening and I have some questions for Suze, but I just want you to know I promised I'd be at Suze School and I'm here. It's Sunday and I'm here, baby.

Suze: Right? And believe it or not, it is a very, very complicated topic. So it's not just me. So it's not just KT, and I was like, KT, if I do this Suze School, you have to sit there and not drink water, not reach for this — because KT fidgets. You just fidget, don't you?

KT: It's hard for me to be still.

Suze: And then it distracts me and then I have to start over. So it can be very complicated. However, you have been writing and — and by the way, when you want to write in a question, you do it at asksuzepodcast@gmail.com. And I said, KT, forget the names. Who cares about the names? Because too many people wrote in the same questions, right? But KT, I think picked five.

KT: I have five questions that I thought would be good.

Suze: Do I look like I just put myself through it to explain all this? All right, go on.

KT: She's spent, everyone. OK...

Suze: It takes more than that to spend me.

KT: My first question says, hey Suze, I'm 58. I just converted $100,000. I'll be 63 when the five-year clock is up. Do I still owe the 10% penalty if I withdraw before then since I'm over 59 and a half? How would you answer that?

Suze: No, because she already gave everyone the answer. She's over 59 and a half. So the truth is — remember everybody — the magic age is 59 and a half. Once you all reach 59 and a half, it doesn't matter when you convert. It doesn't matter about anything. The 10% early withdrawal penalty for age no longer applies. The five-year clock on conversions really only matters if you're under 59 and a half for the amount you converted. Earnings are a different thing, but anyway, OK.

KT: So that's why I have the next question. I'm 45. I converted $20,000 at the age of 40. So funny — I use that as an example. The five years are up. Can I take out my conversion dollars now and what happens to the earnings?

Suze: As I said in the podcast, this person can take out the $20,000 that they converted because they already paid taxes on it, so they don't have to pay tax or penalties again as long as the five years are up. But those five years only apply to the converted amounts. The earnings on that money — if they touch it before 59 and a half — they're going to owe taxes and penalties on it. I just have to ask you — you said penalties. Is it just the 10% penalty?

KT: Yes, but if you take out — you convert $20,000, you already pay taxes on it, three months later you decide, I want that money. It hasn't been in there for five years yet. If you take it out, they're going to charge you a 10% penalty because you have to think about it this way. That $20,000 came from a traditional IRA. Never paid taxes on it, anything, you're 40-some-odd years of age, and you just withdrew all $20,000. You'd have to pay taxes and a 10% penalty.

Therefore, when you convert it, the IRS is like, no, no, no, no. I'm not letting you get money out of your IRA, so to speak, and not have to wait to touch it. That's why the five-year penalty was put into effect. So when you convert, you have to leave it there for five years. Otherwise, if you then take out what you converted, you still owe the 10% penalty because you already paid the taxes. It makes sense, but just so that everyone knows — it's not even if you take out that full amount, any amount, you have a penalty. Any amount that you originally converted, you will owe a 10% penalty on if the account hasn't been open for five years.

OK, next question. This is really important, everybody, because this is what I call the what-ifs. These are the what-ifs. If I do a Roth conversion this year and then I die next year, does my beneficiary have to wait out the five-year conversion clock?

Suze: No. Thank God, right? So beneficiaries, everybody, are not subject to that 10% early withdrawal penalty. However, they may still owe income tax on the earnings if the Roth wasn't open for at least five years, but the five-year clock, so to speak, doesn't affect them with the 10% penalty. That is why you are to open up a Roth IRA first thing Monday morning if you do not have one.

KT: All right, that's good. Next question, Suze. I've had a Roth IRA since 2010. I'm 62. I just converted more money last year. Do I have to wait five years before I can touch the earnings from that conversion?

Suze: This is why I am telling you to open up a Roth IRA right now, and the answer is no, because their Roth had already been opened for more than five years. They opened up a Roth in 2010. The five-year clock started in 2010. And he's 62. So because he's over 59 and a half and because the Roth took on the timeframe of the 2010 one, there are no penalties and everything is tax-free — earnings as well as contributions.

KT: Go have a party. So Suze, my last question is from a listener who wrote in: I converted $50,000 at 35. At 38, I now need $10,000 back from my conversion. Suze, can I just withdraw part of what I converted, or do I trigger penalties on the whole thing?

Suze: No, sweetheart, you absolutely can withdraw part, but any amount you take out from a conversion within its five-year clock and before the age of 59 will be hit with the 10% penalty. The rest can keep growing inside of the Roth. So you are going to pay a 10% penalty on that $10,000 — just that simple.

KT: Was that everything, or you have a lot there and you think that's enough for everybody?

Suze: I think that's good. Yeah, these are my favorite Roth questions. I almost know the answers to all of them. I've been — I mean, I'm sitting here listening like you are, so don't do a quizzy.

KT: I'm just like, is she tempting me? Is she tempting me?

Suze: Don't do a quizzy. All right, everybody, I hope that has helped you and clarified it for you. If not, I'm sure I'll hear from you. But until Thursday, what do you want to say, KT?

KT: OK everyone, remember: people first, then money, then things. That is the correct order, everybody. And have a great Sunday today.

Suze: Yeah, but I have to say one other thing. When we say people first, we mean you. You have to give to yourself as much as you give of yourself. Don't you ever forget that I said that. All right, stay safe, stay healthy, and stay secure. See you Thursday. Bye-bye.