Roth IRA Five-Year Rule refers to a regulation that stipulates that funds contributed to a Roth IRA must remain in the account for a minimum of five years before they can be withdrawn tax-free. This rule applies to both the contributions and the earnings on those contributions.
To qualify for tax-free withdrawals of earnings, the account holder must meet two conditions: the five-year holding period must be satisfied, and the withdrawal must occur after the account holder reaches age 59½, becomes disabled, or in the event of death. For contributions, the five-year period starts on January 1 of the tax year for which the first contribution was made. For instance, if an individual makes their first contribution in 2023, the five-year period would end on December 31, 2027.
If the withdrawal occurs before the five-year period has elapsed, the earnings may be subject to income tax and a 10% early withdrawal penalty unless an exception applies.
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