Roth IRA 5 Year Rule
We might already be aware that an Individual Retirement Account or IRA is a type of investment vehicle which allows employed individuals to make contributions into as long as they are earning a taxable income during the year. This investment vehicle is governed by certain IRA rules and regulations that must be followed in order to get the most benefits from such investment. There is a variety of IRA plans that an investor may choose from, and one of the most popular and preferred plan is the Roth IRA, which is believed to be more advantageous.
Why a Roth IRA?
The contributions to a Roth IRA are taxed right at the moment they are made. This means that the investment has the opportunity to grow tax-free. In fact, according to the Roth IRA distribution rules, all eligible withdrawals and distributions from the account are non-taxable. There are certain parameters that need to be met in order to enjoy tax-free distributions.
The Roth IRA withdrawal rules state that the Roth account holder must be at least 59 and 1/2 years old, and the account must have lapsed the 5-year holding period. Any withdrawal before this will be regarded as an early withdrawal from IRA, which will be subject to regular income tax, plus an additional 10% penalty. There are exceptions that may allow a limited tax-free withdrawal, such as disability of the account holder, or if he is buying his first home.
The 5-year IRA Holding Period Rule
The Roth IRA 5 year rule is almost like a maturation date, or an investment term. This begins on the tax year that the investor opened a Roth account and funded it, meaning he made his first contribution into it. After five years then, the Roth account will be in compliance with the 5 year rule, thus the account holder will be able to enjoy all the benefits associated with meeting such requirement.
Actual Year vs. Tax Year
The actual year in which an person made a Roth IRA contribution is not always the same as the tax year in which he made such contribution.
The first day of the tax year in which an individual opened and funded his new Roth IRA is the day when the Roth IRA 5 year rule clock begins to tick. So therefore, it is clear that regardless of what day and month a person opened and funded his new Roth account, the clock still starts in January.