Harness Money

The Roth IRA 5-year rule is a rule that determines whether earnings on contributions in a Roth IRA are eligible for tax-free withdrawals. Here’s how the rule works:

1. Roth IRA Contributions: Contributions you make to a Roth IRA with after-tax money can be withdrawn at any time without taxes or penalties since you have already paid taxes on that money.

2. Roth IRA Earnings: The earnings or investment gains on your contributions in a Roth IRA are subject to the 5-year rule. To qualify for tax-free withdrawals of earnings, two conditions must be met:

   a. The Roth IRA account must be open for at least five tax years.

   b. You must be at least 59½ years old, disabled, or using the funds for a qualified first-time home purchase (up to a certain limit) to withdraw the earnings tax-free.

If you withdraw earnings from a Roth IRA before meeting both conditions, the earnings portion may be subject to taxes and potentially early withdrawal penalties. It’s important to understand and comply with the Roth IRA 5-year rule to maximize the tax benefits of your Roth IRA account. Remember to consult with a financial advisor or tax professional for specific guidance based on your individual circumstances.