5-Year Rule

• No matter what your age, you cannot take a qualified distribution from your Roth IRA unless it has been open at least five years. The clock starts ticking Jan. 1 the year you make your first contribution. If you contribute before April 15 and apply your contribution to the previous year, the start date would be Jan. 1 of the previous year.
  
  

Significance

• Taking qualified withdrawals allows you to avoid penalties on Roth IRA distributions. Once your account passes the 5-year milestone, you may begin taking qualified distributions the year you turn 59 1/2. If you are younger, you may take qualified distributions for a first home. You can also avoid a penalty if you withdraw money to pay qualifying higher education expenses for you or someone in your immediate family.
  
  

Considerations

• For the purposes of early Roth IRA distributions, Internal Revenue Service rules actually distinguish between the original contribution amounts and earnings in your account. You can withdrawal the entire amount of your contributions at any point and not pay a penalty. However, earnings you withdraw early are subject to a 10 percent penalty.