The Roth IRA: Rules and Advantages with Examples

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One of the biggest tools for wealth generation is the Roth IRA. Here are some things that are good to know.

How the Roth Account Gets Funded

Money from the Roth can only come from three things: contributions, conversions, and growth.


At any point/age, you can pull the contributions you’ve made to your Roth IRA completely tax-free and penalty-free. You can contribute $6,500 per year, as of 2023. This money is always free for you to withdraw, for any reason.

If you’ve deposited $6,500 in 2023, and it grew to $10,000, you can withdraw the $6,500 at any time. But the remaining $3,500 is what you cannot touch until you are 59 1/2 years old.


One thing people do after retirement is a Roth conversion. In the years where their tax bracket is lower, they will strategically shift money from the traditional IRA into their Roth IRA.

Converting from another account to a Roth IRA means paying taxes on the converted amount, and depositing it into the Roth, where it is free to be withdrawn tax and penalty-free at any time (because they are 59 1/2).

However, you cannot access money that is converted, until 5 years has passed. Every time you do a Roth conversion, the converted money has its own separate 5-year clock, after which you can pull that money out tax-free and penalty-free.

One type of conversion is a backdoor contribution, or Backdoor Roth IRA. This is simply a term to describe a strategy used by high-income earners who can’t contribute to a Roth IRA because their income is above certain limits. Rather than contribute directly to a Roth, you contribute to a traditional IRA, and then convert it to a Roth.


Growth has no ceiling in a Roth account. The only limitation is how much you can withdraw without taxes or penalties, before you are 59 1/2.

Roth IRA 5-Year Rules

There are two 5-year rules. Both are important. These are tax years, not calendar years. This means that if you make a conversion in February 2023, your five-year period starts on January 1, 2023.

Roth Account Age

For you to be able to access the growth of your Roth IRA, penalty free, even after 59 1/2, the account must have been established 5 years ago.

In other words, even though you are 59 1/2, if you have just started your Roth account, you are still going to have to wait another 5 years. You are not automatically exempt just because you crossed 59 1/2.

However, if you are 59 1/2 or older, and your account is already 5-years old, you can withdraw any of your contributions at any time, regardless of how long ago you’ve made the contribution. For example, you could have deposited $1000 in 2015, and $5,000 in 2023. Since your account is over 5 years old, and you are already older than 59 1/2, you can withdraw the full $6,000 with no taxes or penalties.


Second, conversions must wait 5-years to be withdrawn. Each conversion has its own 5-year time frame, before you can withdraw it tax-free and penalty-free.

Exceptions to the 5-year rules

If you have not yet met the 5-year requirement for conversions, or your account is not 5 years old, the distribution may qualify for an exception. You may qualify for the exception if:

  • You are withdrawing in a series of substantially equal periodic payments
  • You are using money to pay for qualified higher education expenses, unreimbursed medical bills above 7.5% of adjusted gross income, qualified health insurance premiums while unemployed, qualified disaster distribution of up to $22,000 per disaster after January 25, 2021, or if the distribution was made within one year after the birth/adoption of a child (up to $5,000)

In general, if it’s not your contribution, or a conversion for over 5 years, you’re going to pay taxes and a 10% penalty for any of that excess money you do withdraw.

How The IRS Decides Whether You Need To Pay Taxes

When you start taking money from your IRA, there is an order of operations.

Contributions are taken out first, followed by converted dollars, followed by earnings. What this means is that it does not matter when you made your contributions, when you converted or how much you’ve grown your account. The money you withdraw is first treated as though you are withdrawing your contributions.

Here’s an example. You are 30 (under 59 1/2). You start making contributions of $5,000 per year into your Roth IRA. Then, for 5 years, you do backdoor conversions of $5,000 per year into your Roth IRA. You grow the account an additional $25,000 in this time.

When you withdraw money, the first $25,000 you withdraw is going to be assumed to be contributions. In other words, this money has no tax or penalty.

After that, any money you withdraw is treated as conversions, and finally, as earnings. This example works out the same, no matter what order you make your contributions, conversions, or growth in your account. The IRS will always treat your withdrawals based on the order of operations.

Should we convert money from a 401k to a Roth, to withdraw it from the Roth with less taxes?

You do not get any tax benefits just for putting money into your Roth account. The tax benefits are from the growth that can occur over time. In other words, the longer you let your money sit in the account, the greater your benefit will be.

So if you are to put money into your Roth IRA today, with plans to withdraw it next year, there’s no real advantage (outside of that one year’s growth). It does not make sense to convert money into a Roth IRA, to try to get a tax benefit out of withdrawing it later. The best benefit you can get is converting money and letting it sit in the Roth IRA.

Should we get a traditional Roth or Roth IRA?

Taken from a reddit thread:

“It is simpler to do a backdoor-roth, once you start making too much money, if you don’t have money in a traditional IRA.

You can’t deduct your Traditional IRA contributions anyway if you are covered by a retirement plan at work and you earn above $70k or so. Therefore, pretax 401k + Roth IRA is the way to go.”


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