Money Untouchable For 5 Years
When you make a direct contribution to a Roth IRA, you can withdraw that money at any time without penalty. The earnings, however, must stay in the account until you are 59½ — or you'll incur ordinary income tax rates plus a 10% penalty.
The rules for Roth IRA conversions are different. If you convert money to a Roth IRA and are under age 59½, you can't withdraw the rollover contributions for five years. If you do, you'll face a 10% penalty. (The rules for distributions of earnings are the same as with direct contributions.) There are exceptions for medical expenses, medical insurance premiums paid during unemployment, first-time homebuyers, death, disability, and higher education. And each conversion has its own five-year holding period.
In our next blog post, we will continue the Roth IRA conversion complication discussion.