Actually, there are two five-year rules you need to know about. The first five-year rule determines when you can begin receiving tax-free qualified distributions from your Roth IRA. Withdrawals from your Roth IRA — including both your contributions and any investment earnings — are completely tax- and penalty-free if you satisfy a five-year holding period and one of the following conditions also applies:
• You’ve reached age 59½ by the time of the withdrawal
• The withdrawal is made due to a qualifying disability
• The withdrawal is made for first-time homebuyer expenses ($10,000 lifetime limit)
• The withdrawal is made by your beneficiary or estate after your death
This five-year holding period begins on January 1 of the tax year for which you made your first contribution (regular or rollover) to any Roth IRA you own. For example, if you make your first Roth IRA contribution in March 2023 and designate it as a 2022 contribution, your five-year holding period begins on January 1, 2022 (and ends on December 31, 2026). You have only one five-year holding period for determining whether distributions from any Roth IRA you own are tax-free qualified distributions. (Roth IRAs you inherit are subject to different rules.)
The second five-year rule is a little more complicated. When you convert a traditional IRA to a Roth IRA, the amount you convert (except for any after-tax contributions you’ve made) is subject to income tax in the year of the conversion. However, your conversion isn’t subject to the 10% early distribution penalty, even if you haven’t yet reached age 59½.
But what the IRS giveth it can also taketh away. If you withdraw any portion of your taxable conversion within five years, you’ll have to pay the 10% early-distribution penalty on those funds that previously avoided the tax — unless you’ve reached age 59½ or qualify for another exemption from the penalty tax. This five-year holding period starts on January 1 of the year you convert your traditional IRA to a Roth IRA. And if you have more than one conversion, each will have its own separate five-year holding period for this purpose.
IRS. (2023, November). Retirement Topics - 403(b) Contribution Limits. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits