Ed Slott and the Five-Year Rule

Summary

Podcast Summary: "Ed Slott and the Five-Year Rule" on Jill on Money with Jill Schlesinger

Episode Information

• Title: Ed Slott and the Five-Year Rule
• Host: Jill Schlesinger, CFP®
• Guest: Ed Slott, CPA and IRA Expert
• Release Date: March 14, 2025
• Podcast: Jill on Money with Jill Schlesinger
• Description: In this episode, Jill Schlesinger delves into the intricacies of the five-year rule for Roth IRAs with renowned IRA expert Ed Slott. The discussion aims to demystify this often confusing aspect of retirement planning, providing listeners with actionable insights to optimize their retirement strategies.

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Introduction

Jill Schlesinger opens the episode by highlighting the availability of exclusive content for subscribers, including an in-depth interview with Ed Slott. She encourages listeners to subscribe to the Jill on Money Live subscription service to access full interviews and live webinars. A brief promotional segment introduces listeners to the subscription benefits, emphasizing the value of expert financial discussions.

Snippet of the Conversation with Ed Slott (03:14 - 06:40)

Overview: A prerecorded snippet from a live webinar features Ed Slott explaining the five-year rule associated with Roth IRAs. This segment aims to clarify the complexities surrounding the rule and provide practical advice for investors.

Key Discussion Points:

1. Understanding the Five-Year Rule (03:27 - 05:15)

   • Ed Slott explains that the five-year rule is crucial for determining whether distributions from a Roth IRA are tax-free. He emphasizes that the rule can be confusing because there are two separate five-year periods to consider:
     • First Five-Year Period: Determines if distributions are qualified (i.e., tax and penalty-free) once the account holder reaches 59½ years of age.
     • Second Five-Year Period: Applicable for conversions, where each conversion starts its own five-year clock to avoid the 10% early withdrawal penalty.
   • Quote: “It's complicated. Only for the 10% penalty. But the bottom line is none of this matters if you hold it for 5 years and 59 and a half.” (03:35)

2. Starting the Five-Year Clock (05:15 - 05:33)

   • Ed Slott advises that the five-year period begins on January 1st of the year you make your first Roth IRA contribution or conversion. Regardless of the contribution amount, the clock starts ticking from this date.
   • Quote: “So right now, if you made an IRA contribution that you qualified for under those income limits, if you made an IRA contribution right now in 2024, you already caught a deal because you have five year period already started last 1-1-24.” (05:19)

3. Roth IRA Contributions and Conversions (05:35 - 06:12)

   • The discussion touches on the strategic importance of converting traditional IRAs to Roth IRAs. Ed Slott notes that while conversions can be beneficial, each conversion initiates its own five-year period, impacting the penalty structure for early withdrawals.
   • Quote: “Remember, I said give your dregs to charity. So if you have a plan to give 5 or 10,000 a year to charity, save your traditional IRA...” (06:00)

4. Practical Advice for Investors (06:12 - 06:40)

   • Ed Slott recommends that most investors focus on maximizing their Roth IRA benefits by holding accounts until they meet the five-year and age 59½ requirements. However, he acknowledges that maintaining a small traditional IRA may be beneficial for specific scenarios, such as charitable contributions or unexpected medical expenses.
   • Quote: “Everybody should open a Roth IRA for $20 if you qualify, or $50 to get the five years started. So right now, if you made an IRA contribution that you qualified for under those income limits...” (06:26)

Key Insights and Takeaways

1. Dual Five-Year Rules:

   • Understanding that there are separate five-year periods for qualified distributions and conversions is essential. This knowledge helps in planning withdrawals and avoiding unnecessary penalties.

2. Strategic Contributions:

   • Starting contributions early, even with minimal amounts, can be advantageous as the five-year period begins on January 1st of the contribution year, maximizing the tax-free benefits sooner.

3. Conversions and Timing:

   • While converting traditional IRAs to Roth IRAs can offer long-term tax benefits, each conversion must be carefully timed to manage the five-year penalty-free withdrawal window effectively.

4. Retaining Traditional IRAs:

   • Maintaining a small traditional IRA may provide flexibility for charitable giving and handling unforeseen medical expenses without incurring penalties or taxes.

Conclusion

The conversation with Ed Slott underscores the importance of understanding the five-year rule in Roth IRAs to optimize retirement planning. By carefully managing contributions and conversions, investors can maximize the tax-free benefits of their Roth IRAs while mitigating potential penalties. Jill Schlesinger wraps up the snippet by reiterating the value of subscribing to the Jill on Money Live service for full access to such insightful discussions.

Additional Resources:

• Ed Slott's Website: irahelp.com
• Subscription Service: Visit jillonmoney.com and click on the "Contact Us" button for more information.

Notable Quotes:

• Ed Slott: “It's complicated. Only for the 10% penalty. But the bottom line is none of this matters if you hold it for 5 years and 59 and a half.” (03:35)
• Ed Slott: “Everybody should open a Roth IRA for $20 if you qualify, or $50 to get the five years started.” (06:26)

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This episode provides valuable insights into the five-year rule for Roth IRAs, making complex tax regulations accessible and actionable for listeners. Whether you’re new to retirement planning or looking to refine your strategy, understanding these rules is pivotal for financial success.

Transcript

[Jill Schlesinger]

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[Mark Tularsio]

Learn [e-mail] AmExBusiness welcome to the Jill on Money Show. It's Friday, March 14th and if you missed signing up for the Jill on Money Live subscription service and you're just like, oh, bummer. I really wanted to hear Ed Slott. I wanted to join. Well, I've got a treat for you. We're going to have a little itty bitty snippet of that interview. This is what in the business they call a tease. It because you're supposed to be so tantalized by how fabulous this interview is that you will immediately finish listening. Go to jillonmoney.com Click on the subscription service Jill on Money Live and then pay up 45 bucks. For the next 12 months, you'll be.

[Jill Schlesinger]

Able to watch the Ed Slot interview.

[Mark Tularsio]

That aired last week that we, I'm sorry, conducted last week. And you will be set up for the next 12 months for new webinars that you'll be able to join live. It's a great fun experience. And you'll hear from our conversation. This was live. This guy, like you wind him up, you talk. This was like a stump the DJ where literally people were just asking question after question after question and Ed was like, answer, answer, answer, answer. It was great. So right now, without further ado, a snippet of our conversation with Ed Slott.

[Jill Schlesinger]

He's a cpa.

[Mark Tularsio]

He's an IRA expert. He is the man, he is the myth. And his website is irahelp.com Here is a portion of last week's webinar with Ed Slott.

[Ed Slott]

Can you just talk about the five year rule?

[Unknown]

Oh, gosh.

[Ed Slott]

And if it comes in it, and if it comes like once you hit, let's just say you're, you know, you've had your.

[Unknown]

It doesn't matter people to focus. If you do the Roth. I assume you mean the five year old on the Roth IRA, but also.

[Ed Slott]

If you're 59 and a half, all right.

[Unknown]

If you use the Roth IRA for its intended purpose, none of those rules will ever apply to you. If you hold it till you're 59 and a half and five years, everything that comes out will always be income tax and penalty free for the rest of your life and beyond to your beneficiaries. So this only applies when you don't meet those qualifications. And then there's a. The problem with explaining the five year rule, which most people have find confusing is because there are. It splits off. There are two different five year rules. One for the 10% penalty, which only applies for people under 59 and a half. And one to see if you have a qualified distribution if you have not only 59 and a half, but you held it for five years and the five years counts. This is why everybody should open a Roth IRA for 20 bucks if you qualify, or 50 bucks to get the five years started. If you're so worried about the five year rule because it starts counting for from January 1st, the five years for the first year for which you made an IRA contribution or a conversion. So right now, if you made an IRA contribution that you qualified for under those income limits, if you made an IRA contribution right now in 25, 4, 24 you already caught a deal because you have five year period already started last 1-1-24.

[Mark Tularsio]

So it's the first dollar in is the beginning. The clock starts. It doesn't matter how much.

[Unknown]

Right. For the tax free feature qualified for 59 and a half. If you're under 59 and a half and you're converting, don't do. Each conversion starts its own fresh start for its own five year rule.

[Mark Tularsio]

Oh, I didn't know that.

[Unknown]

Yeah, so it's complicated. Only for the 10% penalty. But the bottom line is none of this matters if you hold it for 5 years and 59 and a half.

[Ed Slott]

With, with more and more people using Roth 401ks, those will eventually be rolled over into Roth IRA IRAs. I imagine so.

[Unknown]

Yeah. And that's another reason, by the way, most people don't know this. The Roth ira. If you do the rollover the right way to the Roth ira, the Roth IRA holding period trumps. So let's say you were in a Roth 401k only two years, but you have this $20 Roth IRA open for 10 years. You've got the five years once you roll it to a Roth.

[Mark Tularsio]

So that is really everybody should have that. Every single person on this, every single person who is watching this right now open a Roth IRA for you, for your friend, for your kid. Just open it and throw some money in there. It's not a big deal.

[Unknown]

You have to qualify by having wages.

[Mark Tularsio]

Yeah, you gotta have wages.

[Ed Slott]

Someone wants to know basically Ed, in your opinion, is the goal to eliminate all pre tax money and move it all into Roth or is it okay to leave some pre tax and pay some taxes later on?

[Unknown]

I think you have to leave a small amount for only two reasons that I can think of other than that I would try and get rid of all because it's a growing building accruing tax bill. Here are the reasons. If you're giving to charity like we talked about, save some IRAs to do QCDs with. Remember I said give your dregs to charity. So if you have a plan to give 5 or 10,000 a year to charity, save your traditional IRA and when you qualify it 70 and a half, do the QCD each year because then you're taking down that IRA at 0% tax rate every year. Another reason which is harder to predict, medical bills. Everybody's going to have them. You just don't know when as you get older. But you might want to keep some traditional IRAs on hand to use to pay medical bills because at least you can get some offsetting deduction, not total offset because you have this 7 1/2% limitation. But you'd hate to have no traditional IRAs and have to take from already taxed money in a Roth to pay medical bills. And you get no deduction because you don't need a deduction because Roths aren't taxable.

[Mark Tularsio]

Okay, if you want the whole interview, you're going to have to subscribe. 45 bucks for the next 12 months. You can subscribe to Jill on Money Live at our website jillonmoney.com hey, while you're there, if you've got a question, just click the Contact Us button, upper right hand corner. Let us know if you want to join us on the air live by checking the box. You can subscribe to us on the Odyssey app or wherever you find your favorite podcast. Hey, you can also subscribe to Money Watch podcast, which drops tomorrow and Sunday, Saturdays and Sundays. Money Watch it's so much fun. We're a little bit more, I don't know, Mark gets to play a little bit more on the Money Watch podcast and we're focusing more on some of the basics of what you you need to think about for your financial building blocks. So I love it. The Money Watch podcast also available through the Odyssey app. Our music is composed by Joel Goodman. Mark Tularsio is our executive producer and king of all things web. We are distributed by Odyssey. Try to lift someone up. Change your work, change your wealth, change your life. Thanks for listening. We'll talk to you next week.

[Jill Schlesinger]

For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been complex, time consuming and expensive. But imagine if real estate investing was suddenly easyall the benefits of owning real, tangible assets without all the complexity and expense. That's the power of the Fundrise Flagship real estate fund. Now you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10 4,700 single family rental homes spread across the booming Sunbelt, 3.3 million square feet of highly sought after industrial facilities. Thanks to the E Commerce wave, the flagship fund is one of the largest of its kind, well diversified and managed by a team of professionals. And now it's available to you. Visit fundrise.com jillonmoney to explore the fund's full portfolio. Check out historical returns and start investing in just minutes. Carefully consider the investment objectives, risks, charges and expenses of the fundrise flagship fund before investing. This and other information can be found in the Fund's [e-mail] flagship. This is a paid advertisement.

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[Mark Tularsio]

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[Jeff Probst]

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