Susie O (0:00)

Hi everybody. Suzio here. Now, what is the goal of money? The goal of money is for you to be secure. And there is no better way for you to be secure than having an emergency savings account. It is essential for your financial foundation. So all of you should be participating in the Ultimate Opportunity savings account at Alliant Credit Union. Go to myalliant.com to find out more. And be secure. September 14, 2025. Welcome everybody to the Women in Money podcast as well as everybody smart enough to listen Susie O here. And you get out that Suzy notebook right here and right now, because this is a little bit of a Masterclass on the five year rule when it comes to Roth IRAs, both contributory Roths as well as converted Roths. And I'm only dealing with Roth iras today, everybody. Just so you know. Are you ready? There are two different types of Roth retirement accounts. And a Roth retirement account, as you better know by now, is an account that is funded with after tax dollars. And it grows and it grows. And if you meet certain rules, you can take out everything tax free later on. And it is those rules, known as the five year rule, that screws everybody up. So let's first begin with a contributory Roth. What is a contributory Roth? Just as its name says, you contribute to it with after tax dollars. And every single year, it's not coming from another account, it is coming from your pocket into this account. And the money that you contribute is known as your original contributions. Now, while that money sits in there, obviously it's growing and growing. The growth of your original contributions is known as earnings. And it is your earnings that the five year rule applies to, not your contributions. Let me give you an example. You are 38 years of age and you put in $7,000 with after tax money. You contribute it to your Roth IRA. At 39, you do the same thing. At 40, you do the same thing. You have contributed $21,000 and over those three years, the account is worth $28,000 now or the difference that $7,000 difference, that is the money that your contributions earned. The five year rule says you can take out any of your original contributions without taxes or penalties, regardless of your age or how long the account has been open. So you are 40 years of age and you need money. And where do you get that money? From your Roth, and that Roth has only been open for three years. But in this example, you can take out up to $21,000 of your original contributions without taxes or penalties, regardless of age or how long the account has been open. But Susie, it says there's a five year rule. Listen to me, the five year rule does not apply to your contributions. It only applies to earnings. So in this case, you cannot take out your earnings until the account has been open for five years and you are 59 and a half years of age. If both of those things have been met, then you can take it all out, income tax and penalty free, period. Done. All right, but you're saying to me, okay, but what if I don't start a contributory ROTH Until I'm 58, then what? You're 58. You contribute $8,000 a year at 58, 59 and 60. All right, and now you have contributed $24,000 and over those three years it's now grown to $30,000. And you want to take out all 30,000 because you think you're over 59 and a half. Can you? No, you cannot without taxes. Now, once you listen closely, once you become 59 and a half or older, the 10% penalty for age absolutely goes away. So you could, if you wanted to, doesn't matter. You could take out up to the 24,000, just like if you were younger. However, to access the $6,000 in this case of earnings, you would have to wait until you were 62, five full years to take out the earnings. Otherwise you're going to pay ordinary income tax on the earnings. Obviously there's no age 10% penalty, but you are going to owe ordinary income tax on that $6,000. Does that make sense? So the five year taxation rule applies to earnings and how long the account has been open. I hope that's clear to all of you. Now let's go to conversions. Conversions again are when you convert from a taxable account to an after tax account. Now, I think the best way for you to understand conversions is to use examples. But before I give you an example, I want you to know that there isn't just one five year rule, there are two. And this is what you have to understand. The first five year rule will be based on your very first Roth IRA opening. And that will determine when earnings can be withdrawn, tax and penalty free, provided you are 59 and a half or older. And I'm going to give you an example of that in a second. The second five year rule applies to each Roth conversion and governs when you can withdraw that specific converted amount penalty free if you are under 59 and a half. Every Roth conversion has its own five year time clock and you have to know the difference. So I'M going to give you examples now, but just keep that in mind what I just said to you. You're 57 and you do your very first Roth conversion in 2025. You do not have a Roth IRA. You've never opened up any type of Roth prior to this. This is going to be your first Roth and your very first Roth conversion. So you're 57 again and you do your first Roth conversion in 2025. In 2027 you are going to be 59 and a half. And once you are 59 and a half, you can take out the amount of money that you converted. No tax and no penalty, because that's attached to your age. But your earnings aren't tax free until 2030. Or why? Because the account has not been open for at least five years. So once you attain 59 and a half, you can take out your conversion money. No tax, no penalty. But earnings in this example, you can't take out until 2030. Now let me give you another example. You've listened to me and you opened up a Roth years ago and it has already met the five year requirement. You're 57 and you do your very first Roth conversion, but you already had another Roth for five years at 59 and a half in the year 2027, everything is going to be tax free conversions and earnings. No penalty. No penalty, because you're already now 59 and a half. No taxation on any of it, including the earnings. Why? Because your Roth converted account takes on the timeframe of your very Roth first Roth IRA that you opened. I know I have said to you, and it is true, every time you convert a Roth, it has its own five year clock. Absolutely true. But if you already have a Roth IRA that had been open for five years, every conversion takes on the five year clock of your very first Roth IRA that you opened. That's where the confusion is, everybody. You think your Roth IRA has its own time clock, and it does. But it also will take on the time clock of the very first Roth IRA that you opened. And it is this time clock that allows you, Once you are 59 and a half years of age or older, that determines when your earnings can be withdrawn, tax and penalty free. But the key is you have to be 59 and a half or older. That's why if you converted at the age of 57, but you already had a Roth for five years at 59 and a half, in just two and a half years, everything is tax free conversion and earnings. That is why I've always said to you? Actually, I haven't said it to you. I've begged you, I've begged you on my hands and knees, everybody, to open up a Roth ira, whether you're going to fund it or not. I don't care if you put $1 in it, I don't care how you get $1 in it. But if you open a Roth IRA and fund it with just $1, that is the Roth IRA that is going to follow you and your time clocks for the rest of your life. Every conversion, your five year time clock is going to be attached to the very first Roth that you have opened. When it comes to being able to withdraw your earnings, tax and penalty free, provided you are age 59 and a half or older. Let me give you another example though. Maybe you're 40 and you convert $20,000 into a brand new Roth. You can't touch that conversion for five years without a 10% penalty. And you can't touch the earnings until you're 59 and a half and the Roth has been open for five years. So let's just say, however, notice that I said you can't touch that conversion for five years without a 10% penalty. Remember, you have already paid taxes on it. The 10% penalty in this case is not attached to age, it is attached to how long the Roth IRA you just converted to has been open. Now in this case here, this is where the second five year rule applies. Because when it comes to a conversion and you wanting to touch the converted amount, what's key here is that this five year time clock is not attached to the first Roth IRA you ever open. It is in this particular case that every single converted Roth has its own five year time clock. And you cannot touch the money that you originally converted for at least five years, assuming you're under 59 and a half. All right? Without a 10% penalty. Do you see? So it's very important. So again, this situation does not use the clock from your original Roth ira, even if you opened it up years ago, if it hasn't been opened for five years, you can withdraw that $20,000. You're not going to pay taxes on it because you already did, but you're going to have to pay a 10% penalty. Are you understanding when it's taxed and when it's not? If you really want to make your life really simple with a converted Roth, simply open up a Roth IRA today and get that five year time clock moving. And remember, when you do convert, just leave the amount you converted alone for at least five years to avoid the 10% penalty if you are under 59 and a half. Just know those two things and your life will be pretty simple. Now I hope that has cleared it up for you. What are some of the biggest mistakes really that all of you make? Believing that you can take out a conversion anytime you can't if you're under 59 and a half. Forgetting that earnings come out last and they aren't tax free until five years plus 59 and a half have been met. You're waiting too long to open a Roth IRA because even that $1 gets your clock going. And you're mixing up the two rules, one for earnings and one for conversions. Don't confuse them. So I hope I haven't confused you more.