You
The account, in layers
Conversion cohorts — each carries its own five-year clock.
Basis is what you contributed less anything already withdrawn — not the balance your custodian shows.
The withdrawal
Roth Withdrawal Order — FinancialDepth
financialdepth.com/roth-withdrawal-order
What you keep after tax
—
Where each dollar comes from
When each layer unlocks
Green is reachable free of the 10% additional tax in that tax year. Grey is still locked, either by a conversion clock or by age.
The unlock ladder
Two clocks, doing two different jobs
Almost every argument about the Roth five-year rule is really two people talking about two different rules. There are two clocks. They start at different times, they govern different taxes, and knowing which one someone means is usually the whole answer.
The first clock starts with the first tax year you put money into any Roth IRA, and it only ever governs one thing: whether earnings escape income tax. It belongs to you rather than to an account, it never restarts, and opening a new Roth at a new custodian does not touch it. Contribute $50 in 2012 and the clock has been running since January 2012, whatever you did afterwards.
The second clock starts on the first day of the tax year of each individual conversion, and it only ever governs one thing: whether the 10% additional tax is recaptured on the part of that conversion that was included in income. Convert in five different years and you have five clocks running side by side. It also switches off entirely at 59½, because the age exception makes it moot.
The practical consequence is that these two rules rarely bite the same person. Most people who fear the five-year rule are holding contributions, which are unrestricted, or seasoned conversions, which are done. The people it actually catches are running a conversion ladder and reaching for a rung too early — and for them the cost is 10% of one cohort, not of the account.
The ordering rules, in the order they apply
| Order | Layer | Income tax | 10% additional tax | Governed by |
|---|---|---|---|---|
| 1 | Regular contributions | Never | Never | Nothing — always free |
| 2a | Conversion, taxable portion, oldest first | Never again | Yes, inside that cohort's five years | That cohort's own clock, or 59½ |
| 2b | Conversion, nontaxable portion | Never | Never recaptured | Nothing — it was never income |
| 3 | Earnings | Yes, unless qualified | Yes, unless 59½ or an exception | The first clock, plus a trigger |
All of your Roth IRAs are treated as a single account for this ordering. Holding money at three custodians does not give you three ladders.
Five things people get wrong
- Treating the balance as basis. Your contribution basis is what you put in less what you have taken out. The custodian's balance includes growth and conversions, and using it will understate your tax badly.
- Thinking a conversion is taxed twice. It is not. You paid income tax at conversion; withdrawing it early risks the 10% recapture only, never income tax again.
- Believing a new account restarts the clock. The qualified-distribution clock is a property of the taxpayer, not the account. It started the first year you ever contributed.
- Assuming one five-year rule covers everything. Being past the first clock does nothing for an unseasoned conversion, and seasoning a conversion does nothing for earnings.
- Forgetting that ordering protects you. Earnings are last out, so a modest withdrawal from a well-funded Roth usually never reaches the taxable layer at all.
Frequently asked questions
In what order does money leave a Roth IRA?+
Regular contributions first; then conversions first-in first-out, with the taxable portion of each taken before its nontaxable portion; then earnings. The order is statutory and you cannot choose. All your Roth IRAs count as one account.
Can I take my contributions out at any time?+
Yes — any age, any reason, no tax, no penalty, because they come out first and were already taxed. The hard part is knowing your basis figure. Old Forms 5498 and 8606 are the paper trail.
What if I take a conversion out before five years?+
The 10% additional tax is recaptured on the part of that conversion that was included in income. Not income tax — you already paid that. It applies to that cohort only, and it stops at 59½ regardless.
Does a new Roth account restart the clock?+
No. The qualified-distribution clock runs from the first tax year you contributed to any Roth IRA and belongs to you, not the account. Each conversion does open its own separate clock, but that one governs only the 10% recapture.
How does a conversion ladder work?+
Convert a slice each year and pay income tax then. Five tax years later that slice comes out with no additional tax and no further income tax. Repeat and a new rung matures every year. The cost is the tax at conversion and the five-year gap at the start, which has to be funded from elsewhere.
Where to go next
The Roth is one route of several
Ordering rules tell you what a Roth withdrawal costs. They do not tell you whether it is the cheapest money to touch first, or what happens when it runs out.
Sources
Every rule below is taken from a current primary source. Secondary commentary was used to locate these documents and for nothing else.
Federal rules only. Figures are in today's dollars with no investment growth — this prices the tax rules, not the market. State treatment is not modelled.