Suze Orman Explains Why The 5-Year Clock Matters So Much

Financial expert Suze Orman is urging Americans not to wait when it comes to opening a Roth IRA. Even if you only have a single dollar to contribute, she says in a recent episode of her “Women & Money” podcast, getting an account started now can save you from future tax headaches.

The reason comes down to the “five-year rule,” a little-understood rule that determines when your Roth IRA money can truly be withdrawn tax-free.

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A Roth IRA is funded with after-tax dollars, meaning you don’t get a tax break when you contribute. The advantage is that the money can grow tax-free, and once certain conditions are met, both contributions and earnings can be withdrawn without additional taxes.

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But while the rules for contributions are straightforward — you can always take out what you put in without penalty — the earnings portion is more complicated. That’s where the five-year rule comes in.

Orman explained that the five-year rule does not apply to your original contributions. For example, if you put $7,000 into a Roth IRA for three years straight, you could withdraw your $21,000 in contributions at any time without taxes or penalties, regardless of age or how long the account has been open.

The earnings, however, are different. You must be at least 59½ and have had the Roth IRA open for at least five years before you can withdraw the growth tax-free. Without meeting both conditions, your earnings could be subject to ordinary income tax.

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The timing becomes especially important if you open a Roth IRA later in life. Orman gave the example of someone who starts an account at age 58. Even if they’re over 59½, they still must wait five years before accessing any earnings tax-free. Otherwise, those gains will be taxed, though the 10% early withdrawal penalty no longer applies after 59½.

Roth conversions — when you move money from a traditional IRA into a Roth — carry their own five-year rule. Each conversion starts its own five-year clock. If you withdraw the converted amount before that period is up and you’re under 59½, you could face a 10% penalty, even though you’ve already paid taxes on it.