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The Ultimate Roth Five Year Rule Masterclass · Suze Orman's Women & Money (And Everyone Smart Enough To Listen)

• 0:08
  Suze: September 14, 2025. Welcome everybody to the Women and Money
• 0:11
  Suze: podcast as well as everybody smart enough to listen. Suze O here,
• 0:15
  Suze: and you get out that Suze notebook right here and
• 0:19
  Suze: right now because this is a little bit of a
• 0:22
  Suze: master class on the 5 year rule when it comes
• 0:26
  Suze: to Roth IRAs, both contributory Roths as well as converted Roths.
• 0:33
  Suze: And I'm only dealing with Roth IRAs today, everybody, just
• 0:38
  Suze: so you know, are you ready?
• 0:41
  Suze: There are two different types of Roth retirement accounts, and
• 0:45
  Suze: a Roth retirement account, as you better know by now,
• 0:49
  Suze: is an account that is funded with after-tax dollars.
• 0:53
  Suze: And it grows and it grows, and if you meet
• 0:56
  Suze: certain rules, you can take out everything tax free later on,
• 1:02
  Suze: and it is those rules known as the 5 year
• 1:05
  Suze: rule that screws everybody up. So let's first begin with
• 1:09
  Suze: a contributory Roth. What is a contributory Roth? Just as
• 1:15
  Suze: its name says, you contribute to it with after-tax dollars
• 1:20
  Suze: every single year.
• 1:23
  Suze: It's not coming from another account. It is coming from
• 1:26
  Suze: your pocket into this account.
• 1:30
  Suze: And the money that you contribute is known as your
• 1:34
  Suze: original contributions.
• 1:37
  Suze: Now while that money sits in there, obviously it's growing
• 1:42
  Suze: and growing. The growth of your original contributions is known
• 1:48
  Suze: as earnings, and it is your earnings that the five
• 1:53
  Suze: year rule applies to, not your contributions. Let me give
• 1:58
  Suze: you an example.
• 2:01
  Suze: You are 38 years of age, and you put in
• 2:04
  Suze: $7,000 with after-tax money you contribute it to your Roth IRA.
• 2:11
  Suze: At 39, you do the same thing. At 40, you
• 2:13
  Suze: do the same thing. You have contributed $21,000 and over
• 2:20
  Suze: those three years.
• 2:22
  Suze: The account is worth $28,000 now, or the difference, that
• 2:27
  Suze: $7,000 difference, that is the money that your contributions earned.
• 2:35
  Suze: The 5 year rule says you can take out any
• 2:39
  Suze: of your original contributions without taxes or penalties regardless of
• 2:47
  Suze: your age or how long the account has been open,
• 2:52
  Suze: so you are 40 years of age and you need money.
• 2:56
  Suze: And where do you get that money from? Your Roth,
• 2:59
  Suze: and that Roth has only been open for three years.
• 3:04
  Suze: But in this example you can take out up to
• 3:08
  Suze: $21,000 of your original contributions without taxes or penalties.
• 3:16
  Suze: Regardless of age or how long the account has been open,
• 3:22
  Suze: but Suze, it says there's a 5 year rule. Listen
• 3:27
  Suze: to me, the 5 year rule does not apply to
• 3:32
  Suze: your contributions. It only applies to earnings. So in this case,
• 3:38
  Suze: you cannot take out your earnings until the account has
• 3:43
  Suze: been opened for 5 years and
• 3:46
  Suze: you are 59 and a half years of age. If both of those
• 3:51
  Suze: things have been met.
• 3:53
  Suze: Then you can take it all out income tax and
• 3:56
  Suze: penalty free period done.
• 4:00
  Suze: Right, but you're saying to me, OK, but what if
• 4:04
  Suze: I don't start a contributory Roth until I'm 58? Then what?
• 4:12
  Suze: You're 58, you contribute $8,000 a year at 58, 59
• 4:18
  Suze: and 60. All right. And now you have contributed $24,000
• 4:25
  Suze: and over those three years it's now grown to $30,000.
• 4:30
  Suze: And you want to take out all 30,000 because you
• 4:34
  Suze: think you're over 59 and a half. Can you? No, you cannot without taxes. Now, once,
• 4:44
  Suze: you listen closely, once you become 59 and a half or older.
• 4:49
  Suze: The 10% penalty for age absolutely goes away.
• 4:55
  Suze: So you could if you wanted to. Doesn't matter. You
• 4:58
  Suze: could take out up to the 24,000 just like if
• 5:02
  Suze: you were younger, however, to access the $6,000 in this
• 5:08
  Suze: case of earnings.
• 5:10
  Suze: You would have to wait until you were 62, five full
• 5:14
  Suze: years to take out the earnings. Otherwise you're going to
• 5:20
  Suze: pay ordinary income tax on the earnings. Obviously there's no
• 5:25
  Suze: age 10% penalty.
• 5:27
  Suze: But you are going to owe ordinary income tax on
• 5:31
  Suze: that $6,000. Does that make sense? So the 5 year
• 5:37
  Suze: taxation rule applies to earnings and how long the account
• 5:45
  Suze: has been open. I hope that's clear to all of you.
• 5:50
  Suze: Now let's go to conversions. Conversions again,
• 5:57
  Suze: are when you convert from a taxable account to an
• 6:01
  Suze: after tax account.
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  Suze: Now I think the best way for you to understand
• 6:08
  Suze: conversions is to use examples, but before I give you
• 6:13
  Suze: an example, I want you to know that there isn't
• 6:18
  Suze: just one 5 year rule. There are two, and this
• 6:22
  Suze: is what you have to understand. The first 5 year
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  Suze: rule
• 6:28
  Suze: will be based on your very first Roth IRA opening,
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  Suze: and that will determine when earnings can be withdrawn tax
• 6:39
  Suze: and penalty free, provided you are 59 and a half or older, and
• 6:44
  Suze: I'm going to give you an example of that in
• 6:46
  Suze: a second. The second 5 year rule applies to each
• 6:52
  Suze: Roth conversion.
• 6:55
  Suze: And governs when you can withdraw that specific converted amount
• 7:00
  Suze: penalty free if you are under 59 and a half. Every Roth conversion
• 7:08
  Suze: has its own 5 year time clock.
• 7:13
  Suze: And you have to know the difference, so I'm going
• 7:16
  Suze: to give you examples now, but just keep that in
• 7:20
  Suze: mind what I just said to you.
• 7:24
  Suze: You're 57.
• 7:26
  Suze: And you do your very first Roth conversion in 2025.
• 7:32
  Suze: You do not have a Roth IRA. You've never opened
• 7:36
  Suze: up any type of Roth prior to this. This is
• 7:39
  Suze: going to be your first Roth and your very first
• 7:43
  Suze: Roth conversion.
• 7:45
  Suze: So you're 57 again and you do your first Roth
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  Suze: conversion in 2025.
• 7:52
  Suze: In 2027 you are going to be 59 and a half.
• 7:58
  Suze: And once you are 59 and a half, you can take out the
• 8:04
  Suze: amount of money that you converted.
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  Suze: No tax and no penalty because that's attached to your age,
• 8:13
  Suze: but your earnings aren't tax free until 2030. Why? Because
• 8:20
  Suze: the account has not been open for at least 5 years.
• 8:26
  Suze: So once you attain 59 and a half, you can take out your
• 8:30
  Suze: conversion money, no tax, no penalty.
• 8:33
  Suze: But earnings in this example you can't take out until 2030.
• 8:39
  Suze: Now let me give you another example.
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  Suze: You've listened to me, and you opened up a Roth
• 8:46
  Suze: years ago and it has already met the 5 year requirement.
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  Suze: You're 57.
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  Suze: And you do your very first wroth conversion, but you
• 9:00
  Suze: already had another Roth for 5 years at 59 and a half in
• 9:07
  Suze: the year 2027, everything is going to be tax free.
• 9:14
  Suze: Conversions and earnings, no penalty. No penalty because you're already
• 9:20
  Suze: now 59 and a half. No taxation on any of it, including the earnings. Why?
• 9:29
  Suze: Because your Roth converted account takes on the time frame
• 9:35
  Suze: of your very first Roth IRA that you opened.
• 9:41
  Suze: I know I have said to you, and it is true,
• 9:44
  Suze: every time you convert a Roth, it has its own
• 9:48
  Suze: 5 year clock, absolutely true.
• 9:52
  Suze: But if you already have a Roth IRA that had
• 9:56
  Suze: been open for 5 years, every conversion takes on the
• 10:02
  Suze: 5 year clock of your very first Roth IRA that
• 10:08
  Suze: you opened.
• 10:11
  Suze: That's where the confusion is. Everybody, you think your Roth
• 10:16
  Suze: IRA has its own time clock, and it does, but
• 10:20
  Suze: it also will take on the time clock of the
• 10:24
  Suze: very first Roth IRA that you opened.
• 10:30
  Suze: And it is this time clock that allows you, once
• 10:35
  Suze: you are 59 and a half years of age or older, that determines
• 10:41
  Suze: when your earnings can be withdrawn tax and penalty free,
• 10:46
  Suze: but the key is you have to be 59 and a half or older.
• 10:54
  Suze: That's why
• 10:55
  Suze: if you converted at the age of 57, but you
• 10:58
  Suze: already had a Roth for 5 years at 59 and a half in
• 11:04
  Suze: just 2 and a half years, everything is tax-free conversion and earnings.
• 11:09
  Suze: That is why I've always said to you.
• 11:12
  Suze: Actually, I haven't said it to you. I've begged you.
• 11:15
  Suze: I've begged you on my hands and knees, everybody, to
• 11:18
  Suze: open up a Roth IRA, whether you're going to fund
• 11:21
  Suze: it or not. I don't care if you put $1
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  Suze: in it. I don't care how you get that $1
• 11:27
  Suze: in it, but if you open a Roth IRA and
• 11:32
  Suze: fund it with just $1 that is the Roth IRA
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  Suze: that is going to follow you.
• 11:39
  Suze: And your time clocks for the rest of your life.
• 11:43
  Suze: Every conversion, your 5 year time clock is going to
• 11:47
  Suze: be attached to the very first Roth that you have opened.
• 11:53
  Suze: When it comes to being able to withdraw your earnings,
• 11:57
  Suze: tax and penalty free, provided you are aged 59 and a half or older,
• 12:03
  Suze: let me give you another example though. Maybe you're 40
• 12:09
  Suze: and you convert $20,000 into a brand new Roth.
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  Suze: You can't touch that conversion for 5 years without a 10% penalty,
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  Suze: and you can't touch the earnings until you're 59 and a half and
• 12:28
  Suze: the Roth has been open for 5 years. So let's
• 12:33
  Suze: just say, however, notice that I said you can't touch
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  Suze: that conversion for 5 years without a 10% penalty. Remember
• 12:42
  Suze: you have already paid taxes on it.
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  Suze: The 10% penalty in this case is not attached to age.
• 12:52
  Suze: It is attached to how long the Roth IRA you
• 12:56
  Suze: just converted to has been open.
• 12:59
  Suze: Now in this case here this is where the second
• 13:04
  Suze: 5 year rule applies because when it comes to a
• 13:09
  Suze: conversion and you wanting to touch the converted amount.
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  Suze: What's key here is that this 5 year time clock
• 13:20
  Suze: is not attached to the first Roth IRA you ever open.
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  Suze: It is in this particular case that every single converted
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  Suze: Roth has its own 5 year time clock.
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  Suze: And you cannot touch the money that you originally converted
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  Suze: for at least 5 years, assuming you're under 59 and a half, all right,
• 13:49
  Suze: without a 10% penalty. Do you see, so it's very important.
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  Suze: So again this
• 13:57
  Suze: situation does not use the clock from your original Roth
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  Suze: IRA even if you opened it up years ago. If
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  Suze: it hasn't been opened for 5 years, you can withdraw
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  Suze: that $20,000. You're not going to pay taxes on it
• 14:14
  Suze: because you already did, but you're going to have to
• 14:17
  Suze: pay a 10% penalty. Are you understanding when it's taxed
• 14:22
  Suze: and when it's not?
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  Suze: If you really want to make your life really simple
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  Suze: with a converted Roth, simply open up a Roth IRA
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  Suze: today and get that 5 year time clock moving.
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  Suze: And remember when you do convert, just leave the amount
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  Suze: you converted alone,
• 14:47
  Suze: for at least 5 years to avoid the 10% penalty,
• 14:53
  Suze: if you are under 59 and a half. Just know those two things
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  Suze: and your life will be pretty simple.
• 15:02
  Suze: Now I hope that has cleared it up for you.
• 15:05
  Suze: What are some of the biggest mistakes really that all
• 15:09
  Suze: of you make?
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  Suze: Believing that you can take out a conversion any time
• 15:14
  Suze: you can't if you're under 59 and a half, forgetting
• 15:18
  Suze: that earnings come out last.
• 15:22
  Suze: And they aren't tax free until 5 years plus 59 and a half
• 15:27
  Suze: have been met.
• 15:28
  Suze: You're waiting too long to open a Roth IRA because
• 15:32
  Suze: even that $1 gets your clock going and you're mixing
• 15:36
  Suze: up the two rules, one for earnings and one for conversions.
• 15:42
  Suze: Don't confuse them.
• 15:44
  Suze: So I hope I haven't confused you more.
• 15:47
  KT: Hi everybody, it's KT!
• 15:49
  KT: She, she confused me, but I'm here.
• 15:52
  Suze: She's been so good.
• 15:54
  KT: I've
• 15:54
  KT: been listening and I have some questions for Suze, but
• 15:59
  KT: I just want you to know I promised I'd be
• 16:01
  KT: at Suze School and I'm here.
• 16:03
  KT: It's
• 16:03
  KT: Sunday and I'm here, baby.
• 16:04
  Suze: Right? And believe it or not, it is
• 16:07
  Suze: a very, very complicated topic.
• 16:11
  KT: So it's not just me.
• 16:11
  Suze: So it's not just KT, and I was like, KT,
• 16:14
  Suze: if I do this Suze school, you have to sit
• 16:16
  Suze: there and not drink water, not reach for this because
• 16:20
  Suze: KT fidgets. You just fidget, don't you?
• 16:23
  KT: It's hard for me to be still.
• 16:24
  Suze: And so and then it distracts me and then I
• 16:26
  Suze: have to start over so it can be very complicated. However...
• 16:31
  Suze: You have been writing and, and by the way, when
• 16:33
  Suze: you want to write in a question, you do it
• 16:35
  Suze: at ask Suze SUZE podcast at gmail.com, and I said, KT,
• 16:41
  Suze: forget the names. Who cares about the names because too
• 16:43
  Suze: many people wrote in the same questions, right? But KT
• 16:47
  Suze: I think picked five.
• 16:49
  KT: I have five questions that I thought would be good.
• 16:52
  Suze: Do I look like
• 16:52
  Suze: I just put myself through it to explain all this.
• 16:54
  Suze: All right, go on.
• 16:55
  KT: She spent everyone. OK...
• 16:58
  Suze: It takes more than that to spend me.
• 17:00
  KT: My first
• 17:00
  KT: question says, hey, Suze, I'm 58. I just converted $100,000.
• 17:07
  KT: I'll be 63 when the 5 year clock is up.
• 17:11
  KT: Do I still owe the 10% penalty if I withdraw
• 17:16
  KT: before then since I'm over 59 and a half?
• 17:20
  Suze: How would you answer that?
• 17:21
  KT: No, because she, she already gave everyone the answer. She's
• 17:24
  KT: over 59 and a half.
• 17:27
  Suze: So the truth is, remember everybody, the magic age is 59 and a half.
• 17:32
  Suze: Once you all reach 59 and a half, it doesn't matter when you convert.
• 17:37
  Suze: It doesn't matter about anything.
• 17:39
  Suze: The 10% early withdrawal penalty for age no longer applies,
• 17:45
  Suze: but the 5 year clock on conversions really only matter
• 17:50
  Suze: if you're under 59 and a half for the amount you converted. Earnings
• 17:54
  Suze: are a different thing, but anyway, OK.
• 17:57
  KT: So that's why I have the next question.
• 17:59
  KT: I'm 45. I converted $20,000 at the age of 40.
• 18:05
  Suze: So funny. I use that as an example.
• 18:07
  KT: The 5 years are up. Can I take out my
• 18:10
  KT: conversion dollars now and what happens to the earnings?
• 18:14
  Suze: So as I
• 18:15
  Suze: said in the podcast, right, is that KT, this person
• 18:20
  Suze: can take out the $20,000 that they converted because they
• 18:24
  Suze: already pay taxes on it, so they don't have to
• 18:26
  Suze: pay tax or penalties again as long as the five
• 18:31
  Suze: years are up. But those five years only apply to
• 18:35
  Suze: the converted amounts. The earnings on that money, if they
• 18:39
  Suze: touch it before 59 and a half, they're going to owe taxes and
• 18:44
  Suze: penalties on it.
• 18:45
  Suze: All right, so there's a difference between the amount they
• 18:49
  Suze: converted and the earnings. So I hope that's clear to
• 18:53
  Suze: all of you. Was that clear to you?
• 18:55
  KT: I just have to ask you, you said penalties. Is
• 18:58
  KT: it just the 10% penalty?
• 19:00
  Suze: Yes, but if you take out, you convert $20,000. You
• 19:04
  Suze: already pay taxes on it. Three months later you decide,
• 19:07
  Suze: I want that money.
• 19:08
  Suze: It hasn't been in there for 5 years yet. If
• 19:11
  Suze: you take it out, they're going to charge you a 10%
• 19:15
  Suze: penalty because you have to think about it this way, KT.
• 19:19
  Suze: That $20,000 came from a traditional IRA. Never paid taxes
• 19:24
  Suze: on it, anything, you're 40 some odd years of age,
• 19:27
  Suze: and you just withdrew all $20,000. You'd have to pay
• 19:32
  Suze: taxes and a 10% penalty.
• 19:35
  Suze: Therefore, when you convert it, the IRS is like, no, no, no, no,
• 19:41
  Suze: I'm not letting you get money out of your IRA,
• 19:43
  Suze: so to speak, and not have to wait to touch it.
• 19:47
  Suze: That's why the 5 year penalty was put into effect.
• 19:51
  Suze: So when you convert, you have to leave it there
• 19:55
  Suze: for 5 years.
• 19:58
  Suze: Otherwise, if you then take out what you converted, you
• 20:01
  Suze: still owe the 10% penalty because you already paid the taxes.
• 20:06
  Suze: Did that make sense?
• 20:07
  KT: It makes sense, but just so that everyone knows, it's
• 20:10
  KT: not even if you take out that full amount, any amount,
• 20:13
  KT: you have a penalty.
• 20:14
  Suze: Any amount that you originally converted, you will owe a 10%
• 20:20
  Suze: penalty on if the account hasn't been opened for 5 years.
• 20:26
  KT: Ok, next question.
• 20:27
  KT: This is really important, everybody, because this is what I
• 20:30
  KT: call the what ifs. These are the what ifs. If
• 20:33
  KT: I do a Roth conversion this year and then I
• 20:36
  KT: die next year, does my beneficiary have to wait out
• 20:41
  KT: the 5 year conversion clock?
• 20:45
  Suze: No, thank God, right. So beneficiaries, everybody are not subject
• 20:49
  Suze: to that 10% early withdrawal penalty. However, they may still
• 20:56
  Suze: owe income tax on the earnings if the Roth wasn't
• 21:00
  Suze: open for at least 5 years, but the 5 year clock,
• 21:04
  Suze: so to speak, doesn't affect them with the 10% penalty.
• 21:08
  Suze: That is why,
• 21:10
  Suze: you are to open up a Roth IRA first thing
• 21:13
  Suze: Monday morning if you do not have one. All right, go on.
• 21:16
  KT: All right, that's good. Next question, Suze. I've had a
• 21:20
  KT: Roth IRA since 2010.
• 21:22
  Suze: Good.
• 21:23
  KT: I'm 62. I just converted more money last year. Do
• 21:28
  KT: I have to wait 5 years before I can touch
• 21:31
  KT: the earnings from that conversion?
• 21:34
  Suze: This is why I am telling you to open up
• 21:37
  Suze: a Roth IRA right now, and the answer is KT, no,
• 21:43
  Suze: because their Roth had already been opened for more than
• 21:46
  Suze: 5 years. They opened up a Roth in 2010. The
• 21:50
  Suze: 5 year clock started in 2010.
• 21:54
  Suze: So therefore,
• 21:55
  KT: And and it's a he just so you know, and
• 21:57
  KT: he's 62,
• 21:58
  Suze: All right. And so because he's over 59 and a half and because
• 22:04
  Suze: the Roth took on the time frame of the 2010 one.
• 22:09
  Suze: There are no penalties and everything is tax-free, earnings as
• 22:15
  Suze: well as contributions. All right.
• 22:18
  KT: Go have a party. So Suze, my last question is
• 22:23
  KT: from
• 22:24
  KT: a listener who wrote in, I converted $50,000 at 35,
• 22:29
  KT: at 38, I now need $10,000 back from my conversion. Suze,
• 22:34
  KT: can I just withdraw part of what I converted, or
• 22:38
  KT: do I trigger penalties on the whole thing?
• 22:41
  Suze: No, sweetheart, you absolute... is it a woman? Yeah, all right,
• 22:44
  Suze: so you absolutely can withdraw
• 22:46
  Suze: part, but any amount you take out from a conversion
• 22:50
  Suze: within its 5 year clock and before the age of
• 22:53
  Suze: 59 will be hit with the 10% penalty. The rest
• 22:58
  Suze: can keep growing inside of the Roth, so you are
• 23:01
  Suze: going to pay a 10% penalty on that $10,000 just
• 23:07
  Suze: that simple.
• 23:09
  Suze: Was that everything, or you have a lot there and
• 23:11
  Suze: you think that's enough for everybody?
• 23:12
  KT: I think that's good. Yeah, these are my favorite Roth questions.
• 23:17
  KT: I almost know the answers to all of them. I've been,
• 23:20
  KT: I mean, I'm sitting here listening like you are, so
• 23:24
  KT: don't do a quizzy.
• 23:25
  Suze: I'm just like, is she tempting me? Is she tempting me?
• 23:29
  KT: Don't do a quizzy.
• 23:30
  Suze: All right, everybody, I hope that has helped you and
• 23:35
  Suze: clarified it for you.
• 23:38
  Suze: If not, I'm sure I'll hear from you. But until Thursday,
• 23:42
  Suze: what do you want to say, KT?
• 23:44
  KT: OK everyone, remember people first, then money, then things.
• 23:48
  Suze: That is the correct order, everybody...
• 23:50
  KT: And have a great Sunday today.
• 23:52
  Suze: Yeah, but I have to say one other thing. When
• 23:55
  Suze: we say people first, we mean you.
• 23:59
  Suze: You have to give to yourself as much as you
• 24:03
  Suze: give of yourself. Don't you ever forget that I said that.
• 24:07
  Suze: All right, stay safe, stay healthy, and stay secure. See
• 24:11
  Suze: you Thursday. Bye bye.