It involves the five-year rule.

A Roth IRA is a retirement account that comes with powerful tax breaks. Roths are a great option for seniors because while you invest with after-tax dollars, any money you withdraw as a retiree is tax-free. You won’t pay taxes on investment gains, and distributions don’t count when determining if you hit the threshold at which Social Security benefits become taxable.

But in order to reap the benefits a Roth IRA provides, you need to follow certain rules. And while most people are familiar with the requirement that you wait until age 59 1/2 to take money out to avoid early withdrawal penalties, there are some other rules that could trip up some retirees. In particular, there are two five-year rules that tend to cause lots of confusion – and not following them could mean you lose out on the big tax benefits a Roth IRA provides. 

The five-year rule after your first contribution

The first five-year rule sounds simple enough: In order to avoid taxes on distributions from your Roth IRA, you must not take money out until five years after your first contribution. But it’s actually a little more complicated than it seems at first glance. 

First things first: The five-year rule supersedes the rule that says you can make tax-free withdrawals once you hit 59 1/2. Once you reach that age milestone, you won’t owe a 10% penalty for early withdrawals, but you still must have made your first contribution at least five years prior to avoid being taxed at your ordinary income tax rates. 

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