You probably know that a Roth IRA can provide tax-free retirement income, but did you know the account must be “aged” before its earnings can be withdrawn tax-free? Unlike traditional IRA accounts, contributions to Roth IRAs provide no tax deduction when they are made, and unlike traditional IRAs, earnings from Roths are tax-free if a distribution is what the IRS refers to as a “qualified distribution.” A qualified distribution is one for which 1)The account has satisfied a five-year aging rule AND 2) Meets one of the following conditions:

The distribution is made after the IRA owner reaches the age of 59.5, The distribution is made after the death of the IRA owner,The distribution is made on account of the IRA owner becoming disabled, OR

The distribution (up to $10,000 lifetime, or $20,000 if filing jointly and the spouse also has a Roth IRA) is for a first-time homebuyer purchasing a home.

Figuring the five-year aging period can be tricky, and the holding period can actually be significantly less than five years. The five-year period:

Begins on the earlier of:

(a) The first day of the individual’s tax year for which the first regular (i.e., non-rollover) contribution is made to any of the individual’s Roth IRAs, or

(b) The first day of the individual’s tax year in which the first conversion contribution is made to any of the individual’s Roth IRAs; and

Ends on the last day of the individual’s fifth consecutive tax year beginning with the tax year described in either (a) or (b) above.

What complicates this a bit is the fact that a contribution to an IRA for a particular year can be made through the filing due date for the tax year in which the contribution applies. For example, an IRA contribution can be made as late as April 17, 2017, for the 2016 tax year. Thus, the five-year holding period would begin January 1, 2016, and end on December 31, 2020, so any distributions made January 1, 2021, and later would meet the five-year aging period. Each time a contribution is made to the Roth account, the aging period does not start over.

The five-year aging requirements apply separately for traditional IRA conversions to a Roth IRA referenced in (b) above.

If for some reason you decide to take a non-qualified distribution from your Roth IRA, i.e., one that does not meet the definition of a qualified distribution (discussed above), then the distributions are treated as made in the following order:

(1) From funds originally contributed as Roth contributions (which have no tax consequences),

(2) Then from conversions of other retirement funds to a Roth IRA (which would be subject to early withdrawal penalties), and

(3) Finally from earnings (which would be both taxable and subject to early withdrawal penalties).