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Say I have $100,000 in a Roth IRA, composed of $60,000 in contributions and $40,000 in interest/earnings. If I roll over that full amount into a second Roth IRA, then wait five years, would I be allowed to withdraw $100,000 from that second IRA, penalty free, even before age 59.5?

If so, is this a reasonable way to access retirement funds early?

3 Answers 3

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No, you can only withdraw contributions penalty free. Rollover doesn't change that.

The 5-year rule allows treating taxable conversions as contributions, but that's not the situation you're describing. Rolling over from one Roth account to another doesn't change the character of the funds.

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  • Perfect, thank you very much. I figured that was the case, but I hadn't found that distinction in my reading on the topic. Commented Jan 5 at 3:10
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A rollover from one Roth IRA account to another (or to the same one) doesn't change anything about the nature of the funds for withdrawal -- contributions are still contributions, earnings are still earnings. (In fact, all Roth IRA accounts are aggregated, so there is no distinction between accounts anyway. A rollover from Roth IRA to Roth IRA is as if nothing happened at all.)

The source of your confusion is probably from reading the ordering rules for Roth IRA withdrawals in Publication 590-B. It is 1) regular contributions, 2) conversions and rollover contributions, and 3) earnings. You might have thought that these "rollover contributions" include rollovers from Roth IRA to Roth IRA. However, in the preceding paragraph, they were talking about "rollover contributions from qualified retirement plans" (i.e. rollovers from Traditional 401(k), which I would probably call a "conversion" since it goes from Traditional to Roth, but they call it a "rollover"). And in the following paragraph, it explicitly says:

Disregard rollover contributions from other Roth IRAs for this purpose.

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If so, is this a reasonable way to access retirement funds early?

Whenever you change the flavor of the money there is a cost involved. Congress put into place taxes and penalties if a person uses retirement money early.

The law also makes sure that moving money from account to account doesn't help or hurt. So moving money from a Roth to a Roth doesn't get blocked by annual contribution limits. It also says that it doesn't change earnings into contributions.

The paperwork filed with you and the IRS from the old investment company will specify the status of all the funds being transferred. Those numbers will also be reflected in similar paperwork from the new investment company.

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