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Roth IRA 5 Year Rule Explained! || One of The Most Misunderstood Rules Regarding Retirement Accounts - YouTube
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the five-year rule for roth iras is one
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of the most misunderstood rules
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regarding retirement accounts
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let's fix that
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hello everybody joe orbit coming at you
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and today we are going to put to bed all
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the misunderstandings and arguments and
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just
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we're going to talk about the five-year
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rule for roth iras and i'm going to
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explain it in a way that makes sense to
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you and you will no longer have any
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questions so the five-year rule for roth
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iras is so misunderstood because it's
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actually two different rules the first
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rule has to deal with roth contributions
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and the second rule has to deal with
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roth conversions and if you don't know
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what a roth ira is or how it's different
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from a traditional ira make sure you
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watch my video on roth iras and why you
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should really be considering making roth
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contributions and why you should be
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thinking about roth conversions the
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beautiful thing about a roth ira is that
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the contributions are always accessible
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so a roth contribution that's when you
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take money out of your pocket and you
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put it into a roth ira and the five-year
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rule for roth contributions says when
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you make your first
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contribution into a roth ira you must
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wait five years until you can access the
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earnings tax free
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that's it you just have to wait five
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years and you only have to wait the five
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years once per individual so let's use
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an example let's say you've never
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contributed to a roth before you're 30
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years old and in 2020 you put 5 000
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into that roth ira and it earns five
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percent a year you can see that over
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time that is going to accumulate and
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grow and you can see that by year five
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you have over six thousand dollars in
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that account so what does this mean for
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the contribution rule
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i am allowed to touch the 5 000 whenever
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i want to but because i'm 35 years old
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even though i've met the five-year rule
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i can't touch the earnings on that
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account for just any old reason if i
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want to touch the earnings on that
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account i have to meet one of the three
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requirements death disability a first
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time home buyer purchase
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so once i've met that five year rule
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once i never have to meet it again now
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let's talk about roth conversions first
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off what is a roth conversion a roth
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conversion is when i take money from an
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ira and i move it over to a roth ira and
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when i do that i have to pay the tax in
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the year that i do the conversion let's
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do an example for roth conversions let's
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say i'm the same 30 year old but this
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time i want to convert ten thousand
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dollars if i do the conversion this year
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next year i'm allowed to touch that ten
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thousand dollars because i've paid the
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tax on it
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but i can't touch the earnings again why
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because i'm under fifty nine and a half
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and i haven't met the five-year rule and
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if i convert 10 000 and 10 000 and 2021
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and 10 000 and 2022 i'm resetting the
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clock on those conversions
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i'm always allowed to touch the
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contributions i'm just not allowed to
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touch the earnings until the five year
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clock has run out but again if i'm under
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59 and a half i can't touch it unless
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death disability or first time home
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buyer purchase
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the difference between the contribution
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rule and the conversion rule in the
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contribution i only have to meet that
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five years once in the conversion rule
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every time i make a new roth conversion
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another five year clock begins but the
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rule for 59 and a half always applies
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that means that if i'm under 59 and a
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half i can't touch the earnings until
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i'm 59 and a half even if i meet the
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five year rule
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but if i'm over 59 and a half the minute
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i turn 59 and a half if i've met the
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five-year rule on the conversion i can
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touch the money now if i'm over 59 and a
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half and i've never made a contribution
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to a roth ira and it's the first time
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i'm putting money into that account i
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still have to wait the full five years
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before i can touch the earnings on a
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tax-free basis so as always if you like
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this video make sure you hit like if you
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want to see more videos like this make
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sure you hit subscribe and if you want
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to be notified every time i come out
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with a new video because we do two every
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single week make sure you turn on that
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bell to get those notifications and i'll
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see you next time
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