Sometimes referred to as the Roth “five-year rule,” it limits your flexibility in using earnings from your Roth IRA until the account has been funded for at least five years.ⁱ

That’s why it’s important to open a Roth IRA sooner rather than later – even if you start with a minimal contribution – just to get the clock running.

While your contributions – the money you deposit into your Roth IRA – can be withdrawn at any time for any reason without taxes or penalties, the five-year rule applies to any money you may have earned on your investments within the Roth IRA. However, it’s up to you to monitor your account to determine whether you are tapping into your contributions or actually withdrawing earnings from your Roth IRA.

So, if you’d like the option of using your Roth IRA earnings without incurring taxes or penalties to cover important expenses such as retirement costs (after 59½), a first-time home purchaseⁱⁱ, or to provide tax-free income to your beneficiaries, the sooner you open a Roth IRA, the sooner you would be able to take advantage of those options.

Counting Down the Years

The five-year period starts with the tax year of your first contribution, but you can make that contribution as late as the mid-April tax filing deadline in the following year. In other words, a tax time Roth IRA contribution in April 2019 could be credited as a 2018 contribution, which would slice a year off the wait. Be aware that this must be designated as a carryback contribution; otherwise an April contribution would be credited to the current year.

A tax-year-2018 account start would mean that the earnings from your Roth IRA could be used for qualified purposes beginning in 2023.

If, over time, you open multiple Roth IRAs in addition to your original account, the 5-year period start date for all of them would revert back to that of your first account. If you’ve had a Roth IRA since 2017, and then open another in 2022, you wouldn’t have to wait to start making qualified withdrawals of the earnings in your 2022 account. Your five-year waiting period would have already elapsed. (For more on the five-year rule, see the IRS Publication 590-B.)

Traditional versus Roth IRAs – Same Goal, Different Route

There are two types of IRAs – traditional and Roth IRAs. More than a third of U.S. households have one or the other – and sometimes both – although relatively few account holders make regular contributions. Only about 12% of American households contribute to an IRA each year, even though most wage-earners would qualify to make annual contributions.ⁱⁱⁱ

Regardless of which type of IRA you choose, you would typically have the flexibility of allocating your contributions to a variety of investments, including a wide range of mutual funds and other securities that may offer the potential for long-term appreciation. However, keep in mind, not all investments increase in value, and may in fact lose money. While past performance is no guarantee of future returns, historically stock and bond markets have been volatile in the short term, but their performance has tended to even out over the long term as the economy moved through its various cycles.

You can contribute up to a total of $5,500 to your IRAs for 2018 ($6,500 if age 50 or over) as long as your contribution doesn’t exceed your after-tax wages. (Those limits rise to $6,000 and $7,000, respectively, for 2019.) In other words, you cannot contribute more than you earn to an IRA. However, you must meet certain income limitations to contribute to a Roth IRA, and to be qualified to deduct a traditional IRA contribution from your income taxes.  For more on that, see IRS Contribution Limits.

You can spread that money to more than one account each year – including both a traditional and a Roth IRA – but the total of all of your contributions may not exceed the annual limit.

Which type of IRA is right for you? There are several distinctions between the two, as well as some similarities. Both are designed to encourage Americans to save and invest for retirement, and both provide tax-deferred growth on investment gains within the account.

Before you make your choice, you may want to compare the primary benefits and drawbacks of each:

If you’re leaning toward opening a Roth IRA – and you hope to tap into the earnings from your investments at some point in the next several years – the best time to take the leap and start the clock may be right now.