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The definition of a U.S. Savings Bond is an investment in the federal government that helps to increase your money. By purchasing a savings bond, you are essentially lending money to the government which you will get back in the future, when the bond matures, with interest. Because these financial products are backed by the federal government, they are considered to be extremely low-risk. And, in certain situations, there can be tax advantages.

Savings Bond Definition

A savings bond is basically a loan made to the U.S. government, in exchange for which the government agrees to repay the loan at a later time, along with interest that is earned over the life of the bond.

There are two types of savings bonds available through the U.S. Treasury, the Series EE savings bond and the Series I savings bond. The Series EE bond offers a fixed-interest rate, while the Series I bond offers a combination of a fixed rate and a variable inflation rate. Both bonds are low-risk and provide interest for up to 30 years, though you may withdraw funds without penalty as long as the bond has been held for at least five years.

Investors may also invest in state or local municipal bonds that fund public projects and may be available in different term lengths.

How Do Savings Bonds Work?

Savings bonds are issued by the U.S. Treasury. You can buy one for yourself, or for someone else, even if that person is under age 18. (That’s why, when you clean out your closets, you may find a U.S. Savings Bond that was a birthday present from Grandma a long time ago.)

Basically, these savings bonds function the same way that other types of bonds work. You buy a savings bond for face value, or the principal, and the bond will then pay interest over a specific period of time.

•   You can buy savings bonds electronically from the U.S. Treasury’s website, TreasuryDirect.gov . For the most part, it’s not possible to buy paper bonds anymore but should you run across one, you can still redeem them. (See below). Unlike many other types of bonds, like some high-yield bonds, you can’t sell savings bonds or hold them in brokerage accounts.

How Much Are Your Savings Bonds Worth?

If you have a savings bond that has been tucked away for a while and you are wondering what it’s worth, here are your options:

•   If it’s a paper bond, log onto the Treasury Department’s website and use the calculator there to find out the value.

•   If it’s an electronic bond, you will need to create (if you don’t already have one) and log onto your TreasuryDirect account.

Savings Bonds Interest Payments

For U.S. Savings Bonds, interest is earned monthly. The interest is compounded semiannually. This means that every six months, the government will apply the bond’s interest rate to grow the principal. That new, larger principal then earns interest for the next six months, when the interest is again added to the principal, and so on.

3 Different Types of Savings Bonds

There are two types of U.S. Savings Bonds available for purchase — Series EE and Series I savings bonds. Here are the differences between the two.

1. Series EE Bonds

Introduced in 1980, Series EE Bonds earn interest plus a guaranteed return of double their value when held for 20 years. These bonds continue to pay interest for 30 years.

Series EE Bonds issued after May 2005 earn a fixed rate. The current Series EE interest rate for bonds issued as of November 1, 2025 is 2.50%.

2. Series I Bonds

Series I Bonds pay a combination of two rates. The first is the original fixed interest rate. The second is an inflation-adjusted interest rate, which is calculated twice a year using the consumer price index for urban consumers (CPI-U). This adjusted rate is designed to protect bond buyers from inflation eating into the value of the investment.

When you redeem a Series I Bond, you get back the face value plus the accumulated interest. You know the fixed rate when you buy the bond. But the inflation-adjusted rate will vary depending on the CPI-U during times of adjustment.

The current composite rate for Series I Savings Bonds issued as of November 1, 2025 is 4.03%.

3. Municipal Bonds

Municipal bonds are a somewhat different savings vehicle than Series I and Series EE Bonds. Municipal Bonds are issued by a state, municipality, or country to fund capital expenditures. By offering these bonds, projects like highway or school construction can be funded.

These bonds (sometimes called “munis”) are exempt from federal taxes and the majority of local taxes. The market price of bonds will vary with the market, and they typically require a larger investment of, say, $5,000. Municipal bonds are available in different terms, ranging from relatively short (about two to five years) to longer (the typical 30-year length).

How To Buy Bonds

You can buy Series EE and I Savings Bonds directly through the United States Treasury Department online account system called TreasuryDirect, as noted above. This is a little bit different than the way you might buy other types of bonds. You can open an account at TreasuryDirect just as you would a checking or savings account at your local bank.

You can buy either an EE or I Savings Bond in any amount ranging from a $25 minimum in penny increments per year. So, if the spirit moves you, go ahead and buy a bond for $49.99. The flexible increments allow investors to dollar cost average and make other types of calculated purchases.

That said, there are annual maximums on how much you may purchase in savings bonds. The electronic bond maximum is $10,000 for each type. You can buy up to $5,000 in paper Series I Bonds using a tax refund you are eligible for. Paper EE Series bonds are no longer issued.

If you are due a refund and you want to buy I Bonds, be sure to file IRS form 8888 when you file your federal tax return. On that form you’ll specify how much of your refund you want to use to buy paper Series I bonds, keeping in mind the minimum purchase amount for a paper bond is $50. The IRS will then process your return and send you the bond that you indicate you want to buy.

The Pros & Cons of Investing in Savings Bonds

Here’s a look at the possible benefits and downsides of investing in savings bonds. This will help you decide if buying these bonds is the right path for you, or if you might prefer to otherwise invest your money or stash it in a high-yield bank account.

The Pros of Investing in Savings Bonds

Here are some of the upsides of investing in savings bonds:

•   Low risk. U.S. Savings Bonds are one of the lower risk investments you could make. You are guaranteed to get back the entire amount you invested, known as principal. You will also receive interest if you keep the bonds until maturity.

•   Tax advantages. Savings bond holders don’t pay state or local taxes on interest at any time. You don’t have to pay federal income tax on the interest until you cash in the bond.

•   Education exception. Eligible taxpayers may qualify for a tax break when they use U.S. Savings Bonds to pay for qualified education expenses.

•   No fees. Unlike just about every other type of security, you won’t pay a fee, markup or commission when you buy savings bonds. They’re sold at face value, directly from the Treasury, so what you pay for is what you get. If you buy a $50 bond, for example, you’ll pay $50.

•   Great gift. Unlike most securities, people under age 18 may hold U.S. Savings bonds in their own names. That’s what makes them a popular birthday and graduation gift.

•   Patriotic gesture. Buying a U.S. Savings Bond helps support the U.S. government. That’s something that was important and appealed to investors when these savings bonds were first introduced in 1935.

The Cons of Investing in Savings Bonds

Next, consider these potential downsides of investing in savings bonds:

•   Low return. The biggest disadvantage of savings bonds is their low rate of return, as noted above. A low risk investment like this often pays low returns. You may find you can invest your money elsewhere for a higher return with only slightly higher risk.

•   Purchase limit. For U.S. Savings Bonds, there’s a purchase limit per year of $10,000 in bonds for each series (meaning you can invest a total of $20,000 per year), plus a $5,000 limit for paper I bonds via tax refunds. For some individuals, this might not align with their investing goals.

•   Tax liability. It’s likely you’ll have to pay federal income tax when you cash in your savings bond, unless you’ve used the proceeds for higher education payments.

•   Penalty for early withdrawal. If you cash in your savings bond before five years have elapsed, you will have to pay the previous three months of interest as a fee. You are typically not allowed to cash in a bond before the one-year mark.

Here, a summary of the pros and cons of investing in savings bonds:

When Do Savings Bonds Mature?

You may wonder how long it takes for a savings bond to mature. The EE and I savings bonds earn interest for 30 years, until they reach their maturity date.

Recommended: Bonds or CDs: Which Is Smarter for Your Money?

How to Cash in Savings Bonds

You’ll also need to know how and when to redeem a savings bond. These bonds earn interest for 30 years, but you can cash them in penalty-free after five years.

•   If you have a paper bond, you can cash it in at your bank or credit union. Bring the bond and your ID. Or go to the Treasury’s TreasuryDirect site for details on how to cash it in.

•   For electronic bonds, log into your TreasuryDirect account, click on “confirm redemption,” and follow the instructions to deposit the amount to a linked checking or savings account. You will likely get the money within a few business days.

•   If you inherited or found an old U.S. Savings Bond, you may be able to redeem savings bonds through the TreasuryDirect portal or via Treasury Retail Securities Services.

Early Redemption of Bonds

If you cash in a U.S. Savings Bond after one year but before five years, you’ll pay a penalty that is the equivalent of the previous three months of interest. Keep in mind that for EE bonds, if you cash in before holding for 20 years, you lose the opportunity to receive the doubled value of the bond that accrues after 20 years.

The History of US Savings Bonds

America’s savings bond program began under President Franklin Delano Roosevelt in 1935, during the Great Depression, with what were known as “baby bonds.” This started the tradition of citizens participating in government financing.

The Series E Saving Bond contributed billions of dollars to financing the World War II effort, and in the post-war years, they became a popular savings vehicle. The fact that they are guaranteed by the U.S. government generally makes them a safe place to stash cash and earn interest.

The Takeaway

U.S. Savings Bonds can be one of the safest ways to invest for the future and show your patriotism. While the interest rates are typically low, for some investors, knowing that the money is being securely held for a couple of decades can really enhance their peace of mind.

Another way to help increase your peace of mind and financial well-being is finding the right banking partner for your deposit product needs.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is a $50 savings bond worth?

The value of a $50 savings bond will depend on how long it has been held. You can log onto the TreasuryDirect site and use the calculator there to find out the value. As an example, a $50 Series I bond issued in 2000 would be worth more than $211 today.

How long does it take for a $50 savings bond to mature?

The full maturation date of U.S. savings bonds is 30 years.

What is a savings bond?

A savings bond is a secure way of investing in the U.S. government and earning interest. Basically, when you buy a U.S. Savings Bond, you are loaning the government money, which, upon maturity, they pay back with interest.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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CN-Q425-3236452-12

Series I bonds are a type of savings bond issued by the U.S. Treasury. They are designed to protect against inflation and are generally considered a safe investment because they are backed by the U.S. government.

An I bond is essentially a loan to the government that comes with the promise of returning the investor’s money, typically with interest. What’s distinct about an I bond is that it offers a composite interest rate — a combination of a fixed interest rate and a variable rate that is adjusted every six months for inflation. These bonds also offer some tax advantages.

If you’re considering buying I bonds and you’re wondering how these savings bonds work, here’s what you need to know.

How Do I Bonds Work?

I Bonds are a type of savings bond offered by the U.S. Treasury and backed by the full faith and credit of the U.S. government. These bonds offer two types of interest payments: a fixed rate and an inflation rate, which together provide the bond’s composite rate (or yield).

The fixed-rate portion is determined when the bond is purchased, and it remains the same for the life of the bond. The variable rate gets adjusted twice a year, based on inflation rates. The composite rate on I bonds issued as of November 1, 2025 is 4.03%. If you’re wondering how that rate compares to the interest rate on other types of savings vehicles, the average rate on a 60-month certificate of deposit (CD) in November 2025 was 1.34%, for example, while high-yield savings accounts may offer about 3.00% APY or higher.

Because I Bonds are backed by the U.S. government, they are designed to have a low risk of default. Furthermore, the principal is guaranteed. This is one of the advantages of savings bonds overall. As a result, I Bonds are generally considered low-risk investments.

Individuals who buy I Bonds must hold them for at least 12 months before cashing them in. if they redeem the bonds before the five-year mark, they will lose the last three months of interest. Investors can hold onto I Bonds for up to 30 years, when they reach maturity.

While paper I Bonds used to be available in certain circumstances, all new I Bonds are electronic as of January 1, 2025.

💡 Quick Tip: If your checking account doesn’t offer decent rates, why not apply for an online checking account with SoFi to earn 0.50% APY. That’s 7x based on FDIC monthly interest checking rate as of December 15, 2025. the national checking account average.

How Do You Calculate I Bond Interest Rate?

If you are interested in buying bonds like I Bonds, you’ll want to know how to figure out the interest rate. To calculate the I Bonds interest rate, you combine the fixed rate and inflation rate to get the composite rate.

For example, let’s say you bought I bonds when the fixed rate was 1.20% and the inflation rate was 0.95%, to calculate the composite rate you would use this formula:

Plugging in the actual numbers, it would be:

Using these numbers, you’ll earn 3.11% interest on the amount you invested in I Bonds for six months, at which time the rate may change again. So if you invested $1,000 in I Bonds, you would earn $15.55 in interest in six months. The earnings would then be added to your original investment, and for the next six months you would earn interest on that new, higher amount of $1,015.55.

One thing to keep in mind is that if you cash in I Bonds before five years, you will lose the last three months worth of interest. So, if possible, you may want to hang onto them for five years to avoid giving up interest you may have earned.

Are I Bonds Still a Good Investment?

Whether I Bonds make sense for you as an investment depends on a number of factors, your financial goals, risk tolerance, overall investment strategy, and timeline.

Benefits of I Bonds

I Bonds have a number of potential advantages. These include:

•   Lower risk: I Bonds are designed to be a low-risk investment, backed by the U.S. government. If you have a low risk tolerance, I Bonds may be a good choice for you. Also, if you’re looking for a place to park money that you’ll need in five or so years — for a down payment on a house, say — I Bonds can offer a low-risk option.

•   Protection against inflation: I Bonds can help protect your purchasing power in times of high inflation. If inflation rises, the interest rate on I Bonds rises as well. For instance, in May 2022, when inflation was high, I Bonds paid a composite rate of 9.62%. As of November 1, 2024 when inflation was much lower, the composite rate on I Bonds issued was 3.11%.

•   May offer tax advantages: While there are federal taxes on I Bonds, there are no state and local taxes on them.

Drawbacks of I Bonds

There are some downsides to investing in I Bonds, however, such as the following:

•   Time commitment: I Bonds must be held for at least 12 months before they can be redeemed.

•   Possible interest penalty: You’ll lose the last three months’ worth of interest if you sell I Bonds before the five-year mark.

•   Purchase limit: Individuals can purchase no more than $10,000 worth of electronic I Bonds each year through the U.S. Treasury’s Treasury Direct.

•   Lower interest rate: The interest rate may be lower for I Bonds than for some other investments.

•   Hard to predict return over time: To maximize your return on investment when purchasing I Bonds, it’s important to understand how the two interest rate components of the bond can play out over time. As mentioned, the fixed interest rate remains the same for the life of the bond. But the inflation rate of the bond adjusts with changes in inflation rates twice per year. If inflation goes up, so does the bond’s inflation rate. If inflation goes down, the bond’s inflation rate would likewise decrease as well.

I Bonds vs EE Bonds

Investors considering buying savings bonds may want to compare I Bonds and EE Bonds. The two types of bonds have many similarities but also a few key differences.

Similarities

You can buy both EE Bonds and I Bonds from Treasury Direct. Both types of bonds are backed by the full faith and credit of the U.S. government, and they are each designed to be a low-risk investment. They both mature in 30 years.

I Bonds and EE Bonds each have a purchase limit of $10,000 per individual per year.

Differences

One of the main differences between EE Bonds and I Bonds is that EE bonds issued after May 2005 have a fixed interest rate that doesn’t change for at least the first 20 of its 30 years, while I Bonds have a composite rate that combines a fixed rate and an inflation rate, which changes every six months. The interest rate for EE bonds bought as of November 1, 2025 is 2.50%.

One unique feature of EE Bonds is that, over a 20-year period, these bonds are guaranteed to double in value. While I Bonds don’t offer the same guarantee, your principal is guaranteed and the bonds are designed to keep pace with inflation.

Do You Pay Taxes on I Bonds?

Tax-efficient investors may want to consider certain I Bond features. For instance, I Bonds are exempt from local and state taxes. While federal taxes usually apply, they could be deferred until the bond is ultimately sold or matures; whichever happens first.

Additionally, I Bond investors may use the interest payments for qualified higher education expenses and receive a 100% deduction. Some restrictions apply, including:

•   You must cash out your I Bonds the year that you want to claim the exclusion.

•   Your modified adjusted gross income must be less than the cut-off amount the IRS sets for the year.

•   You must use the interest paid to cover qualified higher education expenses for you, your spouse, or your dependent children the same year.

•   You cannot be married, filing separately.

How Do You Buy I Bonds?

You need to meet certain criteria to purchase I Bonds. To be eligible to buy I Bonds you must be:

•   A United States citizen, no matter where you live

•   A United States resident, or

•   A civilian employee of the United States, no matter where you live

If you are eligible to purchase them, buying I Bonds is easy. As previously mentioned, individuals can purchase electronic I Bonds online through Treasury Direct, after setting up a Treasury Direct account. They can be bought in denominations starting at $25. The maximum amount of electronic I Bonds someone can purchase is $10,000 per calendar year.

The Takeaway

If you’re looking for an investment that’s designed to be safe, I Bonds may be worth considering. They are backed by the U.S. government and offer protection from inflation, certain tax advantages, and other benefits that may make them a low-risk choice for your savings goals. However, because I Bonds come with a composite rate of return, it’s hard to predict how much your money will actually earn over time.

If you’re interested in different savings vehicles, there are alternatives to I Bonds, including CDs and high-yield savings accounts. By exploring your options, you can determine the best choice — or choices — for you and your financial goals.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How Long Do I Bonds Take to Mature?

I Bonds reach maturity in 30 years. You can redeem I Bonds after holding them for 12 months, but if you cash in I Bonds in less than five years, you’ll lose the last three months of interest.

How Often Can You Buy I Bonds?

In one calendar year, an individual can buy up to $10,000 worth of I Bonds. The limit is counted by the Social Security number of the first person listed on the bond, according to Treasury Direct. If you are a co-owner of I Bonds and the second person named on the bonds, those bonds will not count toward your limit.

In addition, if you give I Bonds as a gift, those bonds count toward the limit of the recipient, not you as the giver.

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

This content is provided for informational and educational purposes only and should not be construed as financial advice.


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Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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The Roth IRA 5-year rule is one of the rules that governs what an investor can and can’t do with funds in a Roth IRA. The Roth IRA 5-year rule comes into play when a person withdraws funds from the account; rolls a traditional IRA account into a Roth; or inherits a Roth IRA account.

Here’s what you need to know.

What Is the Roth IRA 5-Year Rule?

The Roth IRA 5-year rule pertains to withdrawals of earnings from a Roth IRA. A quick reminder of how a Roth works: An individual can contribute funds to a Roth IRA, up to annual limits. For 2025, the maximum IRS contrbution limit for Roth IRAs is $7,000, while investors 50 and older can contribute an extra $1,000. For 2026, the maximum contribution limit is $7,500, and investors ages 50 and older can contribute an addiitional $1,100.

Roth IRA contributions can be withdrawn at any time without tax or penalty, for any reason at any age. However, investment earnings on those contributions can only typically be withdrawn tax- and penalty-free once the investor reaches the age of 59 ½ — and as long as the account has been open for at least a five-year period. The five-year period begins on January 1 of the year you made your first contribution to the Roth IRA. Even if you make your contribution at the very end of the year, you can still count that entire year as year one.

Example of the Roth IRA 5-Year Rule

To illustrate how the 5-year rule works, say an investor opened a Roth IRA in 2022 to save for retirement. The individual contributed $5,000 to a Roth IRA and earned $400 in interest and they now want to withdraw a portion of the money. Since this retirement account is less than five years old, only the $5,000 contribution could be withdrawn without tax or penalty. If part or all of the investment earnings is withdrawn sooner than five years after opening the account, this money may be subject to a 10% penalty.

In 2027, the investor can withdraw earnings tax-free from the Roth IRA because the five-year period will have passed.

💡 Quick Tip: How much does it cost to open a new IRA account? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Exceptions to the 5-Year Rule

There are some exceptions to the Roth IRA 5-year rule, however. According to the IRS, a Roth IRA account holder who takes a withdrawal before the account is five years old may not have to pay the 10% penalty in the following situations:

•   They have reached age 59 ½.

•   They are totally and permanently disabled.

•   They are the beneficiary of a deceased IRA owner.

•   They are using the distribution (up to $10,000) to buy, build, or rebuild a first home.

•   The distributions are part of a series of substantially equal payments.

•   They have unreimbursed medical expenses that are more than 7.5% of their adjusted gross income for the year.

•   They are paying medical insurance premiums during a period of unemployment.

•   They are using the distribution for qualified higher education expenses.

•   The distribution is due to an IRS levy of the qualified plan.

•   They are taking qualified reservist distributions.

5-Year Rule for Roth IRA Conversions

Some investors who have traditional IRAs may consider rolling them over into a Roth IRA. Typically, the money converted from the traditional IRA to a Roth is taxed as income, so it may make sense to talk to a financial or tax professional before making this move.

If this Roth IRA conversion is made, the 5-year rule still applies. The key date is the tax year in which the conversion happened. So, if an investor converted a traditional IRA to a Roth IRA on September 15, 2022, the five-year period would start on January 1, 2022. If the conversion took place on March 10, 2023, the five-year period would start on January 1, 2023. So, unless the conversion took place on January 1 of a certain year, typically, the 5-year rule doesn’t literally equate to five full calendar years.

If an investor makes multiple conversions from a traditional IRA to a Roth IRA, perhaps one in 2023 and one in 2024, then each conversion has its own unique five-year window for the rule.

5-Year Rule for Inherited Roth IRA

The 5-year rule also applies to inherited Roth IRAs. Here’s how it works.

When the owner of a Roth IRA dies, the balance of the account may be inherited by beneficiaries. These beneficiaries can withdraw money without penalty, whether the money they take is from the principal (contributions made by the original account holder) or from investment earnings, as long as the original account holder had the Roth IRA for at least five years. If the original account holder had the Roth IRA for fewer than five tax years, however, the earnings portion of the beneficiary withdrawals is subject to taxation until the five-year anniversary is reached.

People who inherit Roth IRAs, unlike the original account holders, must take required minimum distributions (RMDs). They can do so by withdrawing funds by December 31 of the 10th year after the original holder died if they died after 2019 (or the fifth year if the original account holder died before 2020), or have the withdrawals taken out based upon their own life expectancy.

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How to Shorten the 5-Year Waiting Period

To shorten the five-year waiting period, an investor could open a Roth IRA online and make a contribution on the day before income taxes are due and have it applied to the previous year. For example, if one were to make the contribution in April 2023, that contribution could be considered as being made in the 2022 tax year. As long as this doesn’t cause problems with annual contribution caps, the five-year window would effectively expire in 2027 rather than 2028.

If the same investor opens a second Roth IRA — say in 2024 — the five-year window still expires (in this example) in 2027. The initial Roth IRA opened by an investor determines the beginning of the five-year waiting period for all subsequently opened Roth IRAs.

The Takeaway

For Roth IRA account holders, the 5-year rule is key. After the account has been opened for five years, an account holder who is 59 ½ or older can withdraw investment earnings without incurring taxes or penalties. While there are exceptions to this so-called 5-year rule, for anyone who has a Roth IRA account, this is important information to know about.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

Do I have to wait 5 years to withdraw from my Roth IRA?

Because of the Roth IRA 5-year rule, you generally have to wait at least five years before withdrawing earnings tax-free from your Roth IRA. You can, however, withdraw contributions you made to your Roth IRA at any time tax-free.

Does the 5-year rule apply to Roth contributions?

No, the Roth IRA rule does not apply to contributions made to your Roth IRA, only to earnings. You can withdraw contributions you made to your IRA tax-free at any time.

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