The Five-Year Rule

• In order for a distribution from a Roth IRA to be considered a normal distribution, the IRA owner must not only keep the assets in until age 59 1/2, but must also keep them in for at least five years. The five-year rule applies even for Roth IRAs opened after age 59 1/2, whether funded through contributions or a conversion.
  
  

401k to IRA

• The structure created in a Roth 401k is the same as that created in a Roth IRA. The only difference is the assets a participant is able to contribute. A 401k is employer-based, allowing up to $16,500 in annual contributions as of 2011 IRS regulations. When employment ends, the 401k can be rolled into a self-directed Roth IRA. The time that the money was in the 401k counts toward the five-year rule for a normal distribution.
  
  

Early Distributions

• If you take money out of the Roth 401k or the IRA before five years, the IRS adds it to income and assesses a 10-percent penalty to the distribution's earnings portion. Since the principal is already after-tax dollars, it won't be taxed again even in an early distribution scenario.
  
  

Early Distribution Exceptions

• There are exceptions that avoid the IRS penalty when taking money out prior to five years. If the distribution comes from a 401k, early distribution exceptions allow you to use $10,000 to buy a first home, pay college tuition expenses, prevent foreclosure, prevent eviction and pay medical expenses exceeding 7.5 percent of your adjusted gross income. If the distribution comes from a Roth IRA, only the first home purchase and college tuition payments are allowed. Even though a distribution gets an exception, the earnings are still added to income.