Are Roth IRA Distributions Taxable?

Investing money in a Roth IRA affords you many benefits, namely your money growing tax free over time.

But when it comes time to take out your Roth IRA funds, are Roth IRA distributions taxable? And can you withdraw them without paying penalties?

Here’s the answer: Qualified Roth IRA distributions are tax free; nonqualified distributions may be subject to tax and penalty.

As a general rule, if you meet requirements for both age and length of time the account was open, your Roth IRA withdrawal will not be taxed. But, if you withdraw the funds before meeting those two requirements, this is not the case. Here are the standards used to determine if your Roth IRA distribution is taxed or not…

Your Roth IRA Distributions are Taxable When…

Note, the following discussion assumes your Roth IRA consists of contributions and earnings. If you converted a traditional IRA to a Roth IRA, the rules are a little different and discussed later on.

When you take a Roth IRA distribution, the withdrawal is considered to come first from contributions and then from earnings. Withdrawals of contributions are tax-free, regardless of your age or how old the Roth account is.

The earnings portion of your Roth IRA distribution is taxed:

  1. If you are under 59½, and/or
  2. You haven’t had a Roth IRA account open for more than five years. The five-year period starts when you make your first contribution to a Roth account.

If both requirements are not met, the earnings portion of the withdrawal is taxed as ordinary income. If you are not yet age 59½, the taxable part of the withdrawal is also subject to a 10% penalty unless you are totally and permanently disabled, you inherited the Roth account, or another exception applies. See IRS Publication 590-B.

Your Roth IRA Distributions are Fully Tax-Free If…

If you meet the following requirements, upon withdrawing your Roth IRA funds, they will not be taxed if:

  1. You’re 59½ or older and have had your Roth for five years or more.
  2. You’re under the age of 59½ and have had your Roth IRA for 5 years or longer, but are taking the distribution because:
  1. You are disabled
  2. You inherited the Roth account
  3. The distribution is used to buy or rebuild a first home as described in IRS Publication 590-B.

Roth Account Funds Are Treated Differently If You Converted a Traditional IRA to a Roth

If you converted traditional IRA funds to a Roth, the converted amount is subject to tax if withdrawn before five years. The early withdrawal is taxed as ordinary income and is also subject to the 10% penalty unless you are age 59½ or one of the other exceptions mentioned earlier applies. Likewise, rollovers from other retirement accounts (such as a non-Roth 401(k)) must be held for at least five years to avoid tax and penalty consequences.

If your Roth IRA consists of both contributions and conversion or rollover amounts, any withdrawal is treated as coming first from contributions, then from conversion or rollover amounts, and finally from earnings.

Each conversion or rollover is subject to a new five-year holding period.

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