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When Are Roth IRA Withdrawals Taxed

how are ira withdrawals taxed

Roth IRAs withdrawals may be taxed depending on some circumstances of the retirement account. Learn when you can expect to be taxed on a Roth IRA withdrawal. Show transcript Hide transcript

Transcript: When Are Roth IRA Withdrawals Taxed

Hi, I’m Abby for An IRA, or Individual Retirement Arrangement, is a type of retirement plan that provides tax advantages for retirement accounts in the U.S. A Roth IRA is a specific type of plan that is generally not taxed by the government if you make a withdrawal. Today, we’re going to take a look at instances when Roth IRA withdrawals are taxed.

Roth IRA Withdrawal are Tax-and Penalty-Fee When:

  • When the money has been in the account for at least five years- When the owner is at least fifty-nine and a half years old
  • When the owner has become disabled
  • When the owner is spending up to ten thousand dollars toward a home purchase.

So, when are Roth IRA withdrawals taxed? If the withdrawal does not meet these requirements, it is subject to income tax or a ten percent penalty.

Example Roth IRA Scenario

Let’s use Wayne as an example: Wayne, fifty-five years old, opened his Roth IRA in 2010 and contributed two-thousand dollars to it. For the next three years, he made contributions to it until his total assets were thirty-five thousand dollars.

If Wayne decides to withdrawal these assets now he will owe the IRS a ten percent early-withdrawal penalty because it’s been less than five years since he opened the account.

With all of this talk of penalties and taxes, you’re probably wondering what Wayne can do to make his withdrawals qualified?

How to Qualify for Tax-Free Roth IRA Withdrawal:

The first: keep contributing. Wayne can keep contributing to

his IRA until his money has sat in the account for five years. Because his original contribution of two-thousand dollars is not taxable even before the five year deadline, Wayne can withdrawal those assets in emergencies.

The second: wait a few more years. When Wayne turns fifty-nine and a half, most of his withdrawals automatically qualify as penalty-free. Whether he’s withdrawing money to rebuild his first house or to pay his medical bills after he’s lost his job, the money is now his.

The third: keep track of the original contributions. Wayne’s original contribution was five-thousand dollars. He can withdrawal this cash from his IRA without any IRS penalty if it has not garnered any profits or gains.

The fourth: The best way to go about minimizing penalties on your Roth IRA is to connect with a financial institution that offers a low or no-fee account.

No-Fee Roth IRAs

For example, Scottrade offers no-fee Roth IRAs. Since Scottrade is a brokerage firm with a good reputation, newer investors are encouraged to open their accounts there. Scottrade’s IRAs have no annual fee or sign-up fee, so no matter if you’re a 22-year-old who’s ready to start investing, a long-term investor, or sharing a mutual fund – it’s is a good approach.

Once you open a Roth IRA, you can invest anything you want, from stocks to mutual funds to bonds. It is an effective savings tool for anyone as long as you know what’s taxable and what isn’t.

We hope this video has shed some light on the taxing of Roth IRA withdrawals. For more information on retirement accounts and investing, please visit our Beginners’ Investment section on the web at for watching!

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Category: Taxes

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