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Roth IRAs: Distributions

The tax treatment of a Roth IRA distributions depends on whether the distribution is qualified. Qualified distributions from Roth IRAs are tax and penalty free, but nonqualified distributions may be subjected to tax and an early distribution penalty.

Qualified Distribution Defined

For a distribution to be qualified, it must occur at least five years after the Roth IRA owner established and funded his/her first Roth IRA, and the distribution must occur under at least one of the following conditions:

  • The Roth IRA holder is at least age 59.5 when the distribution occurs.
  • The distributed assets are used toward the purchase, or to build or rebuild a first home for the Roth IRA holder or a qualified family member. Qualified family members include the IRA owner's spouse, a child of the IRA owner and/or of the IRA owner's spouse, a grandchild of the IRA owner and/or of his or her spouse, a parent or other ancestor of the IRA owner and/or of his or her spouse. This is limited to $10,000 per lifetime.
  • The distribution occurs after the Roth IRA holder becomes disabled.
  • The assets are distributed to the beneficiary of the Roth IRA holder after the Roth IRA holder's death.

For example, if an individual establishes a Roth IRA at ABC Brokerage in 2012 and establishes a second Roth IRA at XYZ Brokerage in 2013, the five-year period that determines a qualified distribution begins in 2012, and the five-year period begins with the first day of the year for which the first contribution is made, which, in this case is January 1, 2012. This is true even if the 2012 contribution is made

at anytime up to April 15, 2013.

How Are Non-Qualified Distributions Taxed?

A non-qualified distribution that does not meet the above requirements may be subjected to income tax and/or the 10% early-distribution penalty. The source of a non-qualified distribution determines the applicable tax treatment. Roth IRA distributions can come from the following four sources:

  • A regular contribution
  • a Roth conversion of taxable Traditional IRA assets (Traditional IRA assets for which a tax deduction was allowed) or a rollover of taxable assets from a qualified plan, 403(b) or governmental 457(b) plan. These assets are taxed when converted to the Roth IRA.
  • A Roth conversion of nontaxable Traditional IRA assets (Traditional IRA Assets for which there was no tax deduction.), or a rollover of nontaxable assets from a qualified plan or 403(b) plan. These assets are not subjected to income tax when distributed or converted to a Roth IRA.
  • Earnings on all Roth IRA assets

To determine the source of assets distributed from a Roth IRA, the IRS uses the "ordering rules". According to the ordering rules, assets are distributed from a Roth IRA in the following order. When assets from one source are used up or non-existent, the assets are distributed from the next source in the list:

  1. Regular Roth IRA contributions
  2. Taxable Traditional IRA conversions and taxable rollovers from qualified plans, 403(b) or governmental 457(b) plans
  3. Nontaxable Traditional IRA conversions and nontaxable rollovers from qualified plans and 403(b) plans
  4. Earnings on all Roth IRA assets

The following chart summarizes the tax treatment of Roth IRA distributions.

Distributed Assets

Category: Taxes

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