April Key Focus
When Can I Take a Roth Distribution? Itís About the Rules
You can take money out of your Roth IRA. Generally there is no
income tax due on a distribution, but if you are under age 59 1/2,
you may owe the 10% early distribution penalty. Hereís the way
In order for all Roth distributions to be tax and penalty free, you
must be at least 59 1/2 AND have established any Roth IRA 5
years ago OR the distribution is due to death, disability, or is for a
first-time home purchase.
It is more complicated if you are under age 59 1/2. All of your
Roth IRAs are treated as one big Roth IRA. You have to track
three types of funds in your Roth IRAs: 1) your contributions; 2)
your conversions; 3) your earnings.
When you take a Roth distribution, your contributions are the first
funds distributed, even if they are in a different account from the
one that makes the distribution. Contributions are distributed tax
When your contributions are gone, then you start on your
converted amounts; first in, first out. Each Roth conversion has
its own 5-year holding period. If the funds are distributed before
the 5 years are up for that conversion and you are still under age
59 1/2, then you have to pay the 10% penalty on the amount
distributed. Now, if the funds were after-tax funds when they
were converted, there is no penalty. This means that you could
be under age 59 1/2 at the time of the distribution and not owe a
penalty if the Roth conversion was done more than 5 years ago.
When your contributions and conversions are exhausted, then you
are taking distributions of the earnings on the Roth account. The
earnings will be taxable and subject to the 10% early distribution
penalty since you are under age 59 1/2.
Those are the distribution rules in a nutshell. However, we do
NOT recommend that you take funds from your Roth account to
pay the income tax due on a Roth conversion unless you
absolutely have no other way to pay the tax. You will be reducing
the amount you have available in retirement and you are losing
all of the tax-free compounded interest on what you withdraw. It
could be the difference between living comfortably and having to
make tough choices about where to cut back during retirement.
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