Roth IRA Distribution Ordering Rules

Roth IRA Distribution Ordering Rules

By Andy Ives, CFP®, AIF®
IRA Analyst

This may seem like a rudimentary topic, but it is the basics that are often so confusing. A fundamental understanding of Roth IRA distributions is essential for Roth IRA owners. In a blog post from June 8 ("One Roth IRA Bucket"), I created a scenario where a person had five Roth IRAs, a couple of traditional IRAs, and was doing Roth conversions. The point of that exercise was to demonstrate how the IRS knows what dollars within all of a person's Roth IRAs are contributions, what are conversions, and what are earnings. Additionally, I stressed that the IRS treats the entirety of a person's Roth IRAs, regardless of how many, as a single Roth IRA.

Why is it so important to know which dollars are which within a Roth IRA? Because Roth IRA distributions follow strict ordering rules. There is no such thing as FIFO ("first in, first out") with a Roth IRA. LIFO ("last in, first out") and pro rata also have zero bearing on Roth IRA withdrawals. In fact, there is a simple ordering procedure for Roth IRA distributions:


Q: Late in December 2021, a taxpayer (under age 59=C2=BD) takes a distribution of his (traditional, not Roth) 401(k), and has 20% withheld for federal tax. Early in January 2022, the full 100% of the distribution is deposited in a Roth IRA. Does this avoid the 10% penalty for early distribution? Is this reportable as a Roth conversion in 2022 or 2021?


Q: By law I must withdraw a certain percentage from my retirement accounts to meet the required RMD. And I will have to pay income taxes on that amount. The percentage amount I must withdraw is based on the value of the account as of December 31, 2021 at which time the market was very high. My stocks and mutual fund investments are now worth a lot less than they were in December least 30% less! This means I will have to sell a lot more of my investments (and reduce my retirement nest egg) in order to meet the RMD percentage of value.

I know that if all my investments were in a Roth IRA, I would not have this problem. However, I cannot be alone in this and wonder if the feds have any plans to give some relief to us seniors?


Q: I f a person needs to withdraw an RMD, but doesn't need the money, can he convert this RMD to a Roth IRA?


Q: I turn age 72 in 2023. If I wait to take my first RMD until 4/1/24, do I calculate it using my IRA balance on 12/31/23 or on 12/31/22? I think 12/31/22, but do not want to assume. I can't find a clear answer in Pub 590-B.


Q: When will the IRS release final regulations for RMDs on beneficiary IRAs?


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