Roth Distributions before 5 years
I’m hoping to find out if a Roth IRA distribution of the contributions only made by a 30-something, who has only had the account opened for 2 years, is subject to the 10% penalty?
I’m hoping to find out if a Roth IRA distribution of the contributions only made by a 30-something, who has only had the account opened for 2 years, is subject to the 10% penalty?
Permalink Submitted by Alan - IRA critic on Mon, 2021-10-18 18:24
There is no tax or penalty on distributions of regular Roth contributions, and these can be taken anytime. However, a taxable Roth conversion does need to be held 5 years or until 59.5 to avoid the 10% penalty.
Permalink Submitted by Regina Burks on Mon, 2021-10-18 19:43
Hi There. Thank you for your response. I’m really digging into this questions because the IRS website at https://www.irs.gov/publications/p590b#en_US_2020_publink1000231057 under section 2 then “What Are Qualified Distributions” seems to say differently. It says-“What Are Qualified Distributions?A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.It is made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit.
The payment or distribution is:Made on or after the date you reach age 59½,
Made because you are disabled (defined earlier),
Made to a beneficiary or to your estate after your death, or
One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).”
We were of the same mindset as your response until we saw this and are now concerned we may have it wrong. What do you think after reading the IRS code?Thank you again for your time and response.
Permalink Submitted by Alan - IRA critic on Mon, 2021-10-18 20:43
What you are missing is that to be tax and penalty free, a distribution does not have to be qualified. This particular taxpayer’s Roth is not close to qualification and will not be qualified until they reach 59.5 or become disabled. Therefore, any distribution will be a non qualified distribution which comes out under the Roth IRA ordering rules. The ordering rules state that all regular contributions come out first (tax and penalty free), conversions next with oldest conversion first, and earnings last.
For example, if the person made 2 6000 contributions, and those contributions earned 2000, the Roth balance is 14000. The 12000 of regular Roth contributions comes out first, tax and penalty free. But if the person took out more than 12000, the portion over 12000 would come from earnings, and because the Roth is non qualified the earnings would be subject to both tax and penalty.
In short, anyone at anytime can withdraw their regular Roth contributions without tax or penalty notwithstanding that these a non qualified distributions.
Permalink Submitted by Regina Burks on Mon, 2021-10-18 21:06
I appreciate you’re responding again. When I continue to read through the tax code I do see information on that same line, so I again feel confident in this information. Thanks!