Determining Tax on Roth Distribution in 5 EASY steps
What are the ordering rules?
A 60-day rollover is the distribution of funds from a qualifying retirement account payable to the account owner who then has 60 days to redeposit the funds into another qualifying retirement account.
- Are you withdrawing a contribution? Roth contributions are funds that were directly deposited into a Roth IRA account. Regardless of any factors, including your age, a distribution of Roth contributions will always be both tax and penalty free.
- Are you withdrawing converted amounts before age 59 ½? Converted funds withdrawn before age 59 ½ are never subject to income tax. However, they will be subject to the 10% penalty for early distributions (unless another exception applies) if they have been in a Roth IRA for less than five years. Each conversion starts its own
5-year clock and the converted amounts are withdrawn on a first-in, first-out basis.
- Are you withdrawing converted amounts after 5 years or age 59 ½? A distribution of converted funds after 5 years or after age 59 ½ will be entirely income tax and penalty free.
- Are you withdrawing earnings before age 59 ½? Earnings withdrawn prior to age 59 ½ are generally subject to income tax regardless of how long they've been in a Roth account. Earnings withdrawn prior to age 59 ½ are also generally subject to the 10% penalty for early distributions unless an exception applies.
- Are you withdrawing earnings after age 59 ½ and 5 years? Earnings withdrawn after age 59 ½ are never subject to the 10% penalty. They may, however, be subject to income tax. If you have held any Roth IRA for more than 5 years, your earnings are tax free, if not, they are taxable at ordinary rates.