What if I need to withdraw some or all of my Roth IRA savings during retirement?
While the advantages of the Roth IRA and a Roth IRA conversion are enhanced the longer you are able to allow your assets to remain tax sheltered, Roth IRA savings remain available to you for distribution should you choose to withdraw some or all of your savings during retirement.
Are Roth IRA distributions subject to taxation?
If you take a qualified distribution from your Roth IRA, distributions are exempt from federal taxation. If your Roth IRA distributions are non-qualified distributions, certain taxes and penalties may apply. Due to the complexity of the Roth IRA distribution rules and tax ramifications, you should consult a tax advisor prior to taking distributions from your Roth IRA.
What is a Roth IRA qualified distribution?
A qualified distribution from your Roth IRA is not subject to federal income tax. A distribution from a Roth IRA is considered a qualified distribution if it was withdrawn after satisfying a five-year requirement provided you (i) are age 59½ or older; (ii) are disabled, (iii) qualify for a special purpose distribution such as the purchase of a first home, or (iv) are deceased.
When does the five-year period for qualified distributions begin?
The five-year holding period for Roth IRA qualified distributions begins on January 1st
of the first tax year for which
you make a Roth IRA contribution, or if earlier, the first tax year in which
a conversion or an employer plan rollover is made to one of your Roth IRAs. A subsequent contribution, conversion or rollover will not start a new five-year period for purposes of determining a qualified distribution.
What is a Roth IRA nonqualified distribution?
What are the tax consequences of a Roth IRA nonqualified distribution?
If you receive a distribution from your Roth IRA that does not constitute a qualified distribution, a portion of it may be taxable and may be subject to the 10 percent early distribution penalty tax (if you are under age 59½ and do not qualify for an exception). You must apply the special “ordering” rules to determine whether part of your nonqualified distribution represents a taxable amount. See “What are the Roth IRA ordering rules?”
for more information on ordering rules.
When assets representing Roth IRA contributory basis are distributed as part of a nonqualified distribution, there is no tax or early distribution penalty tax.
When assets representing Roth IRA conversion contributions are distributed as part of a nonqualified distribution, there is no additional federal income tax. However, if you are under age 59½ and conversion assets are distributed within five years of January 1 of the year they were converted, the 10 percent early distribution penalty tax will typically apply unless you meet a penalty exception.
When distributed as part of a nonqualified distribution, Roth IRA earnings are taxed and, unless a penalty exception to the early distribution penalty tax applies, the amount is also subject to an additional 10 percent early distribution penalty tax.
What are the Roth IRA ordering rules?
The “ordering rules” are used to determine the type of assets being distributed from a Roth IRA. The ordering rules for Roth IRA distributions treat distributions as coming from three main categories in the following order: 1) Roth IRA basis; 2) conversion contributions; and then 3) earnings.
The ordering rules treat all Roth IRAs owned by one individual as one. You are responsible for tracking the categories of the assets held in your Roth IRA on IRS Form 8606, Nondeductible IRAs.
If I am under age 59½, what are the penalty exceptions that would allow me to avoid the 10 percent early distribution penalty tax on the nonqualified distribution of conversion assets or Roth IRA earnings?
The 10 percent penalty tax on early distributions does not apply to distributions made to you before you attain age 59½ if any of the following reasons apply:
- You have unreimbursed medical expenses that are more than the applicable percentage of your adjusted gross income and provided certain other conditions apply.
- The distribution is to pay your medical insurance premiums if you are unemployed and receive federal or state unemployment benefits for 12 consecutive weeks, or would have if not self-employed, and you receive the distribution during that or the succeeding tax year.
- A physician certifies that you are disabled as defined by the Internal Revenue Code.
- The distribution, of up to a $10,000 lifetime limit, is used within 120 days of withdrawal to buy or build a home that will be a principal residence for a qualified first-time homebuyer.
- The distributions are not more than your or your spouse’s expenses, or those of your or your spouse’s child or grandchild for attendance at a post-secondary education institution.
- You are receiving substantially equal periodic payments consistent with the Internal Revenue Code and Regulations.
- The distribution is due to an IRS levy on the Roth IRA.
- The distribution is a “qualified reservist distribution” as defined by the Internal Revenue Code.
Am I required to take required minimum distributions (RMDs) from my Roth IRA?
No. Distributions are not required from your Roth IRA during your lifetime or during the lifetime of your spouse beneficiary if he/she treats the Roth IRA as his/her own after your death. However, when you die, your nonspouse beneficiary(ies) and your spouse beneficiary who does not treat the Roth IRA as his/her own must take minimum distributions.
I have heard that I cannot withdraw my Roth IRA assets until the account has been opened for five years. Is this true?
No. Roth IRA assets belong to you, the Roth IRA owner and may be withdrawn at anytime, for any reason. Although there is a widely held belief that Roth IRA assets are not accessible until the Roth IRA has been open for five years, this notion is false. On the same token, however, certain withdrawals (but not all) taken within five years of when you establish your first Roth IRA may be subject to taxes and penalties.
How does the five-year waiting period work for purposes of Roth IRA distributions?
It is understandable that there is confusion over the Roth IRA five-year waiting period, because there are actually two separate five-year waiting periods. There is one five-year waiting period for determining qualified distributions and another five-year period that determines whether the 10 percent early distribution penalty applies to the distributions of Roth conversion assets.
A qualified distribution from your Roth IRA may be made after a five-year waiting period has been satisfied and you (i) are age 59½ or older; (ii) are disabled, (iii) qualify for a special purpose distribution such as the purchase of a first home, or (iv) are deceased. The five-year waiting period for purposes of determining a qualified distribution begins on January 1 of the year for which you deposit your first Roth IRA contribution (i.e. regular/spousal contributions, conversions or employer plan rollover) to any Roth IRA.
Alternatively, when Roth conversion assets are distributed from a Roth IRA as part of a nonqualified distribution, the 10 percent early distribution penalty applies if the distribution is made within the five-year period beginning with the first day of the taxable year in which your conversion contribution was made. The five-year period ends on the last day of the fifth year following the year of the conversion. If the distribution is within the five-year waiting period, the 10 percent penalty applies only to the amount of the conversion contribution includible in gross income as a result of the conversion. However, if a penalty exception found under Internal Revenue Code section 72(t) also applies to such a distribution, the 10 percent penalty can be avoided. The five-year period for determining the 10 percent penalty on a nonqualified distribution of a conversion is separately determined for each conversion contribution.
Note: While the two five-year periods are separate, the five-year period for determining the 10 percent penalty on the distribution of a conversion could be parallel to the qualified distribution five-year waiting period if the conversion contribution in question was the first contribution made to any Roth IRA or if the conversion contribution was made in the same tax year for which the first Roth IRA contribution was made to a Roth IRA.
May I withdraw a charitable distribution from my Roth IRA?
Qualified charitable distributions were allowed only for tax years 2006 -2014 unless extended by Congress to later years.
May I take a series of substantially equal periodic payments from my Roth IRA?