ROTH IRA DISTRIBUTIONS
One of the primary reasons for investing in a Roth IRA is the potential to receive distributions that are tax-free. When certain conditions are met, a Roth IRA distribution is considered “qualified”, which means that the proceeds are neither taxable nor subject to a 10% penalty tax.
IRA Distribution Form
Roth IRAs are Aggregated
If you have more than one Roth IRA, this includes Roth IRAs with Sit Mutual Funds and other financial institutions, you must combine all of them to calculate the tax liability on a distribution. In other words, the IRS views you as having one big Roth IRA, regardless of how many Roth IRAs you actually own.
For a distribution to be considered qualified, your Roth IRA must have been open for at least 5 tax years and the distribution must be made for one of the following reasons:
- on or after the day you turn 59½;
- due to your disability*;
- due to a first-time home purchase**; or
- due to your death
* Disability is defined as being unable to engage in any substantial gainful activity. A physician must certify that your disability will be long-term, continuous, of an indefinite duration, and is expected to lead to death.
** Up to $10,000 of a distribution may be used to buy, build, or rebuild a first home. There is a lifetime limit of $10,000. “First home” means that the individual has not owned a home in the prior two years. The funds must be used within 120 days after receipt. The first home can be for you, your spouse, your or your spouse’s children or grandchildren and your or your spouse’s parents. Note that the individual who must meet the definition of a first-time homebuyer is the person acquiring the home — not the Roth IRA owner.
Non-Qualified Distributions and Ordering Rules
If your Roth IRA distribution is not qualified, part of it may be taxable and/or subject to a 10% penalty tax. Your Roth IRA assets are deemed to be distributed in a certain order, which determines your tax liability. The distribution order is:
2) conversion contributions
A distribution consisting of contributions is neither taxable nor subject to a 10% penalty tax.
When you’ve withdrawn all contributions, you move on to…
2. Conversion Contributions
A distribution consisting of conversion contributions is not taxable but may or may not be subject to a 10% penalty tax under the following conditions:
Within Five Years and Under Age 59½
If the conversion occurred less than five years ago and you are under age 59½, the distribution is subject to a 10% penalty tax (unless an exception applies). Each conversion has its own five-year clock and converted amounts are withdrawn on a first-in, first-out basis.
After Five Years or After Age 59½
If the conversion occurred at least five years ago or you are 59½ or older, the distribution is not subject to a 10% penalty tax.
When you’ve withdrawn all conversion contributions, you move on to…
A distribution consisting of earnings may or may not be taxable and/or may or may not be subject to a 10% penalty tax under the following conditions:
Under Age 59½
Earnings withdrawn before you turn age 59½ are taxable and subject to a 10% penalty tax (unless an exception applies).
Within Five Years and After Age 59½
Earnings withdrawn within five years of opening your Roth IRA but after you turn age 59½ are taxable but not subject to a 10% penalty tax.
After Five Years and After Age 59½
Earnings withdrawn after your Roth IRA has been open for five years and you turn age 59½ are neither taxable nor subject to a 10% penalty tax.
- Redemptions are reported on IRS Form 1099-R (“Distributions from IRAs”) which is mailed to you in January.