8.23 Distributions From a Roth IRA
A distribution from a Roth IRA is tax free if it is a qualified distribution, as discussed below. Even if a distribution is not a qualified distribution, it is tax free to the extent it does not exceed your regular Roth IRA contributions (8.20) and conversion contributions (8.21). The part of a non-qualified distribution allocable to earnings is taxable, but distributions are considered to be from contributions first and then from earnings; see the ordering rule below for the allocation between contributions and earnings. You must report Roth IRA distributions on Form 8606.
You may make a tax-free direct transfer from one Roth IRA to another. A tax-free rollover of a Roth IRA distribution may be made to another Roth IRA if you complete the rollover within 60 days.
You do not have to receive minimum required distributions from a Roth IRA after you reach age 70½ as you would from a traditional IRA (8.13). No Roth IRA distributions at all are required during your lifetime. After your death, your beneficiaries will be subject to a minimum distribution requirement (8.24).
Filing Instruction
Qualified Roth IRA distributions are tax free.
Two tests must be met for a Roth IRA distribution to be “qualified,” and thus completely tax free: (1) the distribution must be made after the end of the five-year period beginning with the first day of the first taxable year for which any Roth IRA contribution was made and (2) one of the following conditions must be met:
- you are age 59½ or older when the distribution is made,
- you are disabled,
- you use the distribution to pay up to $10,000 of qualifying first-time home-buyer expenses as discussed below, or
- you are a beneficiary receiving distributions following the death of the account owner (8.24).
Five-year holding period for qualified distributions.
Even if you are age 59½ or older or meet one of the other tests for qualified distributions, you must also satisfy the five-year holding period test in order to make tax-free withdrawals of earnings from a Roth IRA. The five-year holding period begins with January 1 (assuming you are a calendar-year taxpayer) of the first year for which any Roth IRA contribution is made.
For purposes of determining qualified distributions, you have only one five-year period regardless of the number of Roth IRAs you have. Once you satisfy the five-year test for one Roth IRA, you also meet it for all subsequently established Roth IRAs. For example, if you converted a traditional IRA to a Roth IRA during 1998 (the first year Roth IRA contributions were allowed), or made a regular Roth IRA contribution for 1998 at any time between January 1, 1998, and April 15, 1999, your five-year holding period began January 1, 1998. If in a later year you converted (8.21) a traditional IRA to a Roth IRA, or made a regular Roth IRA contribution (8.20), that new Roth IRA does not get its own five-year holding period. In this case, the five-year period for all your Roth IRAs began January 1, 1998, and ended December 31, 2002. If your first Roth IRA contribution was a regular contribution for 2008 (made by April 15, 2009) or a conversion made during 2008, your five-year period for all your Roth IRAs ends December 31, 2012.
Planning Reminder
If you receive a Roth IRA distribution after the end of your five-year holding period, and you also meet one of the other qualified distribution requirements such as being age 59½ or older, the distribution is completely tax free. If you receive a distribution before satisfying both the five-year holding period requirement and one of the other qualified distribution requirements, and the withdrawal exceeds your contributions, the excess (i.e., earnings) is taxable and possibly subject to the 10% penalty for pre–age 59½ distributions (8.12). Under the ordering rules discussed below, Roth IRA distributions are treated as being made first from contributions and then from earnings.
Ordering rules for distributions.
Even if a distribution is not fully tax free as a qualified distribution, it is not taxable to the extent of your Roth IRA contributions. All of your Roth IRAs are treated as one account for purposes of determining if contributions or earnings have been withdrawn. If a distribution does not exceed total contributions to all of your Roth IRAs, it is not taxable. The taxable part of a distribution is figured on Form 8606.
Where you have made regular annual contributions and also conversion contributions from a traditional IRA or rollover contributions from an employer plan to a Roth IRA, the regular contributions are considered to be withdrawn first. Then, conversion contributions and rollover contributions are considered to be withdrawn in the order in which they were made. If part of a conversion or rollover contribution was not treated as a taxable distribution (because it was allocable to nondeductible or after-tax contributions in the converted or rolled-over account), the taxable part of the conversion or rollover is deemed withdrawn before the nontaxable part. Taking into account the taxable part of a conversion or rollover contribution before the nontaxable part (if any) of the contribution may be important for purposes of determining whether the 10% early distribution penalty applies to the withdrawal of a conversion or rollover contribution within five years of the conversion (see below).
Earnings on Roth IRA contributions are considered to be withdrawn last, after all contributions are taken into account. If the distribution is not a qualified distribution, the withdrawn earnings are subject to tax and if you are under age 59½, to the 10% early distribution penalty, although there are exceptions (8.12).
IRS Alert
Penalty on withdrawals before age 59½ and within five years of conversion or rollover to Roth IRAs.
The regular 10% early withdrawal penalty (8.12) applies if withdrawals from a Roth IRA are made by taxpayers under age 59½ before January 1 of the fifth year after the year of a conversion from a traditional IRA or rollover from an employer plan. Unless a penalty exception is available, the 10% penalty applies to the extent that a withdrawal within the five-year period is allocable under the ordering rule (see above) to the taxable part of the conversion or rollover. Under the ordering rule for Roth IRA distributions, the entire withdrawal may be tax free because it does not exceed regular Roth IRA contributions, plus conversion or rollover contributions, but the 10% penalty still applies if a taxable conversion or rollover amount is deemed to be withdrawn before the end of the five-year period. The five-year period for purposes of this penalty rule is figured separately for each conversion or rollover contribution. If you made a conversion in 2008, the five-year holding period for avoiding the early distribution penalty on a withdrawal from that Roth IRA ends December 31, 2012.
Caution
Distribution used for up to $10,000 of first-time home-buyer expenses.
Tax-free treatment will apply to a Roth IRA distribution received after the first five-year period and used for up to $10,000 of qualifying “first-time” home-buyer expenses. The $10,000 limit is a lifetime cap per IRA owner, not an annual limitation. Expenses qualify if they are used within 120 days of the distribution to pay the acquisition costs of a principal residence for you, your spouse, your child, or your grandchild, or an ancestor of you or your spouse. The residence does not have to be the homeowner’s “first” home. A qualifying first-time home-buyer is considered to be someone who did not have a present ownership interest in a principal residence in the two-year period ending on the acquisition date of the new home. If the home-buyer is married, both spouses must satisfy the two-year test. Eligible acquisition costs include buying, constructing, or reconstructing the principal residence, including reasonable settlement, financing, and closing costs.