Is my non-qualified Roth IRA distribution subject to taxes or early distribution penalties?

By Denise Appleby AAA
A:

The ordering rules must be applied to determine whether the distribution is subject to income taxes and/or the early distribution penalty. Under these ordering rules, distributions are taken from funding sources in the following order:

Note: Roth conversion amounts are not considered distributed until all contribution amounts have been distributed; earnings are not considered distributed until all contribution - and then all conversion - amounts have been distributed

If your distribution consists of only contributions, the amount is tax and penalty free.

If your distribution includes amounts attributed to conversion amounts, that amount will be subject to the early distribution penalty, unless an exception applies.

If your distribution includes amounts attributed to earnings, that amount will be subject to income tax and the early distribution penalty. The penalty is waived if an exception applies.

To learn more, see Avoiding IRS Penalties On Your IRA Assets and Tax Treatment Of Roth IRA Distributions.

Question answered by Denise Appleby, CISP, CRC, CRPS, CRSP, APA

RELATED FAQS

  1. Can I purchase mutual funds for my IRA?

    Learn how to invest your IRA assets in mutual funds. Discover a few of the different types of mutual funds available for ...
  2. How are savings bonds taxed?

    Learn who is responsible for reporting U.S. EE savings bond interest for taxation and when the interest can be reported for ...
  3. Are credit card rewards considered taxable income by the IRS?

    Learn about when the Internal Revenue Service considers the financial value of gifts received from credit card reward programs ...
  4. How do Pay As You Go pension plans work?

    Learn how pay-as-you-go pension plans are different than fully funded pension plans and why some government plans are running ...
RELATED TERMS
  1. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  2. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  3. Gold IRA

    Definition of Gold IRA
  4. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  5. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  6. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
Related Articles
  1. The Best Way To Build Your Retirement ...
    Retirement

    The Best Way To Build Your Retirement ...

  2. Want To Know How To Save For Retirement? ...
    Retirement

    Want To Know How To Save For Retirement? ...

  3. Could Being A Landlord Pay For Your ...
    Retirement

    Could Being A Landlord Pay For Your ...

  4. Smart Retirement Strategies Even Without ...
    Retirement

    Smart Retirement Strategies Even Without ...

  5. 8 Essential Tips For Retirement Saving
    Investing Basics

    8 Essential Tips For Retirement Saving

Trading Center