1. Roth IRAs: Introduction
  2. Roth IRAs: Eligibility Requirements
  3. Roth IRAs: Contributions
  4. Roth IRAs: Distributions
  5. Roth IRAs: Conclusion

The tax treatment of a Roth IRA distributions depends on whether the distribution is qualified. Qualified distributions from Roth IRAs are tax and penalty free, but nonqualified distributions may be subjected to tax and an early distribution penalty.

Qualified Distribution Defined

For a distribution to be qualified, it must occur at least five years after the Roth IRA owner established and funded his/her first Roth IRA, and the distribution must occur under at least one of the following conditions:

  • The Roth IRA holder is at least age 59½ when the distribution occurs.
  • The distributed assets are used toward the purchase, or to build or rebuild a first home for the Roth IRA holder or a qualified family member. Qualified family members include the IRA owner's spouse, a child of the IRA owner and/or of the IRA owner's spouse, a grandchild of the IRA owner and/or of his or her spouse, a parent or other ancestor of the IRA owner and/or of his or her spouse. This is limited to $10,000 per lifetime.
  • The distribution occurs after the Roth IRA holder becomes disabled.
  • The assets are distributed to the beneficiary of the Roth IRA holder after the Roth IRA holder's death.

For example, if an individual establishes a Roth IRA at ABC Brokerage in 2015 and establishes a second Roth IRA at XYZ Brokerage in 2016, the five-year period that determines a qualified distribution begins in 2015, and the five-year period begins with the first day of the year for which the first contribution is made, which, in this case was January 1, 2015. This is true even if the 2015 contribution was made at anytime up to April 15, 2016.

How Are Non-Qualified Distributions Taxed?

A non-qualified distribution that does not meet the above requirements may be subjected to income tax and/or the 10% early-distribution penalty. The source of a non-qualified distribution determines the applicable tax treatment. Roth IRA distributions can come from the following four sources:

  • A regular contribution
  • a Roth conversion of taxable Traditional IRA assets (Traditional IRA assets for which a tax deduction was allowed) or a rollover of taxable assets from a qualified plan, 403(b) or governmental 457(b) plan. These assets are taxed when converted to the Roth IRA.
  • A Roth conversion of nontaxable Traditional IRA assets (Traditional IRA Assets for which there was no tax deduction.), or a rollover of nontaxable assets from a qualified plan or 403(b) plan. These assets are not subjected to income tax when distributed or converted to a Roth IRA.
  • Earnings on all Roth IRA assets

To determine the source of assets distributed from a Roth IRA, the IRS uses the “ordering rules.” According to the ordering rules, assets are distributed from a Roth IRA in the following order. When assets from one source are used up or non-existent, the assets are distributed from the next source in the list:

  1. Regular Roth IRA contributions
  2. Taxable Traditional IRA conversions and taxable rollovers from qualified plans, 403(b) or governmental 457(b) plans
  3. Nontaxable Traditional IRA conversions and nontaxable rollovers from qualified plans and 403(b) plans
  4. Earnings on all Roth IRA assets

The following chart summarizes the tax treatment of Roth IRA distributions.

Distributed Assets Qualified Distributions Non-Qualified Distributions Comments
Regular Contributions - Tax free
- Penalty free
- Tax free
- Penalty free
Income tax and early-distribution penalty are never applied to distributed assets for which no deduction was allowed when the assets were contributed to the IRA.
Taxable Conversion/taxable rollover - Tax free
- Penalty free
- Tax free
- Penalty may apply
- Already taxed when converted or rolled over.
- Penalty is waived if any one of the exceptions applies and/or it has been at least five years since the conversion occurred.
Nontaxable Conversion/nontaxable rollover - Tax free
- Penalty free
- Tax free
- Penalty free
Income tax and penalty are never applied to distributed assets for which no deduction was allowed when the assets were initially contributed to the IRA. For qualified plans and 403(b), these amounts are attributed to after-tax contributions made to the participant\'s account.
Earnings - Tax free
- Penalty free
- Taxable
- Penalty may apply
Penalty is waived if any one of the exceptions applies.

The earnings on non-qualified distributions are subject to income tax. In addition, any earnings and taxable conversion amounts that have been converted less than five years before the distribution occurs are subject to an early-distribution penalty, unless the assets are used for reasons or under circumstances including the following:

  • The distribution occurs on or after the Roth IRA owner reaches age 59½.
  • For unreimbursed medical expenses – If the distribution is used to pay unreimbursed medical expenses, the amount that exceeds 10% (or 7.5% if you or your spouse was born before January 2, 1951) of the individual's adjusted gross income (AGI) for the year of the distribution will not be subjected to the early-distribution penalty. In other words, the amount paid for the unreimbursed medical expenses minus 10% of the individual's adjusted gross income for the year of the distribution can be distributed penalty free.
Example - Unreimbursed Medical Expenses
Jack, 60, has an AGI of $25,000 and he paid $4,000 for unreimbursed medical expenses.
The amount that exceeds 10% of his income is $4,000 – ($25,000 x 10%).
= $4,000 – $2,500.
= $1,500.
The maximum amount Jack may claim for the early-distribution exception is $1,500.
  • To pay medical insurance – Individuals can make a penalty-free distribution to pay medical insurance for themselves, their spouses and their dependents provided the distribution occurs under the following four conditions:
  1. The individual has lost his or her job.
  2. The individual has received unemployment compensation paid under any federal or state law for 12 consecutive weeks.
  3. The individual receives the distributions during either the year he or she receives the unemployment compensation or the following year.
  4. The individual receives the distributions no later than 60 days after he or she has been re-employed.
  • For a disability – If an individual becomes disabled before age 59½ and makes a distribution from his or her Roth IRA, the distributions are not subject to the early-distribution penalty. Individuals may be required to furnish proof that a physical or mental condition inhibits them from engaging in substantial gainful activities. A physician must determine that this condition can be expected to result in death or to continue for an indefinite duration.
  • As distributions to the Roth IRA beneficiary – If the Roth IRA owner dies, the amounts distributed from the Roth IRA by the designated beneficiary are not subject to penalty.
  • As part of an SEPP program – For penalty-free distributions that are part of a series of substantially equal payments over the life of the Roth IRA holder and his or her beneficiary, the payments must last five years or until the Roth IRA owner reaches age 59½ – whichever is longer – and the payments must also follow certain IRS-approved methods.
  • For qualified higher-education expenses – Amounts are penalty free if they must go toward qualified higher-education expenses of the Roth IRA owner and/or his or her dependents. These qualified education expenses are tuition, fees, books, supplies and equipment required for the enrollment or attendance of a student at an eligible educational institution. An eligible educational institution is any college, university, vocational school or other post secondary educational institution eligible to participate in the student aid programs administered by the Department of Education. This includes virtually all accredited post secondary institutions, whether public, nonprofit or proprietary (privately owned and profit-making). The educational institution should be able to indicate whether it is an eligible educational institution.
  • To purchase a first home - The Roth IRA owner can make penalty-free distributions to purchase, build or rebuild a first home:
  1. for the Roth IRA owner
  2. for the Roth IRA owner's spouse
  3. for a child of the Roth IRA owner or of the Roth IRA owner's spouse
  4. for a grandchild of the Roth IRA owner or of the Roth IRA owner's spouse
  5. for a parent or other ancestor of the Roth IRA owner or of the Roth IRA owner's spouse

The first-time homebuyer distribution must be used to pay qualified acquisition costs before the end of the 120th day after the Roth IRA owner receives the distributed assets.

The total distribution the Roth IRA owner uses for first-time home purchases cannot exceed $10,000 during the Roth IRA owner's lifetime. For married individuals, the $10,000 applies separately to each spouse, which means that the total for both is $20,000.

  • For payment of Roth IRS levy - The IRS may levy against an IRA, resulting in a distribution. The distributed amount is subject to income tax, but the early-distribution penalty is waived.

According to the rules that exempt nondeductible or after-tax assets from income tax and early-withdrawal penalties, distributions of assets from regular Roth IRA contributions and nontaxable Traditional IRA conversion assets can be taken at any time, tax and penalty free. Non-qualified distributions of taxable Traditional IRA conversion assets may be subject to early-withdrawal penalties. Non-qualified distributions of earnings may be subject to income tax and early-withdrawal penalty. The following illustration shows when taxes and the early withdrawal penalties apply to Roth IRA distributions. (Learn more in 9 Penalty-Free IRA Withdrawals.)

Example - Tax and Penalty Free Roth IRA Distribution

Harry established his first Roth IRA in 2011 and funded it with $2,000 as a regular contribution. From 2012 through 2015, he made additional regular contributions, and Harry also converted his Traditional IRA assets to his Roth IRA in 2015. The balance in Harry’s Roth IRA is represented as follows:

Assets Source
$10,000 Regular Roth IRA contributions 2011 through 2015
$20,000 Taxable Traditional IRA conversions from 2015 conversion
$5,000 Nontaxable Roth IRA conversions from 2015 conversion
$2,000 Earnings
$37,000

Harry wants to know the tax consequences should he distribute the assets from his Roth IRA during 2016.

Because Harry has had a Roth IRA for at least five years (2011 to 2015), his distributions will be tax and penalty free if he meets one of the following criteria:

  • He is at least age 59½ when the distribution occurs.
  • The distributed assets are used toward the purchase or to rebuild a first home for Harry or a qualified family member.
  • The distribution occurs after Harry becomes disabled.
  • The assets are distributed to Harry's beneficiary after his death.
Example - Roth IRA Distribution Penalty

In this example, Harry established his first IRA in 2012 rather than 2011, so he cannot make a qualified distribution until January 1, 2017. Should Harry distribute the full balance of his Roth IRA in 2016, it will be treated as follows:

  • The $10,000 representing regular contributions will be tax and penalty free. These amounts can be distributed at any time without tax and penalty because no deductions were allowed when they were contributed.
  • The $5,000 representing nontaxable conversion will be tax and penalty free. These amounts can be distributed at any time without tax and penalty because no deductions were allowed when they were contributed.
  • The $20,000 representing taxable conversion assets will be tax free because the taxes were paid when the assets were converted. However, because it has been less than five years since the conversion occurred, Harry will owe the IRS a 10% early-withdrawal penalty unless he meets one of the criteria listed below in the next section.
  • The $2,000 representing earnings will be subjected to income tax. In addition Harry will owe the IRS a 10% early-withdrawal penalty, unless he meets one of the exceptions listed below:

– He uses the assets to pay unreimbursed medical expenses.

– He withdraws the assets when he is at least age 59½.

– He uses the assets to pay medical insurance.

– He withdraws the assets while disabled.

–The assets are distributed by his beneficiary after his death.

–The distribution is part of a SEPP​ program.

–The assets are used for qualified higher education expenses.

–The assets are used for a first home purchase.

– The assets are used to pay an IRS levy.

Additional Information

The 10% early-distribution penalty does not apply to certain amounts that are not subject to income tax. These include amounts that were contributed in excess of the contribution limit and are then removed from the Roth IRA before the Roth IRA owner's tax-filing deadline (plus tax-filing extensions). Other amounts that are not subject to income tax are those deposited to a retirement plan as a rollover contribution within 60 days of receipt.

Key Reminders

  • If a Roth IRA holder completed multiple Roth conversions, the five-year period for each Roth conversion is determined separately for each conversion.
  • For the purposes of determining qualified distributions, there is only one five-year period. This never starts over.
  • If an excess contribution is made to a Roth IRA and later removed, this contribution cannot be used to determine the five-year period for qualified distributions.

The responsibility of determining the tax and/or penalty treatment of distributed Roth IRA assets rests with the Roth IRA owner. Roth IRA owners should ensure that they keep proper records of their Roth IRA transactions and that they file the applicable tax forms with the IRS at the appropriate time.

Required Minimum Distributions

The rules for required minimum distributions (RMDs) do not apply to the Roth IRA owner. They do, however, apply to the Roth IRA owner’s beneficiary.

Roth IRAs: Conclusion

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