Is a distribution from my Roth IRA taxable or subject to penalties?
The taxation of a Roth IRA distribution depends on what assets are being distributed and whether the distribution is considered qualified or nonqualified.
A distribution from a Roth IRA may be taken tax-free and penalty-free if it is a qualified distribution. A qualified distribution is one that satisfies a five-year waiting period, beginning with the year for which you first contributed to a Roth IRA, and one of the following events occurs.
- Attainment of age 59½
- First-time homebuyer
If a distribution from a Roth IRA is not qualified, taxes and penalties may apply. To determine the taxation, you'll need to understand the ordering rules for a Roth IRA distribution.
Ordering Rules for Distributions
The ordering rules state that if a Roth IRA owner has made both contributions and conversion or retirement plan rollover contributions to Roth IRAs, the assets are distributed in the following order.
Second: Conversions and retirement plan rollovers (by year)
Contributions and conversion/plan rollovers are not subject to tax when distributed. In some circumstances, however, distributed conversion/plan rollover assets might be subject to the 10 percent early distribution penalty tax. Earnings are taxable and subject to the penalty tax in a nonqualified distribution. But if the distribution is qualified, none of the distributed assets are taxable.
It is your responsibility as a Roth IRA owner to determine the taxation of your Roth IRA distributions by filing IRS Form 8606, Nondeductible IRAs,with your income tax return.
Roth IRA owners are not required to take distributions (RMDs) from their Roth IRAs. Beneficiaries of Roth IRAs, however, generally are required to take distributions. Spouse beneficiaries may treat the inherited Roth IRA assets as their own, and if doing so, are not required to take distributions.