Roth distribution from an account less than 5 years old

[user17610862872]

How are taxes calculated on a distribution from a Roth account that is not 5 years old but the holder is over 59 1/2. The distribution is part contribution, conversion, and earnings.

[SwapnaM]

The taxes on your distribution are calculated based on the Roth IRA Distribution Ordering Rules:

1. Contributions (always tax-free and penalty-free)
2. Conversions (taxable portion may be subject to penalty if under 59½ or <5 years)
3. Earnings (taxable and possibly penalized if not a qualified distribution)

Conversions: Each Roth conversion has its own 5-year penalty clock. If you were under 59½, you would pay a 10% penalty on any conversion principal withdrawn before its specific 5-year anniversary. Since you are over 59½, that penalty is waived.

Earnings: 

To have a Qualified Distribution (tax- and penalty-free earnings), you must meet BOTH of these criteria:

1. Be age 59½ or older AND

2. Have met the 5-year holding period (The 5-year clock for your first contribution must have passed).

Since you meet the age requirement but not the 5-year holding requirement, the earnings portion is considered a Non-Qualified Distribution, making the earnings taxable as ordinary income. However, since you are over age 59½, the 10% penalty on those earnings is waived.

Use IRS Form 8606 to report Roth IRA distributions and track taxable portions.

@user17610862872 Thanks for the question.

[MarionH]

Distributions from a Roth IRA that is less than 5 years old are subject to specific IRS rules that determine whether the withdrawal is tax-free or taxable, depending on the amount withdrawn and the type of funds being distributed.

IRS Rules for Roth IRA Distributions

The IRS has an established order for how withdrawals from a Roth IRA are taxed:

1. Contributions:

   • Withdrawn first in all cases.
   • Always tax-free because contributions are made with after-tax dollars.

2. Converted or Rolled-Over Funds:

   • Withdrawn next, after contributions.
   • Also tax-free because taxes were already paid at the time of conversion or rollover.

3. Earnings:

   • Withdrawn last.
   • If the Roth IRA is less than 5 years old or the distribution does not meet IRS criteria for a "qualified distribution," earnings are taxable as ordinary income.

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Taxation Depending on Full or Partial Distribution

• Full Distribution:

  • Contributions and converted/rolled-over funds are not taxed, regardless of the account being less than 5 years old.
  • Earnings made from those funds are taxed as they are considered a "non-qualified distribution" for Roth IRAs less than 5 years old unless specific exceptions apply, such as using the earnings for first-time home purchases (up to $10,000).
  • Since you are over the age of 59½, no 10% early withdrawal penalty applies to the earnings, even though they are subject to taxation.

• Partial Distribution:

  • Contributions are withdrawn first and are tax-free; next, converted or rolled-over funds are also tax-free.
  • If your withdrawal amount does not exceed your contributions and converted/rolled-over funds, the distribution is completely tax-free.
  • If your withdrawal reaches the earnings portion, those distributed earnings will be taxable. Your taxable amount will be reported on Box 2 of Form 1099-R.

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For more detailed information on these rules, visit: Roth IRA Withdrawal Rules and Penalties.

By understanding the IRS rules for how Roth IRA distributions are taxed, you can better manage your withdrawals to minimize taxes.

@user17610862872 

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