Retirement tax questions

[Edited: 6/27/2024 | 08:14am PDT]

The slide you posted correctly reflects the ordering rules for how distributions are made but doesn't entirely address when taxes and penalties might apply.

For a distribution from a Roth IRA to be qualified, the account owner must be at least 59 1/2 and have a Roth IRA that is at least five years old. This five-year qualification is a once-in-a-lifetime requirement and is calculated from the first day of the year that you made the initial contribution or conversion to your Roth IRA through the last day of the fifth consecutive year. (A Roth IRA that was started on August 1, 2000, would meet this five-year requirement on January 1, 2005.)

Because you meet both of those requirements, your distributions are qualified and not subject to taxes or penalties. For you, the ordering rules shown in your slide are informational only. They still apply, but there are no penalties or taxes for you to worry about.

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However, for someone who doesn’t meet both requirements to take a qualified distribution from their Roth IRA, the ordering rules minimize the potential taxability of any distribution by delaying distribution of the funds most likely to be taxed for as long as possible.

• Anyone can withdraw their Contributions at any time – without paying income tax or an early withdrawal penalty.
• A non-qualified distribution that includes funds converted to a Roth does not incur income tax on those funds (income tax was paid at the time of conversion) but could be subject to the early withdrawal penalty. This is a “second” five-year rule that looks at the age of each conversion. If a non-qualified distribution includes part of a conversion that is not yet five years old, then that part of the distribution will be subject to the early withdrawal penalty. [The usual exceptions to that penalty are still available.]
• A non-qualified distribution that includes earnings will incur both income tax and the early withdrawal penalty on those earnings. [Again, exceptions to the penalty are available.]

There are detailed Q&As available in the Treasury Regulations: 26 CFR § 1.408A-6 - Distributions.

@Dan S9 

[Edited: 6/27/2024 | 08:14am PDT]