Roth 5 year rule

Forum|Forum|5 years ago
March 12, 2021
4 replies
23 views

I need clarification on the 5 year rule. I took a Roth distribution which included the principal and interest earnings. The Roth IRA was opened in April 2017 and designated for the 2016 tax year, therefore I believe that the 5 year clock starts ticking on Jan1 2016 and the 5 year requirement has been met as of Jan 1 2021, and the interest is not taxable. Do I have this correct?

Thanks!

Opus 17

Level 15

To be a "qualifying" distribution, you must meet both the age test and the 5 year test. If you are over age 59-1/2, then the entire distribution is tax-free because you meet the age and 5 year rules. However, if you are under age 59-1/2, then you will owe income tax plus a 10% early withdrawal penalty on the gains in the account.

mj107

Level 2

What if there was enough contributions to the ROTH IRA account to "cover" the gains at the time of distribution?

Example:

Scenario 1

Total contributions: $1000

Total gains: $75

Total distribution: $800

No income tax or penalty applies regardless of age. IRS allows withdrawal up to $1000 (the total contributions in this case)

Scenario 2

Total contributions: $1000

Total gains: $75

Total distribution: $1075

Income tax on the $75 gain, and 10% penalty if less than 59.5 yrs. No income tax or 10% penalty on the $1000.

Scenario 3

Total contributions: $1000

Total loss: -$75

Total distribution: $925

No income tax or penalty applies regardless of age as the total distribution is less than the total contributed money.

Is my understanding correct?

Thank you

DanaB27

Employee Tax Expert

Yes, that is correct. You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free.

You will need to make sure that you enter your prior year's net contributions when TurboTax asks about them in the follow-up questions:

Click on "Search" on the top and type “1099-R”
Click on “Jump to 1099-R” and enter all your 1099-Rs
Click "Continue" on the "Review your 1099-R info" screen
Answer all the questions and make sure you enter the net contributions prior to 2022 on the "Enter Prior Year Roth IRA Contributions" screen
Answer the remaining question.