Roth IRA Withdrawals

[Dan S9]

I recently attended a seminar re: Roth IRAs and would like to obtain clarification regarding the applicable rules for distributions for my account. I believe the slide below only applies to Roth IRA 'Non-Qualified' distributions and does not apply to me (please confirm). When this distribution sequence applies to a Roth IRA brokerage account would the owner have to sell investments (stocks and ETFs) that have grown in value to withdraw from the contribution value and then reinvest the balance (earnings)?  

Following is a general summary of my Roth IRA account and contributions:

- I opened my Roth IRA account in 1999 and rolled it over into a new Roth IRA account in 2023.

- I have made Roth conversions from my (pre-tax) IRA account in 2023 and 2024. I also plan to make additional conversions for the next few years. I have / will pay taxes on these conversions each year as required.

- I am currently over 59-1/2 years old.

Please confirm the applicable requirements for distributions from my Roth IRA account.

Thank you.

[KimberW]

[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.

==========

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]

[dmertz]

"Even though you are over 59 1/2 and you've had a Roth IRA for well more than five years, you could still be subject to penalties and taxes if you were to withdraw so much that you exhausted your contributions (part 1 of your slide), your conversions (part 2 of your slide), and earnings on your contributions (an invisible split on part 3 of your slide). If your withdrawal exceeded all of that and was high enough to require withdrawing earnings on conversions (the other side of the invisible split in part 3), then you could be subject to penalties and taxes on those earnings, if the conversions weren't at least five years old."

Not true.  Since Dan S9  is over age 59½ and it has been more than 5 years since the first year for which Dan S9 first made a Roth IRA contribution (1999), any distribution taken now from Dan S9's Roth IRAs is a qualified distribution, free of tax and penalty.  After age 59½ there is no waiting period for conversions.

[Opus 17]

Per the chart:

#1 is never taxed.

#2 is not subject to income tax, because you will have paid income tax on the converted amount at the time of the conversion. #2 is subject to a 10% early withdrawal penalty if less than 5 years (5 year clock per conversion).  But, because the 10% early withdrawal penalty is never assessed over age 59-1/2, #2 is tax-free in your situation.  

#3 is not taxed as long as 

a) it is at least 5 years since you opened your first Roth IRA, and

b) you are over age 59-1/2.