topic Re: Roth 5 year rule in Retirement tax questions

Roth 5 year rule

Paul231 — Fri, 12 Mar 2021 22:58:15 GMT

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!

Re: Roth 5 year rule

Opus 17 — Fri, 12 Mar 2021 23:10:57 GMT

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.

Re: Roth 5 year rule

Paul231 — Sat, 13 Mar 2021 00:06:45 GMT

Thanks for your response!

Re: Roth 5 year rule

mj107 — Fri, 07 Apr 2023 01:49:26 GMT

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

Re: Roth 5 year rule

DanaB27 — Sat, 08 Apr 2023 15:52:30 GMT

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.