Roth IRA early distribution not showing as taxable

[mdburford]

I took an early tax distribution before I was 59.5 years old from my Roth IRA, which should incur a 10% penalty. Initially turbotax calculated the 10% penalty, but when I input my previous contributions the Roth IRA the 10% penalty disappeared. Why would making previous contributions to the Roth IRA cancel the 10 penalty. It seems too good to be true.

[AnnetteB6]

Roth IRAs allow you to take a distribution from the account without penalty as long as the distribution is less than or equal to your original contributions.  So, if your distribution was less than your total contributions to the account, then it is tax free regardless of your age or how long you have had the Roth IRA.  

To learn more, take a look at the following TurboTax article:

Roth IRA Withdrawal Rules & Penalties

[mdburford]

Thanks for the reply. I forgot to mention that I have only had this Roth IRA account for 3 years. I have made more contributions than the early distribution I took out in that time. Hence why, when I added the contributions from previous years my 10% penalty TT initially calculated disappeared. But when I go online, I see there is mention of a five-year rule, which appears to imply if you have the Roth IRA for less than 5 years, you will need to pay the 10% penalty. TT asked if you have had the Roth account for more or less than five years, so I selected the less than 5 years, but it still removed the 10% penalty, so I didn’t have any costs associated with the early distribution. Is that correct, so no penalty even if you have had the Roth account for less than five years?

[AnnetteB6 · Accepted solution]

That is correct.  The 10% penalty for having the account less than 5 years would only apply if you were taking a distribution that included earnings in the account.  Since your distribution came only from your original contribution, there is not a penalty regardless of how long you have had the account.

@mdburford 

[mdburford]

Excellent. Thank you so much for the clarification. That explains why TT did not apply the 10% penalty.