Dec 18

In What Order Do Roth IRA Distributions Come Out of the Account

In general, you cannot pick and choose the origin of each distribution you take. For example, if you take a distribution before the five-year holding period is up, you would want to take your contributions first, because they are not subject to tax or penalties. However, the ordering rules for determining Roth distributions are quite taxpayer favorable. Roth distributions are deemed to come out in the following order:

  • Regular Roth IRA contributions are distributed first
  • Next, converted amounts, starting with the amounts first converted
  • Earnings come out last

These ordering rules can significant impact the tax treatment of the distributions. For example, if you take a distribution before the five-year holding period is up of if you fail to satisfy the other requirements of a qualified distribution, the withdrawal still won’t be subject to the early distribution tax as long as you have taken less than the total amount of all contributions you have made to your Roth IRAs. Note that for purposes of these ordering rules, all Roth IRAs are considered a single Roth IRA.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Feb 01

Is There Any Holding Period Requirement Before Taking Tax-Free Distributions from a Roth IRA?

Generally, distributions from a designated Roth account are excluded from gross income if they are (1) made after the employee attains age 59 1/2 , (2) “attributable to” the employee being “disabled,” or (3) made to the employee’s beneficiary or estate after the employee’s death. However, the exclusion is denied if the distribution occurs within five years after the employee’s first designated Roth contribution to the account from which the distribution is received or, if the account contains a rollover from another designated Roth account, to the other account.

Is There Any Holding Period Requirement Before Taking Tax-Free Distributions from a Roth IRA?

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Dec 28

Are Distributions that Consist of my Roth IRA Contributions Ever Subject to Income Tax?

No, the portion of your Roth IRA that consists of your contributions is never subject to income tax when it comes out – even if you take it out the day you made the contribution. That is because all contribution you made were nondeductible – meaning you already paid tax on the money. In addition, any distribution you take from a Roth IRA is presumed to be a return of your contributions until you have withdrawn all contributions you made to it over the years. In other words, all contributions all recovered before earnings before earnings are recovered.

If I establish a Roth IRA is there a certain amount of time I am not allowed to take tax-free distributions of investment returns?

Are Distributions that Consist of my Roth IRA Contributions Ever Subject to Income Tax?In general, you should not take a distribution of your investment returns for five years. A distribution within five calendar years of when you first establish a Roth IRA can never be a qualified distribution. Thus, counting the year of your first contribution as year one, you will satisfy the five-year requirement if you wait until the sixth year before withdrawing any earnings.

However, simply satisfying the five-year requirement will not automatically make a distribution qualified. It must also be at least one of the following:

  • A distribution you take after reaching 59 and 1/2
  • A distribution you take after becoming disabled
  • A distribution to your beneficiary or your estate after your death
  • A distribution you take to purchase a first home (up to a lifetime withdrawal limit of $10,000)

Therefore, if your distribution satisfies the five-year requirement and falls into one of the above categories, it will be qualified and, hence, entirely tax-free.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Mar 18

What Are the Roth IRA Distribution Rules for 2016?

Distributions from Roth IRAs are not required to begin at any particular time, and there are no limitations on death benefits. Distributions from a traditional IRA, in contrast, must begin by April 1 following the year in which the owner reaches age 70 1/2 or (if later) retires and must generally be made in ways that will exhaust the account during the lifetimes or over life expectancies of the owner and his or her spouse. In other words, while congressional policy is that traditional IRAs be for retirement savings only, Congress acquiesces in the use of Roth IRAs for accumulating wealth to be transmitted at death.

Roth and traditional IRAs are subject to the same rules for distributions after the owner’s death. If the beneficiary is not the surviving spouse, distributions must either be completed by the end of the fifth calendar year following the year of the owner’s death or consist of a series of payments beginning before the end of the calendar year following the year of death and continuing not longer than the beneficiary’s life expectancy. If the beneficiary is a surviving spouse, distributions may be delayed until the spouse reaches age 70 1/2 or retires, or the spouse may elect to treat the IRA as his or her own.

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

What Are the Roth IRA Distribution Rules for 2016?Qualified special purpose distributions are distributions, up to a $10,000 lifetime maximum, that are “used” by the distributee within 120 days to pay “qualified acquisition costs” for property to serve as the “principal residence” of a “first-time homebuyer,” who must be the IRA owner, his or her spouse, or a child, grandchild, or more remote ancestor of the owner or spouse. Qualified acquisition costs are costs of acquiring, constructing, or reconstructing a residence, including “reasonable settlement, financing, or other closing costs.” A first-time homebuyer is a person who has not had a “present ownership interest in a principal residence” during the two years preceding the acquisition of the residence financed with the distribution. A distribution can qualify only to the extent of $10,000, less all prior qualified first-time homebuyer distributions received by the recipient.

A nonqualified distribution is excluded from gross income only to the extent of the excess of the taxpayer’s contributions to Roth IRAs, less all prior distributions, qualified and unqualified. A distribution of an excess contribution is not qualified and is therefore included in gross income to the extent of the income of the account required to be included in the distribution. An amount included in gross income on a nonqualified distribution may be subject to an additional 10 percent penalty tax under Internal Revenue Code Section 72(t) (e.g., if made to the owner before age 59 1/2 ). Very generally, the effect of these rules is that investment returns of a Roth IRA are tax-free to the distributee if received in a qualified distribution but are otherwise taxed.

The basis of property other than money received in a distribution from a Roth IRA is the property’s fair market value, whether or not the distribution is qualified. An owner’s lifetime gift of a Roth IRA to another person is treated as a distribution in full to the owner and a gift of an account or annuity that is not an IRA.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Aug 18

Distribution Rules for Roth IRAs

Distributions from Roth IRAs are not required to begin at any particular time, and there are no limitations on death benefits. Distributions from a traditional IRA, in contrast, must begin by April 1 following the year in which the owner reaches age 70 1/2 or (if later) retires and must generally be made in ways that will exhaust the account during the lifetimes or over life expectancies of the owner and his or her spouse. In other words, while congressional policy is that traditional IRAs be for retirement savings only, Congress acquiesces in the use of Roth IRAs for accumulating wealth to be transmitted at death.

Distribution Rules for Roth IRAsRoth and traditional IRAs are subject to the same rules for distributions after the owner’s death. If the beneficiary is not the surviving spouse, distributions must either be completed by the end of the fifth calendar year following the year of the owner’s death or consist of a series of payments beginning before the end of the calendar year following the year of death and continuing not longer than the beneficiary’s life expectancy. If the beneficiary is a surviving spouse, distributions may be delayed until the spouse reaches age 70 1/2 or retires, or the spouse may elect to treat the IRA as his or her own.

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

Qualified special purpose distributions are distributions, up to a $10,000 lifetime maximum, that are “used” by the distributee within 120 days to pay “qualified acquisition costs” for property to serve as the “principal residence” of a “first-time homebuyer,” who must be the IRA owner, his or her spouse, or a child, grandchild, or more remote ancestor of the owner or spouse. Qualified acquisition costs are costs of acquiring, constructing, or reconstructing a residence, including “reasonable settlement, financing, or other closing costs.” A first-time homebuyer is a person who has not had a “present ownership interest in a principal residence” during the two years preceding the acquisition of the residence financed with the distribution. A distribution can qualify only to the extent of $10,000, less all prior qualified first-time homebuyer distributions received by the recipient.

A nonqualified distribution is excluded from gross income only to the extent of the excess of the taxpayer’s contributions to Roth IRAs, less all prior distributions, qualified and unqualified. A distribution of an excess contribution is not qualified and is therefore included in gross income to the extent of the income of the account required to be included in the distribution. An amount included in gross income on a nonqualified distribution may be subject to an additional 10 percent penalty tax under Internal Revenue Code Section 72(t) (e.g., if made to the owner before age 59 1/2 ). Very generally, the effect of these rules is that investment returns of a Roth IRA are tax-free to the distributee if received in a qualified distribution but are otherwise taxed.

The basis of property other than money received in a distribution from a Roth IRA is the property’s fair market value, whether or not the distribution is qualified. An owner’s lifetime gift of a Roth IRA to another person is treated as a distribution in full to the owner and a gift of an account or annuity that is not an IRA.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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