Forums Support Library RPA – Retirement Plan Analyzer Taxation of Roth IRA Distributions

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    • Kathleen Reynolds
      Post count: 428

      The general view of Roth IRAs is that distributions from them are not taxable. This isn’t strictly true.

      Non-qualified Roth-IRA distributions are taxable.

      For distributions caused by rollovers from a non-Roth IRA, the five-year period begins with the tax year in which the rollover occurred. The taxable portion of Pre-59½ distributions is penalized subject to the 10% penalty (exceptions applicable to premature distributions from non-Roth IRAs). If plan owners make nonqualified distributions, contributions to the Roth IRA are recovered tax-free before earnings are taxed.

      However, if plan owners make distributions within the five-year period, the distributions could still be tax-free. This is because Roth IRA distributions are paid from any contributions that plan owners may have made that year. Since plan owners pay taxes when they contribute money to a Roth IRA, they do not have to pay taxes on this same money when they withdraw it from the Roth. But if plan owners make distributions that exceed the amount of the contributions, then the plan owners must pay taxes on the excessive distributions.

      After the five-year period, a Roth IRA distribution is tax-free if it meets the following criteria:

      • The distribution occurs on or after age 59½ or death.
      • The distribution occurs on account of disability.
      • The distribution pays expenses for qualifying first time homebuyers.

      Distributions from a Roth IRA will not be subject to the required distribution rules of Code Sec. 401(a)(9)(A) or the incidental death benefit rules of Code Sec. 401(a).

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