The Basics of Roth IRA Distributions

The Roth IRA, named after former Senator William V. Roth, Jr., was first available on January 1, 1998, as a result of the Taxpayer Relief Act of 1997. Contributions to a Roth IRA are nondeductible, but if certain conditions are met, subsequent distributions are tax free. Distributions of earnings from a Roth IRA are generally not taxable if made no sooner than five years from the first day of the first tax year for which a regular contribution was made and such distributions are either:

  • Made after you reach age 59 1/2.
  • Made to your designated beneficiary or estate after your death.
  • Attributable to your being disabled.
  • Made for first-time home purchase expenses up to $10,000.

Distributions to the extent attributable to earnings that do not meet these requirements are subject to regular income tax plus a 10% penalty unless an exception applies. Exceptions to the early distribution penalty include:

  • Distributions made on account of death or disability.
  • Distributions used to pay medical expenses.
  • Payments structured as a series of substantially equal payments.
  • Distributions used for first-time home purchases (up to $10,000).
  • Distributions used to pay for higher education expenses.

No portion of a Roth IRA distribution is taxable until the cumulative distributions from all of your Roth IRA accounts exceed the total amount of contributions. Thus, contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time. This is true even if the five-year waiting period has not expired and you are not yet age 59 1/2.

Example: Tax-free withdrawal of principal from a Roth IRA.

George is age 50 when he sets up two Roth IRA accounts in 2001. He contributes $1,000 to each account that year and $1,000 to each in 2002 and 2003, so he has made total contributions to each account of $3,000. On July 10, 2004, he has $4,500 in Account One and $4,000 in Account Two (resulting from contributions plus earnings). He withdraws all $4,500 from Account One. The distribution is not a qualified distribution because George is not yet age 59 1/2 and the five-year waiting period has not expired. But, even though the distribution is composed of $3,000 principal and $1,500 earnings from Account One, the withdrawal is considered to come first from George’s $6,000 of total Roth IRA contributions, so the entire withdrawal is tax-free and penalty-free.

Unlike traditional IRAs, there is no minimum amount that you must withdraw each year and there is no age requirement as to when you must begin distributions.

Distributions from a Roth IRA made to a surviving spouse can be treated as distributions from the surviving spouse’s own Roth IRA. This enables the surviving spouse to delay distribution until his or her death, if desired. A non-spouse beneficiary must receive the entire balance of the Roth IRA within five years of the owner’s date of death, or if so elected, over the beneficiary’s life expectancy. For estate tax purposes, the value of your Roth IRA is included in the value of your estate.

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