Roth IRA Distribution Rules

By Clifton Linton
Writer, mPower

We've been hearing about Roth IRAs for the past two years. The big selling point for this retirement vehicle is you don't have to pay taxes on either the principal or profits when you make withdrawals, if you follow the rules. But, when can you get your money? The Roth IRA distribution rules are a little different than traditional IRAs. We present the latest from the IRS:

The IRS labels Roth IRA withdrawals as "qualified" and "non-qualified."

Qualified distributions are not included in your gross income, which is the big plus of this powerful retirement tool.

For a distribution to be qualified, the plan must be open five years AND one of the following conditions applies: you turn 59 ½, you use the money for the purchase of a first home, you become disabled or you die.

That said, what if you don't meet the conditions for making a tax-free withdrawal? (Either you haven't had the account for five years yet, or don't meet the other conditions.)

In this case, your distribution will be "nonqualified". This means that the first money that will come out of the Roth IRA account is your non-deductible contributions. These are always tax- and penalty-free.

Next to be distributed will be any conversion dollars that you were taxed on at the time of conversion. You won't be taxed on these again, but you will have to pay a 10% penalty on this amount except under certain circumstances, including:

• Significant unreimbursed qualifying medical expenses
• Paying medical insurance premiums after losing your job
• Disability
• Death
• If you take the payments as an annuity, that is, a series of substantially equal payments over your lifetime or life expectancy
• To pay for qualified higher education expenses
• To pay certain qualified first-time homebuyer amounts
• If the money is rolled over into a new IRA
• If the money represents a return of nondeductible contributions

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Roth IRA Distribution Rules

By Clifton Linton
Writer, mPower

We've been hearing about Roth IRAs for the past two years. The big selling point for this retirement vehicle is you don't have to pay taxes on either the principal or profits when you make withdrawals, if you follow the rules. But, when can you get your money? The Roth IRA distribution rules are a little different than traditional IRAs. We present the latest from the IRS:

The IRS labels Roth IRA withdrawals as "qualified" and "non-qualified."

Qualified distributions are not included in your gross income, which is the big plus of this powerful retirement tool.

For a distribution to be qualified, the plan must be open five years AND one of the following conditions applies: you turn 59 ½, you use the money for the purchase of a first home, you become disabled or you die.

That said, what if you don't meet the conditions for making a tax-free withdrawal? (Either you haven't had the account for five years yet, or don't meet the other conditions.)

In this case, your distribution will be "nonqualified". This means that the first money that will come out of the Roth IRA account is your non-deductible contributions. These are always tax- and penalty-free.

Next to be distributed will be any conversion dollars that you were taxed on at the time of conversion. You won't be taxed on these again, but you will have to pay a 10% penalty on this amount except under certain circumstances, including:

• Significant unreimbursed qualifying medical expenses
• Paying medical insurance premiums after losing your job
• Disability
• Death
• If you take the payments as an annuity, that is, a series of substantially equal payments over your lifetime or life expectancy
• To pay for qualified higher education expenses
• To pay certain qualified first-time homebuyer amounts
• If the money is rolled over into a new IRA
• If the money represents a return of nondeductible contributions

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.