Early distributions from a Roth
IRA owner is taking a distribution from a Roth prior to age 59 1/2 without exceptions to avoid the penalty. If they take out less than they contributed will it be considered a tax free distribution of contributions?
IRA owner is taking a distribution from a Roth prior to age 59 1/2 without exceptions to avoid the penalty. If they take out less than they contributed will it be considered a tax free distribution of contributions?
Permalink Submitted by Alan - IRA critic on Mon, 2016-02-29 23:43
The portion of their Roth that was distributed in a non qualified distribution depends on the Roth ordering rules. The distribution must be reported on Form 8606, and to do that the IRA owner must know the current amount of regular Roth contributions in all his Roths if more than one, and the amount of conversions done and in which year. Since the distribution was less than the balance of regular contributions and conversions, it is tax free. However, if any conversion money was distributed that was not held 5 years, there is a 10% penalty on the pre amount of such conversions. If no conversions have been done, this is pretty simple, otherwise the IRA owner must know when and how much was converted in total that is older than 5 years, and by year for conversions done less than 5 years back.
Permalink Submitted by Jack Thomas on Tue, 2016-03-01 00:18
Great. Just to confirm, this is a tax free distribution of contributions that also avoids the 10% early withdrawal penalty?
Permalink Submitted by Alan - IRA critic on Tue, 2016-03-01 00:50
Yes. That is certain if the contributions you refer to are regular contributions. If they are conversions as well, then any possible 10% penalty depends on the additional detail as indicated above.
Permalink Submitted by Jack Abriola on Tue, 2016-03-01 18:22
If someone inherits a Roth as a beneficiary and the original participant exceeded the 5 year rule, if the beneficiary takes a distribution, does the exception to the 10% penalty apply to the beneficary’s distribution if he didn’t own it for 5 years?
Permalink Submitted by Alan - IRA critic on Tue, 2016-03-01 19:39
There is never a 10% penalty on an inherited IRA distribution no matter how long the owner and beneficiary had held the account. However, once the Roth has also been open for 5 years combined between the owner and the beneficiary, the earnings in the Roth become tax free as well, so the entire balance will be tax free.