Roth IRA DIstribution Prior to Age 59.5
Since 2015 a client contributed $5,000 to their Roth IRA account. Today that account is worth $20,000. The client is 57. In 2024 client withdrew $1,000. Will there be any income tax or penalties? My understanding is a withdrawal of contributions from a Roth IRA does not incur income taxes or penalties. Is the $1,000 distribution considered a withdrawal of contributions only, or is part of the $1,000 withdrawal considered earnings?
Permalink Submitted by Alan - IRA critic on Thu, 2024-08-01 17:15
Roth IRA ordering rules state the regular Roth contributions come out first (tax and penalty free anytime), conversions next in order of year, and earnings last. Client’s Form 8606 will show the 5000 contribution basis on line 22, and since it exceeds the distribution (line 19), the distribution will be tax and penalty free.
Had this been a Roth 401k, the gains would have been prorated since Roth 401k distributions do not have ordering rules.