The Roth IRA (individual retirement account) is an excellent tool to invest and save money toward retirement. Similar in some ways to the traditional IRA and sharing many of its features, the Roth does still offer some unique benefits not found elsewhere in the world of retirement accounts. Many of the benefits enjoyed by the owners of Roth IRA accounts are in the way the account is distributed. Here we take a look at the common questions regarding distribution rules for the Roth IRA.
What is a distribution?
Before delving into distribution rules, it is important to understand what we are talking about when we use the term “distribution”. Simply put, a distribution from your Roth IRA is the same as a withdrawal. In other words whenever you take money from the account you are receiving a distribution. A qualified distribution from your account is one that is not subject to taxes or penalties.
It is important to remember that there are many caveats to these rules. For example if you have converted another type of retirement plan into a Roth IRA, different rules may apply. Here we are discussing a general overview of “normal” Roth IRA distributions.
Are Roth IRA distributions taxable?
When you contribute to a Roth IRA, you do so with after tax dollars, which means you have already paid taxes on your contributions. While this practice reduces the immediate tax advantage for owners of a Roth IRA, the advantage becomes obvious at the time of distribution. As long as you follow the rules set forth by the IRS, you will never have to pay additional taxes on money withdrawn from your Roth IRA.
When can distributions be taxed?
If you withdrawal earnings from your account prior to age 59 1/2 you will be taxed on those earnings. The same is true if you take money from the account before the account has been open for five years. Contributions to the Roth IRA can be distributed at any time without being subject to taxation.
Do you have to take distributions at a certain age?
Unlike the traditional IRA which requires the owner of the account to begin taking minimum mandatory distributions at age 70 1/2, the Roth IRA has no age limit for distributions. Due to this, owners of the account can use as much or as little of the assets in the account at any time without fear of losing money to the IRS for not meeting minimum mandatory contributions. Any beneficiaries of your account will be required to take distributions at the time of your death.
Are there penalties for taking distributions prior to age 59 1/2?
Withdrawal of contributions prior to age 59 1/2 will not trigger an early withdrawal penalty, however withdrawal of earnings prior to 59 1/2 will be subject to a 10% early withdrawal fee.
Are there exceptions to allow early distribution from a Roth IRA?
As with most other IRS rules, there are exceptions to the standard distribution rules. Remember, contributions can be distributed at any time, therefore the exceptions listed here apply to earnings from the account. In some cases the IRS will allow early distribution of earnings from the account without penalty. They include; death of the account owner, disability, distributions used to pay un-reimbursed medical expenses, distributions used to purchase a first home and to pay back taxes as a result of a levy placed against the IRA. It is always important to understand exactly who or what qualifies for an exception before taking an early distribution from your account.