Roth IRA Distributions
Account owners are eligible to take distributions at any time from an IRA funded by individual contributions and/or conversions from Traditional IRAs, §401(k)s and §403(b)s.
This right includes rolling the proceeds from the distribution to another Roth IRA within 60 days of the account owner’s receipt of the distribution.
This “rollover” may be done once every twelve months.
Non-Qualified Distributions
Distributions taken from a Roth IRA before the initial five-year period has elapsed are considered nonqualified distributions.
All of a taxpayer’s Roth IRAs must be combined to determine the taxation of a non-qualified distribution. First, the account owner will recover his/her cost basis
from contributions made in previous years. Second, the account owner will take distributions from any conversions, starting with the earliest conversion.
(A 10% penalty may apply on any conversion assets so distributed that have not been in the Roth IRA five years or more.) Third, the account owner will
take distribution from earnings. Again, a 10% penalty may apply. (See Premature Distributions for exemptions to this penalty.)
Qualified Distributions
Distributions taken from a Roth IRA after the initial five-year period has elapsed may be
qualified
(tax-free) distributions if they also meet one of the following criteria:
- the account owner has attained age 59½
- the distribution is for first-time homebuyer expenses ($10,000 lifetime limit)
- in the event of death or disability.
Required Minimum Distributions
Roth IRAs are not subject to the Required Minimum Distribution rules.
Premature Distributions
The earnings on premature distributions (i.e., distributions taken before the account owner has attained age 59½)
are taxable at a taxpayer’s ordinary income rate and are generally subject to a 10% penalty unless an exemption exists.
The exemptions to the penalty are:
- per the requirements of the §72(t) provision, substantially equal payments based on the life expectancy of the owner for at least five years or until age 59½, whichever is longer1
- medical care expenses in excess of 7.5% of AGI
- higher education expenses of the IRA owner or spouse, child or grandchild
- involuntary distributions due to an IRS levy
- health insurance premiums for unemployed individuals under certain circumstances
Death Distributions
Legend should be notified by the account owner’s beneficiary(ies) by December 31st of the year of the owner’s
death for optimum payout options or by September 30th of the year following the owner’s death, at the latest, if there are multiple beneficiaries.
If a trust is the owner’s beneficiary, Legend must receive adequate documentation by October 31st of the year following the owner’s death.
Federal Withholding of Income Taxes
Roth IRA distributions are not subject to Federal withholding of income taxes unless the distribution is for an excess contribution.
Talk to your Legend Group financial advisor for assistance in devising a distribution strategy designed to reflect your situation and objectives.
1To take advantage of the §72(t) provision, one must adhere to the established payment schedules (monthly, quarterly, annually) chosen for at least 5 years or until age 59½, whichever comes later.
The exact amount established must be withdrawn each year; any variation will result in the 10% penalty being applied retroactively.
Legend Equities Corporation and its affiliates do not provide tax or legal information or advice.