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Showing posts with label Roth IRA distribution. Show all posts
Showing posts with label Roth IRA distribution. Show all posts

The 3 Most Important Things to Know About Roth IRAs

Roth IRAs have many rules and benefits, so boiling them all down to a list of just three isn't easy. Inevitably, there will be important information you should consider that's not on this list. That said, by simply knowing these three rules, you'll have a pretty good idea of whether or not you should be having the "Roth Talk."

1) Tax-free Distributions in Retirement Come With an Upfront Cost

Perhaps the biggest benefit of the Roth IRA is that it allows for the possibility of tax-free distributions of retirement savings. Once you reach the point where you are able to take a "qualified distribution" from your Roth IRA, everything that comes out of any of your Roth IRAs for the rest of your life will be tax and penalty-free. In order to have a qualified Roth IRA distribution, you must generally have started your first Roth IRA more than five years ago and you must be over age 59 1/2. There are a few other ways you can get to qualified distribution status, but those are generally best discussed with your tax and/or financial advisor.

Roth IRA informationNow it's hard to find someone who doesn't like the sound of "tax and penalty-free," but getting money into a Roth IRA generally isn't free. Instead, it comes with an upfront cost. If you're making regular Roth IRA contributions, that cost is the loss of the tax deduction you may have otherwise received by contributing the same funds to an IRA, 401(k), or other pre-tax retirement plan. If, on the other hand, you’re converting retirement money to a Roth IRA, you must add the converted funds to your income in the year of conversion. Thus, your tax bill for that year may increase significantly but... the allure of future tax and penalty free income may be worth it. This, again, is a conversation worth having with a professional.

2) There are no Required Minimum Distributions During Your Lifetime

To many, the second biggest benefit of Roth IRAs, right behind the tax-free distributions, is the fact that during a Roth IRA owner's lifetime there are no required minimum distributions (RMDs). This gives you the ability to allow your Roth IRA money to grow tax-free as long as possible and, contrary to traditional IRAs, it allows you to take income when you want it, not when Uncle Sam tells you that you must take it. A recent proposal calling for Roth IRA RMDs was included in the President's 2015 Fiscal Year Budget, but it's unlikely to actually happen any time in the near future.

If you're survived by a spouse after your death, they can generally roll your Roth IRA into their own Roth IRA, where they will continue to have no RMD requirements during their lifetime. Ultimately, when your IRA is left to someone other than a spouse, they will have to begin taking RMDs in the year after the year they inherited the account. Those distributions, however, will generally be tax-free.

3) You Can Always Access Your Contributions Tax and Penalty Free

When it comes to Roth IRAs, there's three types of money. There are contributions, which are the funds you put directly into a Roth IRA, there are conversions, which are the funds you've moved to a Roth IRA from a tax-deferred retirement account, like an IRA or 401(k), and there are earnings, which are the growth on your contributions and your conversions. The rules for conversions and earnings, are a bit more complicated, but the rules for Roth IRA contributions are about as simple as it gets when it comes to the tax code. They can be withdrawn at any time tax and penalty free. On top of that, they are also considered to be the first money out of your Roth IRA.

So, for instance, suppose you made a $20,000 Roth IRA conversion five years ago that's now worth $28,000. Last year, you made a $5,000 Roth IRA contribution. In our example, you can take out up to $5,000 out of your Roth IRA at any time tax and penalty free. It doesn't matter if you are under age 59 1/2 or not. It doesn't matter for what purpose you're withdrawing the funds. It doesn't matter that the $20,000 conversion was made before you made your contribution. It doesn't matter if... well, you get the point. No matter what you do, the first $5,000 you take from your Roth IRA will be tax and penalty free.

- By Jeffrey Levine and Jared Trexler

Distributions From a Roth IRA Conversion

Roth IRA conversion distributionSuppose you are one of the many retirement account owners who converted funds to a Roth IRA in 2010 when there was a special 2-year “deal” on paying the taxes. Now you are wondering when you can take a distribution of those funds. The simple answer is that you can always take a distribution of your converted funds. However, depending on what you withdraw, you may not be happy with the tax consequences. Here are the rules.

First of all, all of your Roth IRAs are considered one, big, giant Roth IRA for distribution purposes. Your Roth funds are divided into three “pots” for distribution purposes.

The first pot of Roth funds that you empty are your annual contributions. You can take these funds out at any time and at any age, tax and penalty-free. Any distribution you take from any Roth IRA will be considered to be your contributions until they are gone.

The next pot you empty are your conversions. They are distributed on a first in, first out basis. Your conversions will be always be distributed income tax free. However, if you are either under age 59 ½ and the conversion you are withdrawing from was done less than 5 years ago, the distribution will be subject to the 10% early distribution penalty - unless an exception to the penalty applies.

The last pot of Roth money you empty will be your earnings. Distributions of earnings can be subject to both income tax and the 10% early distribution penalty. To have a tax-free distribution of earnings, you must have established your first Roth IRA account more than 5 years ago AND the distribution must be made after you are either age 59 ½, or due to your death, disability, or the distribution is for the first-time purchase of a home (lifetime cap of $10,000 per person). If you don’t meet those criteria, your distribution will be taxable. If you are under age 59 ½ at the time of the distribution, it will also be subject to the 10% early distribution penalty unless an exception applies.

Now that you know the rules, can you take a distribution from your 2010 Roth conversion? Assuming that is the only Roth IRA you have, yes you can take a distribution from your 2010 conversion. If you are under the age of 59 ½, you will owe the 10% early distribution penalty on any part of the distribution that was taxable at the time of the conversion.

Need help with this or any other IRA question? You can find an Ed Slott-trained advisor in your area on our website, www.irahelp.com.

 - By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Does the 2013 Tax Law Authorize Rollover of After-Tax 401(k) to a Roth IRA?

This week's Slott Report Mailbag (a special Monday edition) includes questions on the new tax law and two popular topics - required minimum distribution (RMD) rules for a beneficiary and Roth IRA contribution rules. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


Does the new tax law authorize the rollover of after tax 401(k) accounts to a Roth IRA? If it does, do you have to pay tax on the earnings in the account at the time of transfer to the Roth?

John Persa

Send questions to [email protected]
The rollover of after-tax 401(k) money to a Roth IRA has been available for several years. When rolling over (converting) after-tax 401(k) funds to a Roth IRA, only the principal part of the after-tax money is tax-free, the earnings in the account would be taxable. A word of caution, though. The IRS position on rollovers from employer plans is that they are treated pro-rata for tax purposes. Therefore, generally your rollover to a Roth IRA will not be income tax free.


Mr. Slott,

I understand that IF I were to take my contributions out of my Roth IRA to pay for college expenses, I can do so at any time without tax or penalty. Is that also true if my Roth IRA is in an annuity? I am 40 years old and my IRA is 5 years old in a 5-year surrender annuity.

Juanita McKenna

You can withdraw your Roth IRA contributions anytime without federal income tax or an IRS penalty for any reason. This rule applies to all Roth IRAs, including those invested in annuities. However, the insurance company can have a surrender charge for withdrawing the funds too soon, based on the terms of your Roth IRA annuity contract.


My friend was ill in 2012 and failed to take her RMD from her IRA before the end of the year. She has since passed away and did not take the RMD in 2013. It is my understanding that the beneficiaries must take the 2013 RMD, but what happens to the 2012 RMD that was not taken?

Cindy Orlovsky

Any RMDs due to the deceased account owner must be taken by the beneficiary(ies) of the IRA. Because she was alive in 2012 and failed to take her RMD, she is subject to a 50% penalty for not taking her RMD. The executor of her estate should file IRS Form 5329 with her 2012 tax return and ask that the 50% penalty be waived because she was ill last year. The beneficiaries should take the 2012 RMD as soon as possible and take the 2013 RMD by the end of the year. Both RMDs will be included in the beneficiary’s 2013 income.