You may think that all Roth IRA withdrawals are federal-income-tax-free. Not true!
Some withdrawals are taxable.
Even worse, some can be socked with a 10 percent early withdrawal penalty tax, and this can happen even when there’s no income tax hit.
Here’s what you need to know about Roth IRA withdrawals under the federal income tax rules. We start with the simplest case.
Rules for Qualified Withdrawals Are Simple
Any withdrawals from any of your Roth accounts are federal-income-tax-free qualified withdrawals if you, as a Roth IRA owner,
are age 59 1/2 or older, and
have had at least one Roth IRA open for over five years.
Such withdrawals are usually state-income-tax-free too. Good!
You must pass both the age and the five-year tests to have a qualified withdrawal.
The five-year period for determining whether your withdrawals are qualified starts on January 1 of the first tax year for which you make a Roth contribution. It can be a regular annual contribution or a conversion contribution.
Example 1. Figuring the earliest date for qualified withdrawals.
You established your initial Roth IRA (Roth IRA-1) with a regular annual contribution made on April 15, 2018, for your 2017 tax year. Your five-year period started on January 1, 2017, even though you physically made your initial Roth contribution in 2018.
Anytime on or after January 1, 2022, you can take federal-income-tax-free qualified withdrawals from Roth IRA-1, assuming you are age 59 1/2 or older on the withdrawal date.
You opened up a second Roth account (Roth IRA-2) in 2020 with a conversion contribution from a traditional ... Log in to view full article.
Log in to view full article
You'll be able to read the full article and get instant access to the last few issues of the Tax Reduction Letter
with a money-back guarantee