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A Tax-Free Roth IRA Distribution In 5 Easy Steps Thumbnail

A Tax-Free Roth IRA Distribution In 5 Easy Steps

Roth IRAs are becoming abundantly popular due to the tax-free nature when it comes to pulling funds out. Here are 5 steps to ensure this process is smooth.

Having a simple list of steps can make the most complicated project seem manageable.  


Roth IRAs offer a trade-off where you pay taxes now on your contribution (or conversion) in exchange for tax-free earnings later. Don’t miss out on tax-free Roth IRA distributions by making mistakes. Here are five steps to follow to make sure money comes out of your Roth IRA tax-free.

Step 1. Aggregate your Roth IRAs. For tax purposes, all of your Roth IRAs are considered one Roth account. There is no tax benefit gained by keeping conversions in a separate Roth IRA from your contributions. This is sometimes called the aggregation rule.

Step 2. Follow the ordering rules. Funds leave your Roth IRAs in a certain order. Contributed amounts are distributed first. Converted amounts are distributed next, first in, first out. Last out would be earnings.

Step 3. Remember, contributions are always available tax- and penalty-free. Not only do your contributions come out first, in addition, they are always available tax- and penalty-free. This means that if you need to tap your Roth IRA, you can easily access contributions without adverse tax consequences, regardless of your age or how long you had the Roth IRA for.

Step 4. Avoid penalties on converted funds. Converted funds are always distributed tax-free. This makes sense since you already paid taxes when you converted them. However, amounts that were taxable at conversion may be subject to the 10% early distribution penalty if you are under the age of 59½ at the time of the distribution and the conversion was less than five years ago. This five-year clock begins separately for each conversion you do. What if you are over age 59 ½ when you take converted dollars (not earnings) from your Roth IRA? Then, you have no worries about this five-year clock.

Step 5. Aim for qualified distributions of earnings. Earnings are not subject to tax if the distribution is a qualified distribution. Your distribution is qualified if it is made after you have owned any Roth IRA account for five years AND you are over the age of 59½, or are dead, or disabled, or taking the funds for a first-time home purchase.

The five-year period for qualified distributions of earnings can be confusing. It is different than the five-year period for penalty-free distributions of converted funds discussed above. It does not re-start with each Roth IRA contribution or conversion. If you contributed $1 to your Roth IRA for 2017, and then in 2020 you converted your one-million-dollar traditional IRA to the Roth IRA, then as of January 1, 2022, all the Roth money would be considered to have been held for five years for purposes of determining qualified distributions of earnings. Your Roth IRA 5-year clock began on the first day of the year for which the first dollar of Roth contributions was made.

By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC

Copyright © 2022, Ed Slott and Company, LLC Reprinted from The Slott Report, 11/2/22, with permission. https://www.irahelp.com/slottreport/tax-free-roth-ira-distribution-5-easy-steps, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Chris Cordoba, founder of California Retirement Advisors, is a member of Ed Slott's Master Elite IRA Advisor Group.
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.