Roth IRA Distribution Ordering Rules - Keep It Simple
Roth IRAs offer powerful tax advantages, but withdrawing funds the wrong way can lead to unexpected penalties. To avoid surprises, it's essential to understand how Roth IRA distribution ordering works. The IRS follows a strict sequence when determining which dollars are withdrawn first, and applying these rules correctly protects your tax-free growth.
Whether you're close to retirement or helping a client manage their retirement income, understanding these distribution priorities helps maximize the benefits of a Roth IRA.
The Three-Part Roth IRA Withdrawal Sequence
The IRS applies withdrawals from a Roth IRA in a specific order:
- Contributions
- Conversions
- Earnings
Each category follows different tax rules. You cannot skip ahead. For example, you cannot withdraw earnings until both contributions and conversion amounts have been fully distributed.
Let’s break these down clearly and simply.
1. Contributions Come Out First
Withdrawals of regular contributions are always tax-free and penalty-free.
Roth IRA contributions are made with after-tax dollars. That means you've already paid tax on this money before it went into the account. As a result, you can withdraw your direct contributions at any time, for any reason, without owing additional taxes or penalties—regardless of your age or how long the account has been open.
This makes Roth IRAs especially flexible. If someone contributed $30,000 over time and the account now holds $50,000, they can remove up to $30,000 with no consequences.
2. Conversions Are Next
Once all contributions have been withdrawn, the next dollars to come out are conversion amounts. These are funds moved from a traditional IRA or qualified plan into a Roth IRA.
These rules apply to converted dollars:
- No taxes apply if tax was already paid at the time of conversion.
- Penalties may apply if funds are withdrawn within five years of conversion, unless you're over age 59½.
That five-year clock starts fresh for each conversion. If you converted funds in multiple years, each conversion has its own five-year holding period.
Withdrawals before the five-year period may be subject to a 10% early distribution penalty, even though the converted dollars themselves aren't taxed again.
3. Earnings Come Out Last
Once contributions and conversions are fully distributed, the final pool of funds is earnings. These represent the growth from investments inside the Roth IRA.
Earnings are tax-free only if two conditions are met:
- The Roth IRA must be at least five years old, AND
- The account holder must be at least 59½ years old
If either of those conditions is not met, the earnings portion of the distribution may be subject to income tax and a 10% penalty. Some exceptions apply (such as for a first-time home purchase or disability), but the general rule is clear: wait until the account satisfies both the five-year rule and age requirement.
What Makes These Rules Confusing?
Several factors cause confusion around Roth IRA withdrawals:
- All Roth IRAs are treated as one. The IRS views all of your Roth IRAs as a single account. This means you don’t need to track distributions by individual account—just the overall totals.
- Inherited Roth IRAs have different rules. These ordering rules do not apply to inherited Roth IRAs. Beneficiaries must follow separate payout structures.
- Roth 401(k)s are excluded. These rules apply only to Roth IRAs. Roth dollars inside 401(k) or 403(b) plans are subject to different distribution guidelines.
One of the most common mistakes people make is misunderstanding how conversions work, especially regarding the five-year rule. Many assume that being over 59½ avoids all penalties. That’s not true for conversions—unless they’ve also aged five years in the Roth.
Key Takeaways to Keep It Simple
You don’t need to memorize complicated charts. Instead, keep these rules in mind:
- Contributions = always available
- Conversions = no tax, but watch the five-year rule
- Earnings = tax-free only if 59½ and account is 5+ years old
Following this order avoids unnecessary taxes and penalties. It also ensures you take full advantage of the Roth IRA’s tax-free growth potential.
FAQ Roth IRA Withdrawals
Can I withdraw Roth IRA contributions at any time?
Yes. Contributions are always available tax-free and penalty-free.
What is the 5-year rule for Roth conversions?
Each conversion must remain in the Roth IRA for five years before the funds can be withdrawn without a 10% penalty, unless the account holder is over age 59½.
Do all Roth IRAs share one five-year clock?
Only for contributions and earnings. Each conversion starts its own five-year clock separately.
What happens if I withdraw earnings too early?
You may owe income tax and a 10% penalty unless you qualify for an exception and meet both the five-year and age 59½ requirements.
Do Roth 401(k) withdrawals follow the same order?
No. Roth 401(k)s follow different IRS rules and do not use the same ordering sequence as Roth IRAs.
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.