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Roth IRA Distribution & Avoiding Taxes & Penalties

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    Qualified Distributions

    • Qualified distributions from your Roth IRA are tax-free and penalty-free. To have your Roth IRA distribution be qualified, you must have made your first Roth IRA contribution at least five tax years prior. In addition, you must meet one of the following criteria: be 59 1/2 years old, suffer a permanent disability or take out no more than $10,000 toward a first home.

    Withdrawals of Contributions

    • The IRS also allows you to take out contributions you made from your Roth IRA whenever you want, no matter what the reason, without paying taxes or a penalty. You receive no income tax benefit from your Roth IRA contributions, so you do not need to pay any penalties for the distribution. Unlike traditional IRAs, which allow you to reduce your taxable income by the amount of your contribution, Roth IRA contributions cannot reduce your taxable income.

    Withdrawal of Earnings Penalty Exceptions

    • If you remove all of the contributions from your Roth IRA, you must start paying income taxes on your distribution and, barring a special early withdrawal exception, an early withdrawal penalty. If you have an exception, you avoid the penalties, but not the income taxes. Exceptions include college tuition, medical expenses exceeding 7.5 percent of your adjusted gross income, and, in the event that your Roth IRA does not yet satisfy the five-year requirement, permanent disabilities and up to $10,000 for your first home.

    Tax Reporting

    • Just because your distribution is penalty-free, or even tax-free, does not mean the IRS does not need to know about it when you file your income tax return. If you take a qualified distribution, just include the amount as a nontaxable IRA distribution. If you take an early distribution, file Form 8606 to figure the amounts coming from contributions and earnings. You report early withdrawals of contributions as nontaxable IRA distributions. You report early withdrawals of earnings on Form 5329, along with the early withdrawal penalty exception. The tax on early earnings withdrawals is not waived, so they are reported as a taxable IRA distribution.

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