Withdrawals from your Roth IRA are considered distributions and will fall into either a qualified or non-qualified distribution. There are many reasons people may want to withdraw money from their IRAs. For instance, an individual may want to use some of the acquired funds towards an annuity. There are no taxes or penalties charged on a qualified Roth IRA withdrawal but a non-qualified distribution will result in charges depending on the scenario.
Determining these costs is the responsibility of the Roth IRA owner, so it is important that you understand the rules and keep proper documentation of all transactions throughout the life of your Roth IRA. Let's have a look at the different situations for withdrawals and their fees.
Qualified Distributions
Qualified withdrawals from a Roth IRA are allowed without penalties or tax fees as long as the plan and first deposit occurred at least 5 years ago and one of the following criteria is met at the time of distribution:
- The Roth IRA owner is at least 59.5 years of age.
- The Roth IRA holder becomes disabled.
- Roth IRA holder has died and distribution goes to the beneficiary.
- The withdrawal or distribution to a maximum of $10,000 per lifetime if it is used toward the purchase, or construction of a first home for any of the following individuals:
- Roth IRA holder
- Roth IRA holder's spouse
- Child of Roth IRA holder or IRA holder's spouse
- Grandchild of Roth IRA holder or IRA holder's spouse
- Parent of Roth IRA holder or IRA holder's spouse
Non-Qualified Distributions
Roth IRA Withdrawals or distributions that are not qualified may or may not have taxes or penalties charged depending on the source of the deposits. Distributions are withdrawn from the Roth IRA in the following order as determined by the IRS:
- Regular contributions -Roth IRA Withdrawals are penalty free and tax free and can be taken anytime.
- Taxable conversion/Rollover amounts (from Traditional IRA's) - Roth IRA Distributions may be charged early-distribution penalties.
- Nontaxable conversion/Rollover amounts (from Traditional IRA's) - Withdrawals from the Roth IRA are penalty free and tax free and can be taken anytime.
- Earnings on all assets - Roth IRA Distributions may have tax and early-distribution charges applied.
- If a non-qualified distribution is taken from the Roth IRA and it qualifies for an early-distribution fee, the fee may be waived if one of the following criteria are met. If none of these are met, a 10% penalty will be applied.
- Roth IRA Holder has reached the age of 59.5.
- Roth IRA distribution will be used for a first home purchase. See above qualifications.
- Roth IRA Holder has become disabled.
- Roth IRA Holder has died, with proceeds going to beneficiary.
- Distribution is used for Roth IRA Holder's eligible medical expenses.
- Distribution is used for Roth IRA Holder's Substantially Equal Periodic Payment or SEPP.
- Roth IRA withdrawal used for post-secondary education expenses.
- Roth IRA Funds are used to pay for medical insurance after the loss of a job.
- Roth IRA funds are withdrawn because of an IRS levy.
- The Roth IRA distribution is rolled over within 60 days of withdrawal.
Required Minimum Distributions
Required Minimum Distributions (RMD) are imposed on traditional IRA's and to a certain extent on Roth IRA's. RMD's are required on Roth IRA's only after the death of the IRA owner and are subject to a 50% penalty if these distributions are not met. If the Roth IRA is rolled over to the surviving spouse, distributions are not required during the life of the spouse. If it is rolled over to another beneficiary, the Roth IRA distributions will have to be made as follows:
- The first withdrawal would need to be taken when the beneficiary turns 61 or the year after the Roth IRA owner's death.
- If the remaining life expectancy of the beneficiary is 10 years, the distribution would need to be the balance of the Roth IRA divided by 10. The following year's distribution would be reduced by 1 to 9 years and so on. This formula is referred to as the Term Certain Method and it is not the only method that is required for distributions.
- If the beneficiary dies before the funds are fully paid out, the distributions can continue although some Roth IRA agreements require a full payout.
Withdrawals from Roth IRA's can be very confusing and complex. Consult with a professional for more advice on tax implications and penalties before considering distributions.
