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Taking Distributions from Roth IRAs

Before you take a Roth IRA distribution, it's important to understand the rules to avoid penalties. The major consideration is order of distribution.

Order of distribution

There are three types of contributions to a Roth IRA: regular, conversions (including rollovers) and earnings. The order in which you take distributions from your account depends on the type of contribution that was initially made.

1. Regular annual contributions

  • Regular Roth IRA contributions are made with after-tax dollars, so account owners don't pay federal income tax on distributions from these contributions.

2. Conversion contributions

  • Again, income tax has already been paid on the converted amount, so no further taxes are owed. These contributions are treated on a first-in, first-out basis.
  • Contributions must remain in the Roth IRA for five years, beginning on Jan. 1 of the year the conversion was made. The five-year period is determined separately for each conversion contribution.
  • If assets are withdrawn before the five-year period ends, they are subject to the 10% premature distribution penalty tax unless an exception applies. The chart on the back (see over) shows circumstances when penalties apply.

3. Earnings

  • A qualified distribution of earnings is not subject to federal income tax or penalty.
  • The five-year period for determining whether an amount is a qualified distribution starts on Jan. 1 of the year the owner makes the first valid contribution to the Roth IRA.
  • Nonqualified distributions of earnings made before the end of the five-year period are taxable.

Distribution of Roth IRA Earnings
Taxes and penalties may apply to Roth IRA distributions
  Withdrawn Within 5 Years Withdrawn After 5 Years
Distribution Reason Earnings
Taxable		 10%
Penalty		 Earnings
Taxable		 10%
Penalty
After age 59½ Yes No No No
Before age 59½ (unless exceptions listed below apply) Yes Yes Yes Yes
– Death Yes No No No
– Disability Yes No No No
– First-time homebuyer ($10,000 limit) Yes No No No
– Qualified higher education expenses Yes No Yes No
– Substantially equal periodic payments Yes No Yes No
– Health insurance premiums of certain unemployed people Yes No Yes No
– Medical expenses above 7½% of MAGI Yes No Yes No

Talk with your advisor

To learn more about straegies for retirement, contact your financial advisor and visit us at invesco.com/RetirementReady.

Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. It was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under US federal tax laws. Federal and state tax laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation. IRA owners are encouraged to seek the advice of an attorney or tax advisor who specializes in this area.

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(2/11/13)
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