Are Roth IRA Distributions Taxed? How To Avoid Penalties and Taxes on Roth IRA Distributions
Full Video: https://youtu.be/ym58iLw7Rkc
Can your Roth IRA become taxable? Are distributions from your Roth IRA taxed? If you don’t follow two very specific rules, you could incur taxes and penalties on your Roth IRA distribution. That is what we are going to discuss in this weeks, Your Financial EKG™ blog.
Roth IRA’s are supposed to be completely tax free. “SUPPOSED TO BE” is the key statement in that sentence. Roth IRA’s can become taxable and penalized if you don’t follow two specific rules. Those rules are the “5 Year Rule” and the “Under 59.5” Rule. Let’s dive into both:
Roth IRA 5 Year Rule:
The 5 Year rule says that you must wait 5 years before taking earnings out of your Roth IRA after your first contribution or conversion. You must also be over the age 59.5 to avoid penalties. SO, in plain english: to take investment earnings out of your Roth IRA without owing taxes or penalties, you must be 59.5 or older and held the account for at least 5 years. This is basically an IRS dictated waiting period for Roth IRA income and distributions. The 5 year rule only applies to the first contribution or conversion, not subsequent Roth IRA conversions or Roth IRA contributions. If you are over the age 59.5 and you do your first Roth IRA conversion, the 5 year rule still applies.
For example, if you put $6,000 in your Roth IRA for the first time and it grows to $12,000, you must wait 5 years before you can take out the $6,000 in earnings AND you must be over age 59.5 to not get penalized on that distribution.
Age 59.5 Rule
I know we explained this above, but you must be over the age 59.5 before you can take distributions, inside or outside the Roth IRA 5 year rule, to avoid penalties. Why 59.5? I have no idea. Just a number Congress came up with. Who celebrates their 59.5 birthday? Again, no idea!
So, in short, YES your Roth IRA can become taxable and penalized if you are not careful. You want to follow these very specific rules to keep your Roth IRA tax free. That is the whole purpose of a Roth IRA. Tax free retirement income! I hope you have enjoyed this blog. Please contact me using the links below if you have any further questions.
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