How Are Roth IRA Withdrawals Taxed

October 2nd, 2021 at 7:46 AM

Some withdrawals are taxable.

Even worse, some can be socked with a 10 percent early withdrawal penalty tax, and this can happen even when there’s no income tax hit.

Any withdrawals from any of your Roth accounts are federal-income-tax-free qualified withdrawals if you, as a Roth IRA owner,

• are age 59 1/2 or older, and
• have had at least one Roth IRA open for over five years.

Such withdrawals are usually state-income-tax-free too. Good!

You must pass both the age and the five-year tests to have a qualified withdrawal.

The five-year period for determining whether your withdrawals are qualified starts on January 1 of the first tax year for which you make a Roth contribution. It can be a regular annual contribution or a conversion contribution.

A non-qualified withdrawal is potentially subject to both federal income tax and the 10 percent early withdrawal penalty tax. The only exceptions are

• when the special first-time home purchase provision applies, or
• when the account owner (that would be you) is disabled or dead.

Mark S. Fineberg, CPA