TaxAlmanac:Featured article/June 29, 2005

From TaxAlmanac

Roth Distributions

In determining the taxability of Roth IRA distributions, it is first necessary to determine if the distribution is a qualified distribution or a non-qualified distribution. IRS Publication 590 defines a qualified distribution as one that meets the following conditions:

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the taxpayer's benefit, and

2. The distribution is:

a. Made on or after the date the taxpayer reaches age 59 1/2, or

b. Made because the taxpayer is disabled, or

c. Made to a beneficiary or to the taxpayer's estate after death, or

d. Made to buy, build, or rebuild a first home as defined in code section 72(t)(8).

If a distribution does not meet the conditions of a qualified Roth distribution (defined above), then the distribution is a non-qualified distribution.

Taxability of Roth Distributions

Qualified Roth distributions are not subject to income tax or the additional 10% tax on early distributions. Non-qualified Roth distributions are subject to income tax only after all contributions to the Roth IRA have been returned. For this purpose, contributions include all regular contributions to the Roth IRA, and amounts converted from traditional IRAs to Roth IRAs in prior years. Thus, the only component of a Roth IRA that can be taxable is the earnings portion of the Roth IRA that is included in a non-qualified distribution.