Roth 5 Year Rules

And do They Apply to My Client?

Clients can ALWAYS take a distribution of basis from Roth IRAS. Basis is annual contributions and converted amounts. Those distributions will not be taxed when they are withdrawn as they were subject to tax when they went into the Roth IRA (or they were already after-tax amounts).

Ordering Rules

There are ordering rules for Roth distributions. All Roth IRAs are treated as one Roth IRA account for purposes of the distribution rules. Contributions come out first. Converted amounts come out next – first in, first out, funds that were taxable at the time of conversion come out before funds that were not taxable at the time of conversion. Earnings come out last.

Qualified Distributions

Distributions must be qualified to be free of all tax and penalties.

Client must have had a Roth IRA (any Roth IRA) for five years,
AND
must be 59 ½
OR
the distribution is due to death,
OR
the distribution is due to the disability of the account owner,
OR
the distribution qualifies for the first time home buyer exception.

The five years start with the establishment of the first Roth IRA and covers all future Roth IRAs that may be established. In other words, it only runs once.