Are Distributions From a Roth IRA Taxable?
Congress passed Roth individual retirements into law in 1997 in the Taxpayer Relief Act. These accounts provide for after-tax savings, which benefit people who expect to be in a higher income tax bracket when they take the money out of the account than when they put it in. Understanding how withdrawals are treated by the Internal Revenue Service can help you avoid paying extra taxes.
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Identification
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Qualified distribution from Roth IRAs are never taxable. To take a qualified distribution, you must have made your first contribution to the account at least five tax years ago and you must be either 59 1/2 years old, permanently disabled or using no more than $10,000 for a first-time home purchase. If you do not meet both of these requirements, you are taking a non-qualified distribution, also called an early distribution, which may be taxable.
Non-Qualified Distributions
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When you take a non-qualified distribution, the IRS sets rules as to what money comes out of the account. First, all contributions made to the account come out. This money can be removed at any time, tax-free and penalty-free, because you did not receive a tax deduction for the contributions. Once contributions have been exhausted, you start withdrawing earnings, which are taxable and usually subject to a 10 percent early withdrawal penalty, unless an exception applies.
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Exceptions
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The IRS permits you to avoid the early withdrawal penalty in certain circumstances. If your medical expenses for the year exceed 7.5 percent of your adjusted gross income, you can avoid the penalty on that amount. For example, if your adjusted gross income equals $30,000 and you had $6,000 of medical bills, you would be able to withdraw $3,750 from the account without penalty, but you would have to pay income taxes. You can also avoid the penalty, but not the income taxes, on withdrawals for qualified college expenses, which include tuition, fees, supplies and, if you are enrolled at least half-time, room and board.
Reporting
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Your financial institution will send you a form 1099-R at the end of any year that you take a distribution from your Roth IRA. The form will show how much of the distribution is taxable and how much is tax-free. If you have an early withdrawal, you will have to file form 5329 to either calculate your penalty or to report which exemption you claim to avoid the penalty.
Misconceptions
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You must report all of your Roth IRA distributions on your income taxes, even if they are not taxable. You may use either form 1040A or form 1040 to file your taxes. On form 1040A, you report nontaxable IRA distributions on line 11a. On form 1040, you report nontaxable IRA distributions on line 15a. These amounts will not be included in your taxable income.
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