Premature Roth IRA Distribution Rules
A Roth individual retirement account offers tax-free qualified distributions. However, sometimes your financial circumstances may tempt you to or necessitate that you take money out prematurely. Knowing the rules for premature distributions of Roth IRA accounts will help you minimize the negative tax implications of such a distribution.
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Premature Distributions Defined
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The Internal Revenue Service defines premature Roth IRA distributions at those taken before five tax years have elapsed since the first contribution and before you are at least 59 1/2 years old. To count the age of your Roth IRA in tax years, start from Jan. 1 of the first tax year that you put money in the Roth IRA. For example, if you made your first contribution for the 2011 tax year, even if you did not make that contribution until February, the age of the account counts from Jan. 1, 2011.
Determining Premature Distribution Composition
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When you take a premature Roth IRA distribution, you have to determine whether the distribution consists of earnings, contributions or both. The IRS permits you to take out your contributions first. The contributions come out without penalties or income taxes. If you have exhausted your contributions, you take out the earnings, which are subject to taxes and penalties. When you file your taxes, you will document this with Form 8606.
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Penalties and Exceptions
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If any of your premature distributions come from earnings, you must file Form 5329 to figure your penalty or, if applicable, explain your exemption. Unless an exception applies, a penalty of 10 percent of the earnings will be added to your taxes for the year. Premature distribution exceptions to the early withdrawal penalty include using the money for medical expenses that exceed 7.5 percent of your adjusted gross income, college costs for yourself or your children, and up to $10,000 for the first purchase of a home. Regardless of whether an exemption applies, the premature distribution of earnings does count as taxable income.
Roth IRA Conversion Money
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Money converted into a Roth IRA account must satisfy a separate five-year requirement, counted from the first day of the tax year in which the conversion took place. This requirement differs for each conversion. For example, if you converted money from a traditional IRA to a Roth IRA in 2007 and from a 401k plan to a Roth IRA in 2010, your money converted from the traditional IRA would meet the requirement in 2012, but the 401k plan money would not meet the requirement until 2015. If this requirement is not met, the IRS imposes the 10 percent early withdrawal penalty, but not income taxes, on the distribution.
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