Will a Distribution from my Roth IRA be Tax & Penalty Free?

A Roth IRA’s main advantage is it allows for tax-free growth on the entirety of the gains in the account as long as all of the distributions are qualified.  Here’s how to make sure your distribution is qualified and to keep from paying taxes or penalties.

Will the distribution exceed contributions?

If your distribution is less than total contributions, then the entirety of the distribution will be tax and penalty free. If the total distribution does exceed contributions, move on.

Have there ever been Roth Conversions?

If there was a Roth Conversion within the last 5 tax years, then the distribution is subject to a 10% penalty unless you meet an exception or are over age 59.5. 

Are you over age 59.5?

Any distributions after age 59.5 will be tax and penalty free.  If you are younger than 59.5, there are still several exceptions that may allow you to take distributions penalty free. 

Do you have medical insurance premiums after losing your job, qualify for disaster recovery assistance, have higher education expenses, taking substantially equal payments, or are disabled?

All of the above exceptions will allow for distributions penalty-free regardless of age, although the earnings will be subject to ordinary income tax rates.

There are several more qualifying exclusions that allow for penalty-free withdrawals from your Roth IRA, but earnings may still be taxed.  To see if you qualify for any of the exceptions, check out our flowchart here. If you are considering withdrawing funds prematurely from your Roth IRA and are seeking advice, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

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