Understanding IRA Distributions

Required Minimum Distributions

IRAs (Individual Retirement Accounts) are designed to help fund retirement, but unlike other retirement savings plans, you can withdraw your assets anytime. Withdrawing money from your IRA (also called taking a distribution or a disbursement) can have penalties and tax consequences, so it’s important to know the rules before you take action. You may want to consult a competent tax advisor.

ROTH IRA
With a Roth IRA, your assets are distributed as follows:

  • Contributions leave the IRA first
  • Conversion/retirement plan rollovers (excluding designated Roth assets) come out next
  • Earnings are distributed last

Let’s Talk Taxes
When it comes to paying taxes on your Roth IRA disbursements, you don’t have to include any contribution or conversion/rollover amounts in your income for the year of the distribution. This is because Roth IRA contributions are not tax deductible and conversion/rollover assets are taxed at the time of the conversion or rollover. You may, however, need to include the earnings in your taxable income.

Age & Penalties
With a Roth IRA, there is not an age at which you’re required to take a distribution. If you choose to take a distribution before age 59½ and the distribution is not qualified, it may be subject to the 10% early distribution penalty tax. This penalty tax will not apply to any contribution amounts included in the distribution. Whether conversion/rollover amounts are subject to the penalty tax depends on when the assets were converted or rolled over. Earnings are subject to the penalty tax when included in a non-qualified distribution.

If the Roth IRA distribution is qualified, then no taxes or penalties apply, not even on the earnings. To be a qualified distribution, you must have owned a Roth IRA for at least 5 years AND be age 59½ or older, disabled, or a first-time homebuyer. Roth IRA beneficiaries also may take qualified distributions if inheriting from someone who has had a Roth IRA for at least five years.

Traditional IRA
With a Traditional IRA (also called a SIMPLE IRA, for Savings Incentive Match Plan for Employees of Small Employers), assets are distributed pro rata, which means that a portion of both deductible and nondeductible assets make up every distribution (if your IRA contains both types of assets).

Let’s Talk Taxes
In most cases, you will need to include any Traditional IRA distribution amounts in your income for the year of the distribution. Any contributions for which you did not claim a deduction will not be taxed when taken out.

Age & Penalties
With a Traditional IRA, you are required to begin receiving the minimum required distribution beginning the year you turn 70½. If you choose to take a distribution before age 59½, you will be subject to the 10% early distribution penalty tax, unless you qualify for an exception.

What is a Qualified Distribution?
For both Roth and Traditional IRAs, you generally won’t pay a penalty for taking early distribution in cases of:

  • Age 59½ or older
  • Death
  • Disability
  • Substantially equal periodic payments
  • Certain medical expenses
  • Health insurance if unemployed
  • Higher education
  • First-time homebuyer
  • IRS levy
  • Qualified reservist status