Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: I have a client who is younger than 59 ½ and wants to take a distribution from his Roth IRA.  Is the distribution taxable?

Answer: Qualifying distributions from a Roth are income tax-free.

A qualifying distribution occurs when an individual takes a distribution following a five year period beginning with the taxable year in which that individual first made a contribution to any Roth IRA in the taxpayer’s own name and one of the following is met:

(1) the distribution is on or after the owner attains age 59-1/2,

(2) the distribution is made to a beneficiary after the death of the owner,

(3) the distribution is on account of the owner’s disability, or

(4) the distribution is a qualified first-time homebuyer distribution.

All other Roth IRA distributions are non-qualifying.  Non-qualifying Roth IRA withdrawals are made according to the following ordering sequence: (1) aggregate annual contributions, (2) conversion amounts, (3) earnings on annual contributions and conversion amounts.

Distributions of annual contributions are always income tax-free and are never subject to the 10% early withdrawal penalty.  A distribution of conversion amounts is also income tax-free, but these amounts may be subject to the 10% early withdrawal penalty if made within five years of the conversion and while the owner is under age 59-1/2.

Earnings distributed prior to age 59-1/2 are also generally subject to the 10% early withdrawal penalty.

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