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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