Withdrawals from a Roth IRA

The great advantage to Roth IRAs is that qualified distributions from them are not subject to tax. The catch, however, is that you cannot make any withdrawals in the first five tax years your Roth IRA is open.

Even after the five-year waiting period is met, the withdrawal has to be under one of the following circumstances:

• you have attained age 59-1/2
• you became disabled
• the distribution was used to pay for qualified first-time homebuyer expenses
• the withdrawal was made to a beneficiary after your death.

As long as you follow these rules, there should be no problem.

If the rules aren't followed, any nonqualified distributions from a Roth IRA may be taxable. For ordering purposes, withdrawals are first treated as coming from regular contributions (which are not taxed since you made the contributions on an after-tax basis); then from traditional IRA conversion contributions on a first-in first-out basis (treated as taxable to the extent they are included in income); and finally from earnings on contributions (considered taxable income).

The 10 percent penalty for early withdrawals does not apply to qualified distributions from Roth IRAs, but may apply to nonqualified distributions unless they fall under one of the general exceptions to premature withdrawals for regular IRAs. Taxable withdrawals from a Roth IRA are reported on IRS Form 8606, Nondeductible IRAs.

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