Are Distributions that consist of my Roth IRA Contributions ever subject to income tax?
No. The portion of your Roth IRA that consists of your contributions is never subject to income tax when it comes out – even if you take it out the day you made the contribution. That is because all contribution you made were nondeductible – meaning you already paid tax on the money. In addition, any distribution you take from a Roth IRA is presumed to be a return of your contributions until you have withdrawn all contributions you made to it over the years. In other words, all contributions all recovered before earnings before earnings are recovered.
If I establish a Roth IRA is there a certain amount of time I am not allowed to take tax-free distributions of investment returns?
In general, you should not take a distribution of your investment returns for five years. A distribution within five calendar years of when you first establish a Roth IRA can never be a qualified distribution. Thus, counting the year of your first contribution as year one, you will satisfy the five-year requirement if you wait until the sixth year before withdrawing any earnings.
However, simply satisfying the five-year requirement will not automatically make a distribution qualified. It must also be at least one of the following:
- A distribution you take after reaching 59 and 1/2
- A distribution you take after becoming disabled
- A distribution to your beneficiary or your estate after your death
- A distribution you take to purchase a first home (up to a lifetime withdrawal limit of $10,000)
Therefore, if your distribution satisfies the five-year requirement and falls into one of the above categories, it will be qualified and, hence, entirely tax-free.
Please contact one of our Roth IRA Experts at 800-472-0646 for more information.