Avoid Costly Tax Surprises on Your Roth IRA Distributions

When you opened your Roth IRA, you probably assumed all future distributions would be tax-free. After all, that’s one of the main selling points, right? Unfortunately, that’s a common misconception that can lead to some unexpected tax bills if you’re not careful. Determining tax on Roth IRA distributions is critical. While Roth IRAs do offer significant tax advantages, certain withdrawals may be subject to income tax—and understanding when and why can save you from a costly surprise come tax season.

Here’s the key: Not all Roth IRA withdrawals are created equal. Depending on the type of funds you’re withdrawing—whether contributions, converted funds, or earnings—and your age, different rules apply.

Avoid Unnecessary Taxes on your Roth IRA Distributions

1. Are You Withdrawing Contributions?

Good news! Contributions—the annual amounts you deposit into your Roth IRA—are always both tax- and penalty-free when withdrawn. These are the first funds to come out of your account under IRS “ordering rules.”

2. Are You Under 59 ½ and Withdrawing Converted Funds?

Converted funds—money you’ve rolled over from a traditional IRA or other retirement plan—are a bit more complex. While converted funds are never subject to income tax, if you’re under 59 ½ and they’ve been in your Roth for less than five years, you could face a 10% penalty for early withdrawal. Each conversion has its own 5-year clock, so understanding the timing is critical.

3. Are You Over 59 ½ or Have Held Converted Funds for More Than 5 Years?

Once you’ve hit age 59 ½ or the converted funds have been in your account for more than 5 years, any withdrawals of converted funds will be completely tax and penalty-free.

4. Withdrawing Earnings Before Age 59 ½?

Here’s where it gets tricky: Earnings—the growth of your Roth IRA—withdrawn before age 59 ½ are generally subject to income tax AND a 10% penalty unless an exception applies.

5. Withdrawing Earnings After 59 ½ and 5 Years?

If you’re over 59 ½ and have held any Roth IRA for more than five years, congratulations—any withdrawals of your earnings will be completely tax-free. However, if you haven’t reached that 5-year milestone, you could still face taxes on those earnings.

Ready to Ensure Your Roth Distributions Stay Tax-Free?

Navigating Roth IRA rules can be confusing, but with a little guidance, you can avoid the tax pitfalls and make sure your retirement distributions work in your favor.

To simplify things, we’ve put together a helpful resource: “Determining Tax on Roth IRA Distributions in 5 Easy Steps.” You can download it below and start planning smarter Roth withdrawals.

RFG Wealth Advisory in Argyle, Texas, is an independent, fee-only Registered Investment Advisor firm that always puts our client’s interests first. We have a transparent, simple fee structure that’s easy to understand.

Contact RFG Wealth Advisory Today

Don’t wait until it’s too late to avoid costly mistakes. Schedule a time with one of our qualified financial advisors, by calling 940-464-4104, or schedule online at https://RFGWealthAdvisory.com/free-assessment and let’s discuss your current situation and any questions you may have about your Roth IRA. We’re here to help you plan effectively so you can enjoy the retirement you deserve.

Financial success doesn’t happen by chance—let’s work together to secure your future!