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How to Take Roth IRA Withdrawals

Follow the rules to get your money without penalties or taxes

the words "ira roth tax free" are written on pink and yellow post-it notes stuck on the lid of a box of money

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Q: I'm 63 and have a Roth IRA. When can I access these funds totally tax- and penalty-free? The current stock market has produced some big gains in my Roth, and I could use some funds now. But I am worried about a tax bill if I withdraw the earnings on my Roth funds. I know there is a five-year rule, but when does that term begin? 

—C.D.

A: The 10 percent early-distribution penalty doesn't apply to you, since that only comes into play when you withdraw certain Roth funds before age 59 1/2. Because you are 63, you will never pay that penalty on any Roth funds you withdraw. More good news: It's likely you won't owe any income taxes on any funds you withdraw from your Roth IRA.

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Confused about IRAs, 401(k)s, Roths, taxes and more related to saving for retirement? Ed has the answers. Email your questions to IRAHelp@aarp.org.

The five-year holding rule begins on the first day of the year for which you made your initial Roth IRA contribution (or converted a traditional IRA to a Roth). Once you've held your Roth funds for five years and have reached age 59 1/2, all funds you withdraw from your Roth will be tax- and penalty-free whenever you withdraw them.

For example, if 2016 was the first year you made a contribution to your Roth IRA, then on Jan. 1, 2021, you would have satisfied your five-year holding period and any funds you withdrew from your Roth (even if you withdrew the entire account) would be tax- and penalty-free.

But let's say you first opened your Roth for the 2019 year. It's still likely you won't pay any taxes on funds withdrawn because there are ordering rules on withdrawals from your IRA. Yes, you will not satisfy your five-year holding period until 2024, but that applies only to the earnings on your Roth funds, and those funds are deemed to be distributed last, after you've withdrawn all your Roth contributions and conversions.

Under the tax law, Roth funds are deemed to come out in a certain order, called ordering rules, based on three baskets of funds. The first basket of funds deemed to be distributed is your original Roth IRA contributions. The next basket is your converted Roth funds. The third basket is earnings on your Roth funds. These ordering rules apply to all your Roth IRA funds together, no matter how many Roth IRAs you may have. Under the tax law, all your Roth funds are considered one pot.

Your original Roth contributions and converted funds (if any) will come out tax-free. If you do withdraw so much that you reach the earnings basket (after your Roth contributions and conversions are fully withdrawn), then the next funds you take out will be deemed to come from your earnings, and those will be taxable if you withdraw them before 2024, but you still won't face a 10 percent penalty, because that can never apply to you.

Here is an example: Let's say you first contributed to your Roth for 2019 and you contributed the maximum allowed, which was $7,000. Then in 2020 you converted $30,000 from your IRA to your Roth IRA. Let's assume that the earnings on that $37,000 total was $6,000, so now you have a total of $43,000 in your Roth IRA. The first $37,000 (the total of your Roth contributions and converted funds) is tax-free whenever it's withdrawn, and the $6,000 in earnings will be taxable if it's withdrawn before 2024.

Let's say you'd like to withdraw $15,000 from your Roth right now (in 2021). There will be no tax on that withdrawal because the first $7,000 is deemed to come from your 2019 Roth IRA contribution and the next $8,000 is deemed to come from your converted funds. Withdrawals from both baskets are tax-free. You won't reach the earnings basket until all the remaining converted funds are withdrawn. If you need to withdraw all your Roth funds now, then there will be a tax, but only on the $6,000 in earnings. But again, that won't happen until you've withdrawn more than $37,000.


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Q: I wish to leave my Roth IRA to my granddaughter, who is 30 years old. When she inherits, when will she have to withdraw the funds, and will there be any taxes due for her?

—L.G.

A: Your lucky granddaughter will have to withdraw the inherited Roth IRA funds by the end of the 10th year after your death. The Secure Act, which has been in effect since 2020, has changed the withdrawal rules, so a person's age generally no longer has an effect on the payout period. The withdrawals your granddaughter will take will probably be tax-free, too. See below for the odd case where the earnings could be taxable to her.

If she inherits in 2035, for example, then she must withdraw the entire inherited Roth IRA account balance by the end of 2045. There are no required withdrawals within the 10 years, but if she wishes, she can take any amounts within the 10 years. In this example, your granddaughter will owe no taxes on funds she withdraws because more than five years have passed since you opened a Roth IRA. She will also never be subject to any early-distribution penalty (even though she is well under age 59 1/2) because that penalty never applies to a beneficiary.

In the odd instance that you died before having your Roth IRA open for at least five years (hopefully not!), then the earnings on your Roth funds would have to be held for five years (including the time you held the funds) to be tax-free to your granddaughter. But even in this case, the earnings would be deemed to be withdrawn last, so it's unlikely there would be any tax on the funds your granddaughter withdrew.

One warning: Make sure to advise your granddaughter that any Roth funds she inherits from you must go to a properly titled inherited Roth IRA. As a beneficiary, she cannot contribute those inherited funds to her own Roth IRA. A properly titled inherited Roth IRA simply means that your name must remain on the account title and that the account clearly shows that it is a beneficiary account. Each financial institution has its own version of this titling, but the point is that it must be set up as an inherited (beneficiary) Roth IRA.

Ed Slott, CPA, is a nationally recognized IRA expert, public television personality, author and media resource who has dedicated his life to educating Americans (and their financial professionals) on protecting retirement accounts from unnecessary taxes. His most recent book is The New Retirement Savings Time Bomb (Penguin Random House, 2021), Visit www.IRAHelp.com to learn more.

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