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Roth IRA Distributions- Determining Tax and Penalty

Last Updated November 11, 2010

Earnings in Roth IRAs accumulate on a tax-deferred basis, but eventually become tax-free if distributions are qualified. The determination of whether a Roth IRA distribution is qualified is fairly simple. On the other hand, determining whether any portion of a non-qualified Roth distribution is taxable is a more involved process.  The following guidelines can be used to help determine whether a Roth IRA distribution is qualified, and if it’s not qualified, the possible tax consequences that may apply.
Roth IRA Distributions
A qualified Roth IRA distribution is one that meets the following two requirements:
1.         It occurs at least five years after the owner established and funded his/her first Roth IRA and
2.         It occurs under one of the following circumstances:
o   After the owner reaches 59 ½,
o   The distribution was used towards the purchase, building or rebuilding the first home for an eligible party. This is subject to a life-time limit of $10,000,
o   The distribution occurs after the owner is disabled or
o   The distribution was made by beneficiaries after the owner’s death.
A distribution that meets these two requirements is tax and penalty free.