Publication 590 |
2000 Tax Year |
Are Distributions From My Roth IRA Taxable?
You do not include in your gross income qualified
distributions or distributions that are a return of your regular
contributions from your Roth IRA(s). You also do not include
distributions from your Roth IRA that you roll over tax free into
another Roth IRA. You may have to include part of other distributions
in your income. See Ordering Rules for Distributions,
later.
What Are Qualified Distributions?
A qualified distribution is any payment or distribution from your
Roth IRA made after the 5-taxable-year period beginning with the first
taxable year for which a contribution was made to a Roth IRA set up
for your benefit if the payment or distribution is:
- Made on or after the date you reach age 59 1/2,
- Made because you are disabled,
- Made to a beneficiary or to your estate after your death,
or
- One that meets the requirements listed under First
home in chapter 1
(up to a $10,000 lifetime limit).
What Distributions Are Not Qualified Distributions?
A distribution is not a qualified distribution if it is:
- Made within the 5-year period beginning with the first year
for which either a regular or a conversion contribution was made to a
Roth IRA set up for your benefit.
- Made after the 5-year period described in (1), but you do
not meet any of the following requirements.
- You have not reached age 59 1/2.
- You are not disabled.
- The distribution is not made to a beneficiary or to your
estate after your death.
- You do not use the distribution to pay certain qualified
first-time homebuyer amounts. (See First home under
When Can I Withdraw or Use IRA Assets? in chapter 1.)
- The withdrawal of contributions and earnings on or before
the due date of your return (including extensions) for the year in
which you made the contributions.
Additional Tax on Early Distributions
If you receive a distribution that is not a qualified distribution,
you may have to pay the 10% additional tax on early distributions as
explained in the following paragraphs.
Distributions of conversion contributions within 5-year
period.
If, within the 5-year period starting with the year in which you
made a conversion contribution of an amount from a traditional IRA to
a Roth IRA, you take a distribution from a Roth IRA of an amount
attributable to the portion of the conversion contribution that you
had to include in income, you generally must pay the 10% additional
tax on early distributions. (See Ordering Rules for
Distributions, later, to determine the amount, if any, of the
distribution that is attributable to the conversion contribution.) The
5-year period is separately determined for each conversion
contribution.
Unless one of the exceptions listed later applies, you must pay the
additional tax on the portion of the distribution attributable to the
part of the conversion contribution that you had to include in income
because of the conversion.
The 10% additional tax applies as though you must include the
amount in gross income in the year of the distribution, even if you
had included it in income in an earlier year (such as in the year of
the conversion). You also must pay the additional tax on any portion
of the distribution attributable to earnings on contributions. See
Example 2, later.
Other early distributions.
Unless one of the exceptions listed below applies, you must pay the
10% additional tax on early distributions on the taxable part of any
distributions that are not qualified distributions.
Exceptions.
You may not have to pay the 10% additional tax on early
distributions in the following situations.
- You have reached age 59 1/2.
- You are disabled.
- You are the beneficiary of a deceased IRA owner.
- You use the distribution to pay certain qualified first-time
homebuyer amounts.
- The distributions are part of a series of substantially
equal payments.
- You have significant unreimbursed medical expenses.
- You are paying medical insurance premiums after losing your
job.
- The distributions are not more than qualified higher
education expenses.
- The distribution is due to an IRS levy of the qualified
plan.
Withdrawals of contributions by due date.
You can withdraw contributions tax free by the due date of your
return for the year in which you made the contributions. If you have
an extension of time to file your return, you can withdraw them tax
free by the extended due date. You can do this only if you also
withdraw any interest or other income earned on the contributions.
You must include in income any earnings on the contributions you
withdraw. Include the earnings in income for the year in which you
made the withdrawn contributions. See Excess Contributions
in chapter 1.
Ordering Rules for Distributions
If you receive a distribution from your Roth IRA that is not
a qualified distribution, part of it may be taxable. For
purposes of determining the correct tax treatment of distributions
(other than the withdrawal of excess contributions and the earnings on
them, discussed earlier), there is a set order in which contributions
(including conversion contributions) and earnings are considered to be
distributed from your Roth IRA. The order of distributions is as
follows.
- Regular contributions.
- Conversion contributions, on a first-in-first-out basis
(generally, total conversions from the earliest year first). See
Aggregation (grouping and adding) rules, later. These
conversion contributions are taken into account as follows:
- Taxable portion (the amount required to be
included in gross income because of conversion) first, and then
the
- Nontaxable portion.
- Earnings on contributions.
Rollover contributions from other Roth IRAs are disregarded for
this purpose.
Aggregation (grouping and adding) rules.
To determine the taxable amounts distributed (withdrawn),
distributions and contributions are grouped and added together as
follows.
- All distributions from all your Roth IRAs during the year
are added together.
- All regular contributions made during and for the year
(contributions made after the close of the year, but before the due
date of your return) are added together. This total is added to the
total undistributed regular contributions made in prior years.
- All conversion contributions made during the year are added
together. For purposes of the ordering rules, in the case of any
conversion in which the conversion distribution is made in 2000 and
the conversion contribution is made in 2001, the conversion
contribution is treated as contributed prior to other conversion
contributions made in 2001.
Any recharacterized contributions that end up in a Roth IRA are
added to the appropriate contribution group for the year that the
original contribution would have been taken into account if it had
been made directly to the Roth IRA.
Any recharacterized contribution that ends up in an IRA other than
a Roth IRA is disregarded for the purpose of grouping (aggregating)
both contributions and distributions. Any amount withdrawn to correct
an excess contribution (including the earnings withdrawn) is also
disregarded for this purpose.
How Do I Figure the Taxable Part?
To figure the taxable part of a distribution that is not
a qualified distribution, complete the following worksheet.
Worksheet
To Figure the Taxable Part of a Distribution
(That is Not a Qualified Distribution)
From a Roth IRA
Caution. If you converted
amounts from a traditional IRA in 1998 and you are including the
taxable part ratably over a 4-year period, do not use this
worksheet. Instead, see Distributions from Roth IRAs
earlier under How To Treat 1998 Conversions, and
Examples, later, for information on how to determine the
amount to include in income. |
1) |
Enter the total of all distributions made
from your Roth IRA(s) during the year |
$ |
2) |
Enter the amount of qualified distributions
made during the year |
|
3) |
Subtract line 2 from line 1 |
|
4) |
Enter the amount of distributions made during
the year to correct excess contributions made during the year. (Do not
include earnings.) |
|
5) |
Subtract line 4 from line 3 |
|
6) |
Enter the amount of distributions made during
the year that were contributed to another Roth IRA in a qualified
rollover contribution |
|
7) |
Subtract line 6 from line 5 |
|
8) |
Enter the amount of all prior
distributions from your Roth IRA(s) (whether or not they were
qualified distributions) |
|
9) |
Add lines 1 and 8 |
|
10) |
Enter the amount of the distributions
included on line 8 that were previously includible in your income |
|
11) |
Subtract line 10 from line 9 |
|
12) |
Enter the total of all your contributions to
all of your Roth IRAs |
|
13) |
Enter the total of all distributions made
(this year and in prior years) to correct excess contributions.
(Include earnings.) |
|
14) |
Subtract line 13 from line 12. (Do not enter
less
than 0.) |
|
15) |
Subtract line 14 from line 11. (Do not enter
less
than 0.) |
|
16) |
Enter the smaller of the amount on line 7 or
the amount on line 15. This is the taxable part of your
distribution |
$ |
Examples
The following examples illustrate the rules affecting the tax
treatment of distributions from Roth IRAs.
Example 1.
On October 15, 1998, Justin converted all $80,000 in his
traditional IRA to his Roth IRA. His Forms 8606 from prior years show
that $20,000 of the amount converted is his basis.
Because of the conversion, Justin must include $60,000 ($80,000
minus $20,000) in his gross income. He did not elect to report all the
income in 1998, so the income is spread ratably over 4 years.
For 1999, Justin must include $15,000 ($60,000 divided by 4) in his
gross income.
On February 23, 1999, Justin makes a regular contribution of $2,000
to a Roth IRA. On November 7, 1999, Justin takes a $5,000 distribution
from his Roth IRA.
The first $2,000 of the distribution is a return of Justin's
regular contribution and is not includible in his income.
The next $3,000 of the distribution is includible in income because
of the special early inclusion rule for conversion contributions that
are distributed during the 4-year spread period. The $3,000 is added
to the $15,000 of conversion income that is includible in his income
for 1999 under the 4-year rule.
Justin must report $18,000 as taxable IRA distributions on his
return for 1999.
Because the $3,000 is distributed before the end of the 5-year
period, it is subject to the 10% additional tax on early distributions
that applies to distributions of conversion contributions.
Justin must file Form 5329 with his return to report the early
distribution and figure the additional tax or claim an exception, if
one applies.
Example 2.
The facts are the same as in Example 1, except that
Justin makes a $2,000 regular contribution to his Roth IRA in each
year, 1999 through 2002, and does not take any distributions in 1999
through 2001.
On February 14, 2002, Justin takes an $85,000 distribution from his
IRA.
The first $8,000 of the distribution is a return of his regular
contributions (the total of his regular contributions in each year
1999 through 2002). This amount is returned tax free.
The next $60,000 is a return of the conversion contribution made in
1998 that was includible in income in 1998, 1999, 2000, and 2001. This
amount is not includible in income in 2002.
The remaining $17,000 is a return of the conversion contribution
made in 1998 that was not includible in income because it was part of
his basis. This amount is returned tax free.
Although none of the distribution is includible in income, the
$60,000 of conversion contributions withdrawn is subject to the 10%
early distribution tax, unless an exception to that tax applies. The
tax is applied as though the $60,000 is includible in income in the
year of the distribution. This is because the conversion contribution
that was includible in income is distributed within the 5-year period
beginning with the year of the conversion contribution (1998). In this
case, the additional tax is $6,000.
Although Justin has no income to report from the distribution, he
must file Form 5329 to report the additional tax.
Example 3.
Assume the same facts as in Example 2, except that there
is no distribution in 2002. Instead, the entire $170,000 balance in
Justin's Roth IRA is distributed to him in 2004. The balance includes
all contributions made to the IRA and the earnings on those
contributions ($90,000 of contributions and $80,000 of earnings).
Because Justin is not age 59 1/2 or disabled and the
distribution will not be used to buy a first home, the distribution is
not a qualified distribution.
The first $10,000 of the distribution is treated as a return of his
regular contributions ($2,000 in each year 1999 through 2003). This
amount is returned tax free.
The next $60,000 is a return of the conversion contribution made in
1998 that was includible in income in 1998, 1999, 2000, and 2001. This
amount is not includible in income.
The next $20,000 is a return of the conversion contribution made in
1998 that was not includible in income in 2004. This amount is
returned tax free.
The last $80,000 distributed is the earnings on the contributions.
This amount must be included in Justin's gross income for 2004 and is
subject to the 10% additional tax on early distributions unless an
exception applies.
Am I required to take distributions when I reach age 70 1/2?
You are not required to take distributions from your Roth IRA at
any age. The minimum distribution rules that apply to traditional IRAs
do not apply to Roth IRAs while the owner is alive. However, after the
death of a Roth IRA owner, certain of the minimum distribution rules
that apply to traditional IRAs also apply to Roth IRAs.
Can I use my Roth IRA to satisfy minimum distribution
requirements for traditional IRAs?
No. Nor can you use distributions from traditional IRAs for
required distributions from Roth IRAs. See Distributions to
beneficiaries, later.
Distributions After Owner's Death
If a Roth IRA owner dies, the minimum distribution rules that apply
to traditional IRAs apply to Roth IRAs as though the Roth IRA owner
died before his or her required beginning date. See When Can I
Withdraw or Use IRA Assets? in chapter 1.
Distributions to beneficiaries.
Generally, the entire interest in the Roth IRA must be distributed
by the end of the fifth calendar year after the year of the owner's
death unless the interest is payable to a designated beneficiary over
the life or life expectancy of the designated beneficiary. (See
Beneficiaries under When Must I Withdraw IRA Assets?
(Required Distributions) in chapter 1.)
If paid as an annuity,
it must be payable over a period not greater than the designated
beneficiary's life expectancy and distributions must begin before the
end of the calendar year following the year of death. Distributions
from another Roth IRA cannot be substituted for these distributions
unless the other Roth IRA was inherited from the same decedent.
If the sole beneficiary is the spouse, he or she can either delay
distributions until the decedent would have reached age 70 1/2, or treat the Roth IRA as his or her own.
Aggregation with other Roth IRAs.
A beneficiary can aggregate an inherited Roth IRA with another Roth
IRA maintained by the beneficiary only if the beneficiary either
inherited the other Roth IRA from the same decedent, or was the spouse
of the decedent and the sole beneficiary of the Roth IRA and elects to
treat it as his or her own IRA.
Distributions that are not qualified distributions.
If a distribution to a beneficiary does not satisfy the
requirements for a qualified distribution, it is generally includible
in the beneficiary's gross income in the same manner as it would have
been included in the owner's income had it been distributed to the IRA
owner when he or she was alive.
If the owner of a Roth IRA who is including the conversion of a
1998 distribution under the 4-year rule dies before all amounts are
included in gross income, all remaining amounts are included in the
IRA owner's gross income for the year of death. Consequently,
beneficiaries generally receive distributions of conversion
contributions tax free, provided the distributions are made after the
end of the 5-year period discussed under What Are Qualified
Distributions?, earlier. To determine the 5-year period, count
the time the Roth IRA was held by the owner and the beneficiary. There
is a special rule if the spouse is the sole beneficiary of the IRA.
See Death of Roth IRA owner during 4-year period under
Can I Move Amounts Into a Roth IRA?, earlier.
If the owner of a Roth IRA dies prior to the end of the 5-year
period discussed earlier under What Distributions Are Not
Qualified Distributions?, or the 5-year period starting with the
year of a conversion contribution, each type of contribution is
divided among multiple beneficiaries according to the pro-rata share
of each. See Ordering Rules for Distributions, earlier.
Example.
When Ms. Hubbard dies in 2000, her Roth IRA contains regular
contributions of $4,000, a conversion contribution of $10,000 that was
made in 1998, and earnings of $2,000. No distributions had been made
from her IRA. She had no basis and did not elect to pay the tax on the
entire conversion contribution in 1998.
When she established her IRA, she named each of her 4 children as
equal beneficiaries. Each child will receive one-fourth of each type
of contribution and one-fourth of the earnings. An immediate
distribution of $4,000 to each child will be treated as $1,000 from
regular contributions, $2,500 from conversion contributions, and $500
from earnings.
In this case, because the distributions are made before the end of
the 5-year period, each beneficiary includes $500 in income for 2000.
The 10% additional tax on early distributions does not apply because
the distribution was made to the beneficiaries as a result of the
death of the IRA owner.
The amounts not previously included in Ms. Hubbard's gross income
under the 4-year rule are included in gross income on her final
return.
Basis of distributed amounts.
The basis of property distributed from a Roth IRA is its fair
market value (FMV) on the date of distribution, whether or not the
distribution is a qualified distribution.
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