Roth IRAs allow tax-free distributions to fund retirement. However, to help secure retirement savings and avoid premature raiding of Roth IRAs, Congress did not give them blanket exemption from taxes and penalties. Thus, there are times where distributions from Roth IRAs are subject to either or both ordinary income tax and/or the 10% early withdrawal penalty. The IRS and Treasury have issued regulations governing the rules of the road for Roth IRAs, which interpret the rules Congress wrote in IRC Section 408A.
A Few Introductory Notes Before We Get Started
The below post is different from many posts on FITaxGuy.com in two respects. First, my posts tend to be planning focused, though they often dive into tax rules, as a good understanding of the rules helps with planning. This post is almost entirely rules focused rather than planning focused.
Second, the primary audience for this post is tax and financial advisors (though I welcome both laymen and professionals reading and questioning the post). I have recently observed that professionals seem to be confused about the Roth IRA distribution rules. It’s time to lay out the rules with citations to the relevant governing regulations!
Below I lay out my breakdown of the rules with extensive citation to the regulations so you can see where I’m getting my assertions from. You get to be the judge and jury as to whether I have properly presented the relevant rule.
Now, back to the show. Per Treas. Reg. Section 1.408A-6 Q&A 1(a) “[t]he taxability of a distribution from a Roth IRA generally depends on whether or not the distribution is a qualified distribution.”
Roth IRA Qualified Distributions
A qualified distribution is not included in the Roth IRA’s owner’s gross income (Treas. Reg. Section 1.408A-6 Q&A 1(b)) and is thus tax free and penalty free (see Treas. Reg. Section 1.408A-6 Q&A 5(a)).
The way most distributions from a Roth IRA qualify as a “qualified distribution” is by satisfying the requirements that the owner (1) is age 59 ½ or older (see Treas. Reg. Section 1.408A-6 Q&A 1(b)(2)) and (2) has owned a Roth IRA for at least 5 years (see Treas. Reg. Section 1.408A-6 Q&A 1(b)(1)).
Once one qualifies for a qualified distribution by satisfying both the age 59 ½ requirement and the 5 year requirement, he or she no longer has any need to consider either of the two Roth IRA 5-year rules (the so-called 5-Year Conversion Clock and the so-called 5-Year Earnings Clock).
Roth IRA Nonqualified Distributions
Now we turn to the taxation of distributions that do not qualify as qualified distributions (what I colloquially refer to as “nonqualified distributions”). As a very general matter, the taxation of these distributions is mostly governed by Treas. Reg. Section 1.408A-6 Q&As 1, 4, 5, 8, and 9.
Ordering Rule
Treas. Reg. Section 1.408A-6 Q&A 8 provides an ordering rule for distributions from a Roth IRA. This creates three layers. Each layer must be fully withdrawn prior to a subsequent layer being accessed. See Treas. Reg. Section 1.408A-6 Q&A 8(a).
First, all annual contributions are withdrawn. Second, all previous Roth conversions are withdrawn (first in, first out). Third, earnings (growth) in the Roth IRA are withdrawn.
Tax Free Withdrawal of Owner Contributions (Both Annual Contributions and Roth Conversions)
Annual contributions and Roth conversions are “contributions” that are always withdrawn income tax free. See Treas. Reg. Section 1.408A-6 Q&A 1(b) (contributions always are withdrawn tax free), Q&A 8(a) (annual contributions and Roth conversions are both “contributions”).
Roth IRA annual contributions can be withdrawn at any time for any reason tax and penalty free! See Treas. Reg. Section 1.408A-6 Q&A 1(b) and Q&A 5(a).
5 Year Clock on Roth Conversions
However, the withdrawal of taxable Roth conversions can be subject to the 10% early withdrawal penalty. See Treas. Reg. Section 1.408A-6 Q&A 5(b) (see also IRC Section 408A(d)(3)(F)). This is only true if the Roth conversion is withdrawn within 5 years. See Treas. Reg. Section 1.408A-6 Q&A 5(b) (the 5-Year Conversion Clock).
Per Treas. Reg. Section 1.408A-6 Q&A 5(b), the exceptions to the 10% early withdrawal penalty also apply. The most prominent such exception is having attained the age of 59 ½. Thus, a distribution from a Roth IRA received by an owner at least 59 ½ years old will never be subject to the 10% early withdrawal penalty.
Roth Earnings
Nonqualified distributions of earnings are subject to ordinary income tax (see Treas. Reg. Section 1.408A-6 Q&A 4) and potentially the 10% early withdrawal penalty (see Treas. Reg. Section 1.408A-6 Q&A 5(a)). Generally speaking, if one is either under age 59 ½ years old (see Treas. Reg. Section 1.408A-6 Q&A 1(b)(2)) or if the owner has not owned a Roth IRA for at least 5 years (see Treas. Reg. Section 1.408A-6 Q&A 1(b)(1), the 5-Year Earnings Clock), any withdrawal of earnings will be subject to ordinary income tax. Further, if one receives a distribution of earnings prior to age 59 ½, they are generally subject to the 10% early withdrawal penalty, unless they qualify for another exception.
Note that as a practical matter, distributions of earnings received prior to turning age 59 ½ are rare since all previous annual contributions and Roth conversions must be withdrawn prior to a distribution being considered a distribution of earnings.
A Quick Note on Roth IRA Aggregation
For purposes of assessing the taxation of a distribution from a Roth IRA, one aggregates all of their Roth IRAs and treats them together as a single Roth IRA. See IRC Section 408A(d)(4), Treas. Reg. Section 1.408A-6 Q&A 9(a) and (b), and my YouTube video on the subject.
UPDATE October 30, 2023: I appreciate Andy Ives’s post on IRAHelp.com. He lays out very simply the Roth IRA Distribution rules at the end of this short post. His analysis agrees with mine.
Application to Fact Patterns
Having now covered the universe of the taxation of Roth IRA distributions (both qualified distributions and nonqualified distributions), let’s apply the rules to four examples.
Example 1: Jorge celebrates his 65th birthday in the year 2023. After his birthday party, he converted $40,000 of his traditional 401(k) to a Roth IRA. The conversion is fully taxable. This is the first time Jorge has owned any Roth IRA. On January 1, 2024, Jorge withdrew $25,000 from his Roth IRA. On January 1, 2025, Jorge withdrew $25,000 from his Roth IRA.
What results in 2024 and 2025?
Jorge, as of both 2024 and 2025, does not meet the criteria for taking a qualified distribution because he has not owned a Roth IRA for at least 5 years. Thus, he has a nonqualified distribution in both years.
In 2024, the $25,000 withdrawal of Roth conversions is income tax free (see Treas. Reg. Section 1.408A-6 Q&A 1(b)) and is penalty free because Jorge is older than age 59 ½. This demonstrates that the 5-Year Conversion Clock is irrelevant once one turns age 59 ½. Check out Jorge’s 2024 Form 8606 Part III here (pardon the use of the 2022 version, it’s the latest one available as of this writing).
In 2025, the first $15,000 of Jorge’s withdrawal is a return of Roth conversions and thus not subject to ordinary income tax. Further, this withdrawal is not subject to the 10% early withdrawal penalty. The second $10,000 Jorge withdrew is a nonqualified distribution of earnings. Jorge must pay ordinary income tax on those $10,000 (see Treas. Reg. Section 1.408A-6 Q&A 4). This withdrawal of earnings violates the 5-Year Earnings Clock and is thus subject to ordinary income tax. However, this withdrawal of earnings is not subject to the 10% early withdrawal penalty as Jorge is older than age 59 ½. Check out Jorge’s 2025 Form 8606 Part III here.
Example 2: Samantha celebrates her 45th birthday in the year 2023. After her birthday party, she converted $60,000 of her old traditional 401(k) to a Roth IRA. The conversion is fully taxable. This is the first time Samantha has owned any Roth IRA. On January 1, 2024, Samantha withdrew $25,000 from her Roth IRA. On January 1, 2025, Samantha withdrew $40,000 from her Roth IRA.
What results in 2024 and 2025?
Samantha, as of both 2024 and 2025, does not meet the criteria for taking a qualified distribution because she has not owned a Roth IRA for at least 5 years. Thus, she has a nonqualified distribution in both years.
In 2024, Samantha’s withdrawal is a return of Roth conversions and thus not subject to ordinary income tax. However, because the withdrawal is from Roth conversions younger than 5 years old, and Samantha is under age 59 ½, Samantha must pay the 10% early withdrawal penalty ($2,500) on the distribution (she violates the 5-Year Conversion Clock), unless an exception applies.
In 2025, the first $35,000 of Samantha’s withdrawal is a return of Roth conversions and thus not subject to ordinary income tax. However, because the withdrawal is from Roth conversions younger than 5 years old, Samantha must pay the 10% early withdrawal penalty ($3,500) on the distribution (she violates the 5-Year Conversion Clock), unless an exception applies.
The second $5,000 Samantha withdrew in 2025 is a nonqualified distribution of earnings. Samantha must pay ordinary income tax on those $5,000 (see Treas. Reg. Section 1.408A-6 Q&A 4) and generally must pay the 10% early withdrawal penalty ($500) on that $5,000 distribution of earnings, unless an exception applies.
Example 3: Ed celebrates his 65th birthday in the year 2023. After his birthday party, he converted $40,000 of his old traditional 401(k) to a Roth IRA. The conversion is fully taxable. Ed has owned a Roth IRA since 1998. On January 1, 2024, Ed withdrew $25,000 from his Roth IRA. On January 1, 2025, Ed withdrew $25,000 from his Roth IRA.
What results in 2024 and 2025?
Unlike Examples 1 & 2, we finally have a qualified distribution! Why? Ed has (i) owned a Roth IRA since 1998 (more than 5 years) and (ii) is over age 59 ½. Thus, the only type of distribution Ed can take from his Roth IRA is a qualified distribution. Per Treas. Reg. Section 1.408A-6 Q&A 1(b), a qualified distribution is tax free. Further, Ed cannot pay the early withdrawal penalty on a distribution from his Roth IRA as he is in his 60s (see also Treas. Reg. Section 1.408A-6 Q&A 5(a)). Thus, there is no tax and no penalty on either the 2024 distribution or the 2025 distribution.
Example 4: This example is based on my conversation with Brad Barrett on a recent episode of the ChooseFI podcast. Jonathan turns age 57 on July 1, 2023. He’s never had a Roth IRA. On July 1, 2023, he converted $50,000 from a traditional IRA to a Roth IRA. The conversion is fully taxable.
What withdrawal constraints does Jonathan have on his Roth IRA?
If Jonathan withdraws up to $50,000 from his Roth IRA prior to turning age 59 ½ on January 1, 2026, Jonathan will have to pay the 10% early withdrawal penalty as he violates the 5-Year Conversion Clock (unless an exception applies).
If Jonathan cumulatively withdraws amounts in excess of $50,000 from his Roth IRA prior to turning age 59 ½, he will pay ordinary income tax on the withdrawal of those earnings (as he violates the 5-Year Earnings Clock) and he will pay the 10% early withdrawal penalty (unless an exception applies).
From January 1, 2026 through December 31, 2027, if Jonathan cumulatively withdraws amounts in excess of $50,000 from his Roth IRA, he will pay ordinary income tax on the withdrawal of those earnings (as he violates the 5-Year Earnings Clock). However, Jonathan will not pay the 10% early withdrawal penalty. Starting on January 1, 2028, Jonathan satisfies the 5-Year Earnings Clock (see Treas. Reg. Section 1.408A-6 Q&A 2) and is now permanently able to take a qualified distribution from his Roth IRA going forward.
Example 5: Denzel celebrates his 35th birthday in the year 2023. After his birthday party, he contributed $6,500 to a traditional IRA on July 1, 2023. He cannot deduct the contribution based on his income level. On August 2, 2023, at a time the traditional IRA was worth $6,502, he converted the entire traditional IRA to a Roth IRA, completing a Backdoor Roth IRA. This is the first time Denzel has owned any Roth IRA. He owned no traditional IRAs, SEP IRAs, and/or SIMPLE IRAs on December 31, 2023. Denzel reported $2 of taxable income on his 2023 tax return due to the Backdoor Roth IRA.
On January 16, 2024, Denzel withdrew $3,000 from his Roth IRA and made no contributions to his Roth IRA during 2024.
What results in 2024?
Denzel, as of 2024, does not meet the criteria for taking a qualified distribution because he has not owned a Roth IRA for at least 5 years. Thus, he has a nonqualified distribution in 2024.
Pursuant to Treas. Reg. Section 1.408A-6 Q&A 8(b), the taxable portion of the Roth conversion ($2 out of $6,502) comes out first. That $2 is subject to the 10% early withdrawal penalty (a $0.20 penalty which rounds down to $0) since he violates the 5-Year Conversion Clock, unless an exception applies. This $2 constitutes what I colloquially refer to as a micro layer inside the Roth IRA: for 5 years it is subject to the 10% early withdrawal penalty if withdrawn (unless an exception applies).
However, the $2 recovery of the taxable Roth conversion is not subject to ordinary income tax. See Treas. Reg. Section 1.408A-6 Q&A 1(b).
Second, the $2,998 nontaxable portion of the Roth conversion is distributed out. This nonqualified distribution is subject to neither ordinary income tax nor the 10% early withdrawal penalty. See Treas. Reg. Section 1.408A-6 Q&A 1(b), 5(a), and 5(b). Check out Denzel’s 2024 Form 8606 Part III here.
There is some confusion on this latter result. Treas. Reg. Section 1.408A-6 Q&A 4 provides that only once all of the owner’s previous “contributions” have been withdrawn are nonqualified Roth IRA distributions subject to ordinary income tax. For this purpose, it is clear from reading Treas. Reg. Section 1.408A-6 Q&A 8(a) that “contributions” include both “annual contributions” and “Roth conversions.” See also Treas. Reg. Section 1.408A-6 Q&A 5(b) providing that the 10% early withdrawal penalty does not hit withdrawals of nontaxable converted amounts (“For purposes of applying the tax, only the amount of the conversion contribution includible in gross income as a result of the conversion is taken into account.”). Thus, the nontaxable portion of a Backdoor Roth IRA can be recovered tax and penalty free at any time for any reason.
Other than the minor potential Backdoor Roth IRA micro layer issue, a Backdoor Roth IRA could, in theory, serve as an emergency fund (though generally we want to plan for long term Roth IRA tax-free growth).
Roth IRA Distributions Summary Chart
| Type of Distribution | Ordinary Income Tax | 10% Early Withdrawal Penalty | Notes |
| Qualified Distribution | Never | Never | Main way to qualify: attain age 59 ½ and own Roth IRA for 5 years. |
| NQ Return of Annual Contributions | Never | Never | Comes out prior to returns of conversions and earnings. |
| NQ Return of Roth Conversions | Never | Can apply. Applies if the taxable conversion is less than 5 years old and the owner is under age 59 ½ (though exceptions can apply). | Come out “FIFO” (first-in, first out). |
| NQ Distribution of Earnings | Always | Yes, if the owner is under age 59 ½ (though exceptions can apply). | Come out only if all prior annual contributions and conversions have been withdrawn. |
Exceptions to the 59 ½ Year Age Requirement
It is possible to qualify for a qualified distribution if one is younger than 59 ½ years of age. It happens if (1) the 5-Year Earnings Clock is satisfied and (2) the Roth IRA owner (i) is using the money for a first-time home purchase (limit of $10,000), or (ii) is disabled, or (iii) has died. See Treas. Reg. Section 1.408A-6 Q&A 1(b)(2). Outside of the owner’s death, these situations are rare.
Resources
Notice this post cites the to regulation and occasionally the Internal Revenue Code. That’s because they are the law of land! The Code is the primary law of the land, but it tends to be written in a manner inaccessible to most laymen and difficult for many professionals to understand. The regulations interpret the Code. While not an elementary school level read, Treas. Reg. Section 1.408A-6 is much more comprehensible than the Code. The regulation’s question and answer format makes it much easier to digest.
IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), is an IRS publication. As such it is (i) informative and (ii) not binding authority on either the IRS or on taxpayers. Please understand both when using an IRS publication. I will note that Publication 590-B has an excellent flowchart (Figure 2-1) which can be used to help determine if a distribution from a Roth IRA is a qualified distribution.
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This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.
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