A Roth IRA is a personal savings account that serves two purposes. It can be used as both a retirement financial planning tool and a savings account. The Roth IRA can provide you with tax benefits and tax advantages unlike other types of IRA accounts. Distribution tax rules are stipulated by the Internal Revenue Service (IRS). Failure to comply with these rules may result in punitive damages.
Tax-Free Distribution Tax Rule
One of the appealing factors about a Roth IRA is the fact that it can provide you with tax-free income in certain situations. The IRS says that when you receive a distribution that is a return of your total contribution, it is considered tax-free. The distribution does not need to be included in the income you use for preparing your federal income tax return. Another tax-free situation occurs whenever you rollover your tax-free Roth IRA into another tax-free Roth IRA.
Qualified Distributions Tax Rule
The IRS states that in order to receive proper Roth IRA tax treatment, your distributions must be meet the criteria of what is termed a "qualified distribution." A qualified distribution is defined by the IRS as any stipulated distribution or payment from your Roth IRA. To be considered as qualified, your distribution must be made after you have reached the age of 59-1/2, made because you are considered disabled and/or made to your estate or beneficiary after your death. Another Roth IRA distribution tax rule states that in order to be qualified, the distribution must be made later than five years after you make your first contribution into the Roth account says the IRS.
Nonqualified Distributions Tax Rule
There is a Roth IRA distribution tax rule stating that if your distribution is not considered a qualified one, it will be classified as nonqualified. In this case, part of your distribution may be taxable for Roth IRA purposes. The IRS says that you must follow a pre-determined set order to calculate how much is taxable for income tax purposes. First, you need to deduct any regular contributions you made to your Roth IRA from the distribution amount you received. The next step involves deducting any contributions that were based upon conversions (both nontaxable and taxable portions) and rollovers. If there is any distribution amount left, the final step involves deducting any earnings that you received from contributions. According to the IRS, any excess is taxable. Any nonqualified distribution will usually be assessed a 10 percent additional tax.
Minimum Distribution Tax Rule
Unlike the traditional IRAs, a Roth IRA does not have any minimum distribution tax rules. This applies, however, only when the owner of the Roth IRA is still alive. After the death of the Roth owner, many of the distribution tax rules that apply to a traditional IRA also apply to a Roth IRA says IRA Publication 590 (Individual Retirement Arrangements (IRAs).
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