John M. Hoffman & Associates CPAs

Frequently Asked Tax Questions

Individual Retirement Accounts – IRAs

ROTH IRA:

"What rules must I follow to make the income my ROTH earns free of tax?"

To be a qualified distribution from a ROTH (which gets you tax free and penalty free distributions from the ROTH), you must satisfy a five year holding period. The five year holding period starts in the tax year following the first year for which a ROTH contribution is made and ends the 1st day of the year following that five year period, AND, the distribution must satisfy one of the following 4 (only 1 required):

  1. Made on or after the ROTH account owner reaches age 59 and ½.

  2. Payable to a beneficiary following the death of the ROTH account holder.

  3. Attributable to the account owner becoming disabled.

  4. A distribution that qualifies as a first time home buyer distribution (limited to $10,000).

 

"What happens if I need to get at the money in my ROTH account early?"

Rule # 1 is that distributions are always first considered to be a return of your contributions. There is no tax consequence to taking your contributions out of a ROTH IRA. You can always get at that money. For that reason, stashing money for college savings in a ROTH is not a bad thing as when you need the money for college, you can withdraw all of the contributions tax free and let the income stay in the IRA and continue to grow tax free.

If you draw down beyond your contributions, and start withdrawing income, and your distribution is not a “qualified distribution”, your withdrawal may be subject to a 10% early withdrawal penalty (unless you meet one of those criteria such as payment of higher education or medical expenses), as well as being includable in your taxable income.