Did you take a distribution from a Roth IRA during 2013? If so, you may not have been thinking about income tax consequences, as one often-touted benefit of Roth IRAs is tax-free distributions.
However, like most tax rules, there are exceptions. In some cases, when you distribute earnings from your Roth IRA you may have to pay income tax and/or a 10% penalty-tax. That can happen when you’re under age 59½ and you distribute the earnings within five years of making your first Roth contribution. Note that the earnings portion is what’s taxable in this situation, not the contributions you made.
This rule can also apply if you’re the beneficiary of a Roth and receive distributions from the account.
The five-year waiting period that applies to conversions may also make your Roth distributions taxable. When you’re under age 59½ and convert traditional IRA funds to a Roth, you generally have to wait five years (or until you reach age 59½, whichever comes first) before taking a distribution of the converted balance. Otherwise, the distribution may be subject to the 10% penalty tax. Note that when you make more than one conversion, this five-year rule applies separately to each.
Please give us a call to review distributions you intend to make or receive from IRAs or other retirement accounts. Don’t let unintended taxes surprise you.