Roth IRA distributions are generally tax-free if certain conditions are met. Contributions to a Roth IRA are made with after-tax dollars, meaning you have already paid taxes on the money you contribute. As a result, when you withdraw funds from your Roth IRA, those distributions are typically not subject to federal income tax. This is one of the key advantages of a Roth IRA. However, it's important to note that there are specific rules and requirements that must be followed to ensure tax-free distributions.
To qualify for tax-free Roth IRA distributions, you must meet two main criteria:
1. Qualified Distribution: The distribution must be considered a qualified distribution. A qualified distribution is one that occurs at least five years after your first Roth IRA contribution and meets one of the following conditions:
- You are age 59½ or older.
- You become disabled.
- The distribution is made to your beneficiary after your death.
2. Roth IRA Contribution Basis: The distribution must come from your Roth IRA contribution basis. Your contribution basis is the total amount of money you have contributed to your Roth IRA over the years. This includes both regular contributions and any conversions from traditional IRAs or employer-sponsored retirement plans. Distributions from your contribution basis are always tax-free.
It's important to note that if you withdraw earnings from your Roth IRA before meeting the criteria for a qualified distribution, those earnings may be subject to taxes and penalties. Earnings are generally subject to income tax and a 10% early withdrawal penalty if withdrawn before age 59½. However, there are some exceptions to the early withdrawal penalty, such as using the funds for a first-time home purchase or qualified higher education expenses.
In summary, Roth IRA distributions are typically tax-free if certain conditions are met. Contributions to a Roth IRA are made with after-tax dollars, and as a result, qualified distributions from a Roth IRA are generally not subject to federal income tax. However, it's important to understand the specific rules and requirements to ensure tax-free distributions and avoid potential taxes and penalties on earnings withdrawn before meeting the criteria for a qualified distribution.