You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering Rules for Distributions, later.

What Are Qualified Distributions?

A qualified distribution is any payment or distribution from your Roth IRA made after the 5-taxable-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit if the payment or distribution is:

1. Made on or after the date you reach age 59 1/2,
2. Made because you are disabled,
3. Made to a beneficiary or to your estate after your death, or
4. One that meets the requirements listed under First home in chapter 1 (up to a $10,000 lifetime limit).

What Distributions Are Not Qualified Distributions?

A distribution is not a qualified distribution if it is:

1. Made within the 5-year period beginning with the first year for which either a regular or a conversion contribution was made to a Roth IRA set up for your benefit.
2. Made after the 5-year period described in (1), but you do not meet any of the following requirements.
   1. You have not reached age 59 1/2.
   2. You are not disabled.
   3. The distribution is not made to a beneficiary or to your estate after your death.
   4. You do not use the distribution to pay certain qualified first-time homebuyer amounts. (See First home under When Can I Withdraw or Use IRA Assets? in chapter 1.)
3. The withdrawal of contributions and earnings on or before the due date of your return (including extensions) for the year in which you made the contributions.

Additional Tax on Early Distributions

If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.

Distributions of conversion contributions within 5-year period. If, within the 5-year period starting with the year in which you made a conversion contribution of an amount from a traditional IRA to a Roth IRA, you take a distribution from a Roth IRA of an amount attributable to the portion of the conversion contribution that you had to include in income, you generally must pay the 10% additional tax on early distributions. (See Ordering Rules for Distributions, later, to determine the amount, if any, of the distribution that is attributable to the conversion contribution.) The 5-year period is separately determined for each conversion contribution.

Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion contribution that you had to include in income because of the conversion.

The 10% additional tax applies as though you must include the amount in gross income in the year of the distribution, even if you had included it in income in an earlier year (such as in the year of the conversion). You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions. See Example 2, later.

Other early distributions. Unless one of the exceptions listed below applies, you must pay the 10% additional tax on early distributions on the taxable part of any distributions that are not qualified distributions.

Exceptions. You may not have to pay the 10% additional tax on early distributions in the following situations.

• You have reached age 59 1/2.
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the distribution to pay certain qualified first-time homebuyer amounts.
• The distributions are part of a series of substantially equal payments.
• You have significant unreimbursed medical expenses.
• You are paying medical insurance premiums after losing your job.
• The distributions are not more than qualified higher education expenses.
• The distribution is due to an IRS levy of the qualified plan.

Withdrawals of contributions by due date. You can withdraw contributions tax free by the due date of your return for the year in which you made the contributions. If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. You can do this only if you also withdraw any interest or other income earned on the contributions.

You must include in income any earnings on the contributions you withdraw. Include the earnings in income for the year in which you made the withdrawn contributions. See Excess Contributions in chapter 1.

Ordering Rules for Distributions

If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. For purposes of determining the correct tax treatment of distributions (other than the withdrawal of excess contributions and the earnings on them, discussed earlier), there is a set order in which contributions (including conversion contributions) and earnings are considered to be distributed from your Roth IRA. The order of distributions is as follows.

1. Regular contributions.
2. Conversion contributions, on a first-in-first-out basis (generally, total conversions from the earliest year first). See Aggregation (grouping and adding) rules, later. These conversion contributions are taken into account as follows:
   1. Taxable portion (the amount required to be included in gross income because of conversion) first, and then the
   2. Nontaxable portion.
3. Earnings on contributions.

Rollover contributions from other Roth IRAs are disregarded for this purpose.

Aggregation (grouping and adding) rules. To determine the taxable amounts distributed (withdrawn), distributions and contributions are grouped and added together as follows.

1. All distributions from all your Roth IRAs during the year are added together.
2. All regular contributions made during and for the year (contributions made after the close of the year, but before the due date of your return) are added together. This total is added to the total undistributed regular contributions made in prior years.
3. All conversion contributions made during the year are added together. For purposes of the ordering rules, in the case of any conversion in which the conversion distribution is made in 2000 and the conversion contribution is made in 2001, the conversion contribution is treated as contributed prior to other conversion contributions made in 2001.

Any recharacterized contributions that end up in a Roth IRA are added to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA.

Any recharacterized contribution that ends up in an IRA other than a Roth IRA is disregarded for the purpose of grouping (aggregating) both contributions and distributions. Any amount withdrawn to correct an excess contribution (including the earnings withdrawn) is also disregarded for this purpose.

How Do I Figure the Taxable Part?

To figure the taxable part of a distribution that is not a qualified distribution, complete the following worksheet.

Worksheet
To Figure the Taxable Part of a Distribution
(That is Not a Qualified Distribution)
From a Roth IRA

Caution. If you converted amounts from a traditional IRA in 1998 and you are including the taxable part ratably over a 4-year period, do not use this worksheet. Instead, see Distributions from Roth IRAs earlier under How To Treat 1998 Conversions, and Examples, later, for information on how to determine the amount to include in income.
1)	Enter the total of all distributions made from your Roth IRA(s) during the year			$
2)	Enter the amount of qualified distributions made during the year
3)	Subtract line 2 from line 1
4)	Enter the amount of distributions made during the year to correct excess contributions made during the year. (Do not include earnings.)
5)	Subtract line 4 from line 3
6)	Enter the amount of distributions made during the year that were contributed to another Roth IRA in a qualified rollover contribution
7)	Subtract line 6 from line 5
8)	Enter the amount of all prior distributions from your Roth IRA(s) (whether or not they were qualified distributions)
9)	Add lines 1 and 8
10)	Enter the amount of the distributions included on line 8 that were previously includible in your income
11)	Subtract line 10 from line 9
12)	Enter the total of all your contributions to all of your Roth IRAs
13)	Enter the total of all distributions made (this year and in prior years) to correct excess contributions. (Include earnings.)
14)	Subtract line 13 from line 12. (Do not enter less than 0.)
15)	Subtract line 14 from line 11. (Do not enter less than 0.)
16)	Enter the smaller of the amount on line 7 or the amount on line 15. This is the taxable part of your distribution			$

Examples

The following examples illustrate the rules affecting the tax treatment of distributions from Roth IRAs.

Example 1. On October 15, 1998, Justin converted all $80,000 in his traditional IRA to his Roth IRA. His Forms 8606 from prior years show that $20,000 of the amount converted is his basis.

Because of the conversion, Justin must include $60,000 ($80,000 minus $20,000) in his gross income. He did not elect to report all the income in 1998, so the income is spread ratably over 4 years.

For 1999, Justin must include $15,000 ($60,000 divided by 4) in his gross income.

On February 23, 1999, Justin makes a regular contribution of $2,000 to a Roth IRA. On November 7, 1999, Justin takes a $5,000 distribution from his Roth IRA.

The first $2,000 of the distribution is a return of Justin's regular contribution and is not includible in his income.

The next $3,000 of the distribution is includible in income because of the special early inclusion rule for conversion contributions that are distributed during the 4-year spread period. The $3,000 is added to the $15,000 of conversion income that is includible in his income for 1999 under the 4-year rule.

Justin must report $18,000 as taxable IRA distributions on his return for 1999.

Because the $3,000 is distributed before the end of the 5-year period, it is subject to the 10% additional tax on early distributions that applies to distributions of conversion contributions.

Justin must file Form 5329 with his return to report the early distribution and figure the additional tax or claim an exception, if one applies.

Example 2. The facts are the same as in Example 1, except that Justin makes a $2,000 regular contribution to his Roth IRA in each year, 1999 through 2002, and does not take any distributions in 1999 through 2001.

On February 14, 2002, Justin takes an $85,000 distribution from his IRA.

The first $8,000 of the distribution is a return of his regular contributions (the total of his regular contributions in each year 1999 through 2002). This amount is returned tax free.

The next $60,000 is a return of the conversion contribution made in 1998 that was includible in income in 1998, 1999, 2000, and 2001. This amount is not includible in income in 2002.

The remaining $17,000 is a return of the conversion contribution made in 1998 that was not includible in income because it was part of his basis. This amount is returned tax free.

Although none of the distribution is includible in income, the $60,000 of conversion contributions withdrawn is subject to the 10% early distribution tax, unless an exception to that tax applies. The tax is applied as though the $60,000 is includible in income in the year of the distribution. This is because the conversion contribution that was includible in income is distributed within the 5-year period beginning with the year of the conversion contribution (1998). In this case, the additional tax is $6,000.

Although Justin has no income to report from the distribution, he must file Form 5329 to report the additional tax.

Example 3. Assume the same facts as in Example 2, except that there is no distribution in 2002. Instead, the entire $170,000 balance in Justin's Roth IRA is distributed to him in 2004. The balance includes all contributions made to the IRA and the earnings on those contributions ($90,000 of contributions and $80,000 of earnings).

Because Justin is not age 59 1/2 or disabled and the distribution will not be used to buy a first home, the distribution is not a qualified distribution.

The first $10,000 of the distribution is treated as a return of his regular contributions ($2,000 in each year 1999 through 2003). This amount is returned tax free.

The next $60,000 is a return of the conversion contribution made in 1998 that was includible in income in 1998, 1999, 2000, and 2001. This amount is not includible in income.

The next $20,000 is a return of the conversion contribution made in 1998 that was not includible in income in 2004. This amount is returned tax free.

The last $80,000 distributed is the earnings on the contributions. This amount must be included in Justin's gross income for 2004 and is subject to the 10% additional tax on early distributions unless an exception applies.

Am I required to take distributions when I reach age 70 1/2? You are not required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs.

Can I use my Roth IRA to satisfy minimum distribution requirements for traditional IRAs? No. Nor can you use distributions from traditional IRAs for required distributions from Roth IRAs. See Distributions to beneficiaries, later.

Distributions After Owner's Death

If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. See When Can I Withdraw or Use IRA Assets? in chapter 1.

Distributions to beneficiaries. Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. (See Beneficiaries under When Must I Withdraw IRA Assets? (Required Distributions) in chapter 1.) If paid as an annuity, it must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.

If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70 1/2, or treat the Roth IRA as his or her own.

Aggregation with other Roth IRAs. A beneficiary can aggregate an inherited Roth IRA with another Roth IRA maintained by the beneficiary only if the beneficiary either inherited the other Roth IRA from the same decedent, or was the spouse of the decedent and the sole beneficiary of the Roth IRA and elects to treat it as his or her own IRA.

Distributions that are not qualified distributions. If a distribution to a beneficiary does not satisfy the requirements for a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive.

If the owner of a Roth IRA who is including the conversion of a 1998 distribution under the 4-year rule dies before all amounts are included in gross income, all remaining amounts are included in the IRA owner's gross income for the year of death. Consequently, beneficiaries generally receive distributions of conversion contributions tax free, provided the distributions are made after the end of the 5-year period discussed under What Are Qualified Distributions?, earlier. To determine the 5-year period, count the time the Roth IRA was held by the owner and the beneficiary. There is a special rule if the spouse is the sole beneficiary of the IRA. See Death of Roth IRA owner during 4-year period under Can I Move Amounts Into a Roth IRA?, earlier.

If the owner of a Roth IRA dies prior to the end of the 5-year period discussed earlier under What Distributions Are Not Qualified Distributions?, or the 5-year period starting with the year of a conversion contribution, each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. See Ordering Rules for Distributions, earlier.

Example. When Ms. Hubbard dies in 2000, her Roth IRA contains regular contributions of $4,000, a conversion contribution of $10,000 that was made in 1998, and earnings of $2,000. No distributions had been made from her IRA. She had no basis and did not elect to pay the tax on the entire conversion contribution in 1998.

When she established her IRA, she named each of her 4 children as equal beneficiaries. Each child will receive one-fourth of each type of contribution and one-fourth of the earnings. An immediate distribution of $4,000 to each child will be treated as $1,000 from regular contributions, $2,500 from conversion contributions, and $500 from earnings.

In this case, because the distributions are made before the end of the 5-year period, each beneficiary includes $500 in income for 2000. The 10% additional tax on early distributions does not apply because the distribution was made to the beneficiaries as a result of the death of the IRA owner.

The amounts not previously included in Ms. Hubbard's gross income under the 4-year rule are included in gross income on her final return.

Basis of distributed amounts. The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution.

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