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Are there restrictions on making withdrawals from a Roth IRA?
Yes and no. You are free to make withdrawals at any time from your Roth IRA, but only qualified distributions receive tax-free treatment. A qualified distribution is not subject to federal income tax or a 10% early distribution penalty. See “Tax Considerations,” above.
If your withdrawal is nonqualified, the portion of such distribution that represents investment earnings is subject to federal income tax and may also be subject to the 10% early distribution penalty if you are under age 59½ (unless an exception applies). However, the portion that represents your Roth IRA contributions is not subject to tax or penalty as those dollars have been taxed once already.
In 2024, you establish your first Roth IRA and you contribute $7,000 in after-tax dollars. You make no further contribution to the Roth IRA. Two years later, your Roth IRA has grown to $7,300. You withdraw the entire $7,300. Because you withdrew the funds within five tax years, your withdrawal does not meet the requirements for a qualified distribution. You already paid tax on the $7,000 you contributed, so that portion of your withdrawal is not taxed or penalized. However, the $300 that represents investment earnings is subject to tax and possibly the 10% early distribution penalty (unless an exception applies).
Distributions from Roth IRAs are generally treated as being made from your nontaxable contributions first and earnings last (see ordering rules below). In the previous example, if you withdrew only $7,000 (leaving $300 in the Roth IRA), the withdrawal would be tax-free (and penalty-free) since the entire amount would be considered a return of your contributions.
Can you roll over funds to a Roth IRA?
Yes. Funds can be rolled over or converted from a traditional IRA, from another Roth IRA, from a Roth 401(k), 403(b), or 457(b) plan, or from a non-Roth 401(k), 403(b), or 457(b) plan.
These rules generally apply to IRA owners during their lifetimes. Special rules apply to spouse and nonspouse beneficiaries.
Funds in one Roth IRA can be rolled over tax free to another Roth IRA. This can be done as a direct transfer of funds from one Roth IRA trustee or custodian to another, or you can have the funds distributed to you and then roll them over to the new Roth IRA trustee or custodian yourself. If you choose the latter method and fail to complete the rollover within 60 days (from the date you received the funds), you may be subject to tax and penalty on the investment earnings portion of the funds (unless you qualify for tax-free withdrawals from the Roth IRA).
You can make only one tax-free, 60-day, rollover from one IRA to another IRA in any one-year period no matter how many IRAs (traditional, Roth, SEP, and SIMPLE) you own. This does not apply to direct (trustee-to-trustee) transfers, or Roth IRA conversions.
Funds can also be rolled over tax-free from a Roth 401(k), Roth 403(b, or 457(b) account to a Roth IRA. You can roll over an eligible distribution from a Roth 401(k)/403(b)/457(b) account even if you would not otherwise be able to make regular or conversion contributions to a Roth IRA because of income limits. If the distribution from the Roth 401(k)/403(b)/457(b) account is a tax-free qualified distribution, then the entire amount of the rollover is treated as part of your basis in the Roth IRA. If the distribution from the Roth 401(k)/403(b)/457(b) account is nonqualified, then only the nontaxable portion of the distribution (representing your Roth contributions) is treated as part of your basis in the Roth IRA, and the taxable portion is treated as earnings. Rollovers can be either direct or 60-day rollovers.
Separate five-year holding periods generally apply to (a) all Roth IRAs you own, and (b) each Roth 401(k)/403(b)/457(b) designated Roth account you own. A rollover from a Roth 401(k)/403(b)/457(b) account does not affect your Roth IRAs’ five-year holding period, regardless of how long the dollars rolled over resided in the 401(k)/403(b)/457(b) plan.
You cannot make a rollover from a Roth IRA to a Roth 401(k)/403(b)/457(b) account.
Funds can also be rolled over, or “converted,” from a traditional IRA to a Roth IRA. The amount rolled over/converted will be subject to federal income tax in the year of the conversion, except for the portion that represents any nondeductible (after-tax) contributions you’ve made to the traditional IRA. The 10% early distribution penalty tax does not apply. (“Traditional IRA” for this purpose includes SEP IRAs, and SIMPLE IRAs after two years of participation.)
You can also roll over non-Roth funds from a 401(k) or other qualified plan, 403(b), or governmental 457(b) account to a Roth IRA. These rollovers are also sometimes referred to as “conversions.” This may be done either by means of a direct rollover, or an indirect (60-day) rollover. The taxable portion of your distribution from the 401(k). 403(b), or 457(b) plan will be included in your gross income in the year you make the rollover. The 10% early distribution penalty tax does not apply.
Certain distributions from IRAs and employer plans cannot be rolled over. These include (among others) required minimum distributions, certain periodic payments, hardship distributions, certain distributions of excess contributions and deferrals, and certain deemed distributions (for example, a loan treated as a distribution because it exceeded applicable limits).