Roth IRA Distributions

Question 1

What are the two categories of Roth IRA distributions?

Answer 1

Qualified and non-qualified distributions

Question 2

What two requirements must be met for a Roth IRA distribution to be qualified?

Answer 2

The five-year rule (account open at least five tax years, starting January 1 of the first contribution/conversion year).

A triggering event (age 59½ or older, death, disability, or first-time home purchase up to $10,000 lifetime)

Question 3

Are taxes or penalties owed on a qualified Roth IRA distribution?

Answer 3

No-both are avoided

Question 4

When does the Roth IRA five-year clock start?

Answer 4

January 1 of the year of your first Roth IRA contribution or conversion

Question 5

Does the five-year rule apply separately to each Roth IRA?

Answer 5

No, it applies across all Roth IRAs owned by the individual

Question 6

List the four main triggering events for a qualified Roth IRA distribution.

Answer 6

Age 59½ or older

Death

Disability

First-time home purchase (up to $10,000 lifetime)

Question 7

In what order are Roth IRA withdrawals treated?

Answer 7

Contributions (always first)

Conversions (second)

Earnings (last)

Question 8

Are contributions ever taxed or penalized when withdrawn?

Answer 8

No, they are always tax- and penalty-free

Question 9

Are Roth IRA conversions taxed when withdrawn?

Answer 9

No, but if withdrawn within five years and under age 59½, a 10% penalty may apply unless an exception exists

Question 10

Does each Roth IRA conversion have its own five-year penalty clock?

Answer 10

Yes, each conversion starts a separate five-year period for penalty purposes.

Question 11

When are Roth IRA earnings tax- and penalty-free?

Answer 11

Only when both the five-year rule and a triggering event are met (qualified distribution)

Question 12

What happens to earnings in a non-qualified distribution?

Answer 12

They may be subject to income tax and a 10% penalty unless an exception applies

Question 13

List common exceptions to the 10% early withdrawal penalty on Roth IRA earnings.

Answer 13

Age 59½ or older

Death or disability

Substantially equal periodic payments (72(t))

Unreimbursed medical expenses >7.5% AGI

Health insurance premiums while unemployed

Qualified higher education expenses

First-time home purchase (up to $10,000)

IRS levy

Qualified birth or adoption ($5,000 limit)

Qualified disaster or recovery distributions

Question 14

What is the main difference between qualified and non-qualified Roth IRA distributions?

Answer 14

Qualified distributions are always tax- and penalty-free; non-qualified distributions may be taxed and/or penalized, but contributions are always tax/penalty-free.

Question 15

Individual is age 60, Roth IRA open 6 years: What is the tax/penalty treatment of a withdrawal?

Answer 15

Fully qualified-no tax or penalty

Question 16

Individual is age 58, Roth IRA open 4 years: Withdraws contributions and earnings. What is taxed/penalized?

Answer 16

Contributions: never taxed/penalized; earnings: taxable and penalized unless an exception applies

Question 17

An individual is age 55, Roth IRA open 6 years, uses funds for higher education. What is taxed/penalized?

Answer 17

Contributions: never taxed/penalized; earnings: taxable but penalty-free due to higher education exception

Question 18

What are the three most important Roth IRA distribution rules to memorize for the CFP exam?

Answer 18

The five-year rule and qualified distribution triggers

The ordering rules for withdrawals

The penalty exceptions for non-qualified distributions