How do I figure out the tax owed on an early withdrawal from a Roth IRA?
Good question. If you do a conversion, your Roth IRA can include money from (1) your annual after-tax contributions (2) contributions from one or more converted regular IRAs, and (3) earnings on both types of contributions. To figure out what happens when you later take Roth account withdrawals, you need “ordering rules.” Withdrawals are treated as coming first from your annual after-tax contributions. As advertised, this layer of money can always be taken out tax-free at any time. Beyond this easy-to-understand rule, be careful. The next layer comes from contributions of converted traditional IRA money. Withdrawals come first from the taxable amount, then from the nontaxable amount (if any). You’ll generally owe a 10% penalty if you withdraw the taxable part of a conversion contribution within five years of the conversion. Withdrawals after age 59 1/2 are excepted, and the other exceptions to the 10% premature withdrawal penalty (death, disability, etc.) apply as well. The good news:
Good question. If you do a conversion, your Roth IRA can include money from (1) your annual after-tax contributions (2) contributions from one or more converted regular IRAs, and (3) earnings on both types of contributions. To figure out what happens when you later take Roth account withdrawals, you need “ordering rules.
