Drawdown Requirements for a Roth IRA

The Internal Revenue Service has made individual retirement accounts attractive vehicles to save for your golden years with a bevy of tax breaks. But those perks come with a web or rules, restrictions and requirements. One rule that many investors don't think about during the savings years is the minimum required distributions mandated by the IRS after age 70 1/2. Uncle Sam wants to get back all that tax-deferred money you've been socking away all the years.

Roth Drawdowns

Good news: The minimum distributions do not apply to your Roth IRA. That's because contributions are not tax deductible. In essence, you've already paid tax on the cash you've put into the account, so the IRS won't force you to start taking money out until you want to. As long as you're over age 59 ½ and the assets have been in your account for more than five years, you won't pay a penny of tax on the distributions from your Roth IRA.

Inherited Roth IRA

If you're the beneficiary of a Roth IRA, you may face a mandatory distribution. Spouse beneficiaries can roll the inherited IRA into their own accounts and ward off mandatory drawdowns. Nonspouse beneficiaries can convert the inherited account into their own Roth, but they face taxes on the amount converted unless they have been in the original account for more than five years. Or you can choose to take a full distribution of the account balance starting in the year following inheritance and based on the IRS Single Life Expectancy Tables.

Traditional Distribution Requirements

Those original tax-free contributions come at a price, which is required minimum distributions once the IRA owner reaches age 70 ½. All traditional IRA distributions are taxable at the owner's tax bracket in the year of distribution. The minimum requirements are calculated based on life expectancy. If you don't take the distribution the IRS will penalize you with up to a 50 percent excise tax on the undistributed amounts. Of course, you can withdraw more if you like, but you need to take a percentage out each year.

Reporting Distributions

Use Form 8606 (Nondeductible IRAs) to report Roth IRA distributions. If any portion of your distribution is taxable, it should be noted on the 1099 you receive in the year following the distribution. If you have distributions that were in the account for fewer than five years, they are taxable. All traditional IRA distributions are taxable, unless some of the original contributions were nondeductible due to income limitations. Calculate the taxable portion on Form 8606.

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About the Author

Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.

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