The percentage tax rate on Roth individual retirement account withdrawals is zero, as long as you follow the rules. Roth IRAs are alternatives to traditional IRAs, in which withdrawals create taxable income. Tax rates, or the income they imply, figure into Roth IRAs in a few ways.
Roth IRA contributions are made with after-tax dollars. Because you’ve already paid income tax on this money, Roth contributions are not tax-deductible. If you are in a higher tax bracket, your modified adjusted gross income may reduce or eliminate your ability to make a Roth contribution. The Internal Revenue Service reduces Roth contributions for singles with a MAGI range of $112,000 to $127,000. For married couples, the MAGI range is $178,000 to $188,000. If your annual MAGI exceeds the upper value of your range, you cannot contribute any money to your Roth IRA for the tax year. Use Worksheet 2-1 and Table 2-1 from IRS Publication 590 to calculate your maximum Roth IRA contribution.
Roth Withdrawal Rules
You can withdraw Roth IRA contributions at any time tax-free. Unlike with traditional IRA rules, the IRS never forces you to take required minimum distributions from a Roth. Your earnings qualify for tax-free withdrawals if you meet two requirements: You must be at least 59 1/2 years old, and your Roth IRA must have been open at least five years. The IRS grants exemptions from the age requirement if the withdrawal is because of disability, death or used to buy your first home.
Taxes on Nonqualified Withdrawals
Nonqualified withdrawals from your Roth IRA create ordinary taxable income at your marginal tax rate. This is the tax rate on the "last dollar" you earn during the year. You may also have to pay a 10 percent penalty on nonqualified withdrawals. According to IRS Publication 590, the exemptions to the penalty include reaching 59 1/2, having a permanent disability and being the beneficiary of a deceased IRA owner. Exemptions also include buying your first home, taking substantially equal periodic payments, having high medical costs, paying medical insurance premiums while unemployed, paying qualified higher educational expenses and being a qualified military reservist making the withdrawal.
You may own a traditional IRA, and it might contain nondeductible contributions, which form the accounts cost basis. If you roll your traditional IRA into a Roth, you create no taxable income on the basis amount when withdrawn from either IRA. Use IRS Form 8606 to calculate the part of your Roth IRA conversion that creates taxable income.
- Comstock/Comstock/Getty Images