By Andy Ives, CFP®, AIF®
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Within the 400-page Ed Slott advisor training manual, we include a basic chart that outlines the Roth IRA distribution ordering rules and the availability of those specific dollars. When presenting the material to a live audience, I always say it is my favorite page. Those in the crowd usually joke and ask incredulously, “You have a favorite page in this book?”
Yes. For such a simple graph, I think it will get a person through 95% of all Roth IRA distribution questions (and that percentage might be low). In fact, I keep the chart on my computer desktop and have shared it with so many people I lost count. The Slott Report format precludes me from sharing the actual chart, but I can share the words on it. Some key items I always mention during our training programs before discussing the chart:
- Remember – the IRS views ALL of a person’s Roth IRAs as one big bucket of money. It does not matter how many Roth IRAs you maintain.
- This is only applicable to Roth IRAs. These ordering rules do not consider any Roth dollars a person may have in a 401(k) nor does it factor in any inherited Roth IRAs.
- Pay particular attention to the “OR” and “AND” words. These little words make a big difference as to availability of the Roth IRA funds.
- When taking a distribution from a Roth IRA, this is the order in which the dollars come out, 1 through 3. You cannot access your converted dollars until the contributions have been depleted, and you cannot access any earnings until both the contributions and conversions are gone.
Keep it simple.
And now, the words on my favorite chart…
Roth IRA Distribution Ordering Rules
1. Contributions. No tax. No penalty.
2. Conversions. No tax. No penalty if distributed after 5 years OR distributed after age 59 ½.
3. Earnings. No tax or penalty if distributed after 5 years AND 59 ½.