What happens if I take an early or “nonqualified” distribution from my Roth IRA?

When you take money from your Roth IRA, it comes out in a certain order. The Roth IRA ordering rules dictate that the first dollars to leave your Roth IRA are any regular contributions that you’ve made. These always come out tax- and penalty-free, whether the distribution is qualified or nonqualified.

The next dollars distributed are any conversion or qualified plan rollover assets (amounts that you converted from your Traditional IRA or rolled over from an employer-sponsored retirement plan), in the order you converted them or rolled them over (by year). These amounts may be subject to early distribution penalty taxes, depending on when the conversion or rollover took place, and whether you have a penalty tax exception. Each conversion and rollover has its own five-year period. Each five-year period must be met to avoid an early distribution penalty tax on a nonqualified distribution.

Once your conversions and rollovers are exhausted, your earnings will come out next. When you remove earnings in a nonqualified distribution, the earnings will be taxed and are subject to the early distribution penalty tax, unless you meet a penalty tax exception.

If you have more than one Roth IRA, the contribution assets, conversion assets, and earnings in all of your Roth IRAs are aggregated for purposes of these ordering rules. For example, John owns two Roth IRAs and each one contains $5,000 in contributions ($10,000 total), $2,000 in conversion amounts ($4,000 total), and $500 in earnings ($1,000 total). He wants to take a $13,000 distribution. That distribution is made up of $10,000 in contribution dollars and $3,000 of conversion dollars. The next time he takes a distribution, the first money to come out will be from the remaining conversion dollars, assuming that he does not make any more contributions to either of his Roth IRAs.

You must track the assets in your Roth IRA for purposes of the ordering rules and you must complete the appropriate IRS tax forms to file and pay any taxes due with your income tax return.