What Are the Rules for a Qualified Roth Distribution?

A Roth retirement account, like a Roth IRA or Roth 401(k), is a savings plan funded with after-tax dollars, which allows future withdrawals in retirement to be free from federal income tax. A “distribution” is any withdrawal of money from the account, consisting of either original contributions or investment earnings. Whether a distribution is tax-free depends on if it meets the criteria to be considered “qualified.”

The Two Core Requirements for a Qualified Distribution

For a Roth IRA distribution to be qualified and tax-free, it must satisfy two conditions. The first is a five-year holding period, which starts on January 1 of the tax year for which the first contribution was made to any of your Roth IRAs. For instance, if you made your first Roth IRA contribution for the 2024 tax year on April 10, 2025, the five-year period started on January 1, 2024.

This single five-year clock applies to all of an individual’s Roth IRAs combined. Once met, the requirement is satisfied for any distribution from any Roth IRA you own. Funds converted from a traditional IRA to a Roth IRA are subject to their own five-year waiting period to avoid penalties on the converted amount. Each Roth 401(k) plan also has its own five-year clock, distinct from the Roth IRA clock.

In addition to the five-year holding period, the distribution must be for a specific qualifying reason. These reasons include:

• The account owner has reached age 59 ½.
• The account owner has become totally and permanently disabled, meaning they cannot perform any substantial gainful activity due to a physical or mental impairment.
• The distribution is made to a beneficiary or the owner’s estate after the account owner’s death.
• The withdrawal is for a first-time home purchase, with a lifetime maximum of $10,000 in earnings used to buy, build, or rebuild a home. The funds must be used within 120 days of withdrawal.

Tax Treatment of Distributions

When a distribution is qualified, the entire amount withdrawn is free from federal income tax and penalties. This tax-free treatment applies to both the original contributions and all investment earnings that have accumulated in the account.

If a distribution is non-qualified, its tax treatment follows specific IRS ordering rules. First, all direct contributions are considered withdrawn. Since contributions are made with after-tax money, this portion of the distribution is always returned tax-free and penalty-free.

After contributions are depleted, funds converted from traditional IRAs are withdrawn next. These are generally tax-free, but a 10% penalty can apply if withdrawn within five years of conversion by an owner under 59 ½. Investment earnings are withdrawn last and are subject to ordinary income tax and a 10% early withdrawal penalty if the owner is under 59 ½.

For example, imagine an individual under age 59 ½ with a Roth IRA held for three years, containing $20,000 in contributions and $5,000 in earnings. If they take a $22,000 non-qualified distribution, the first $20,000 is considered a return of their contributions and is completely tax-free and penalty-free. The remaining $2,000 is a withdrawal of earnings, which would be subject to both ordinary income tax and the 10% early withdrawal penalty.

Special Considerations for Beneficiaries

When an individual inherits a Roth IRA, the tax treatment depends on whether the distribution is qualified based on the original owner’s account. The five-year holding period is measured from when the deceased owner first contributed. If the original owner had already met the five-year rule, the beneficiary is also considered to have met it.

If the owner died before their five-year clock was complete, the beneficiary must wait until that original period is satisfied for earnings to be qualified. Even if the five-year rule is met, the distribution of earnings is only tax-free if the deceased owner had a qualifying reason for the distribution. A beneficiary can also take qualified distributions if they are disabled or use the funds for a first-time home purchase, up to the $10,000 lifetime limit.

The SECURE Act generally requires most non-spouse beneficiaries to withdraw all assets from an inherited IRA by the end of the tenth year following the owner’s death. A beneficiary subject to this 10-year rule does not have to take annual withdrawals and can allow the funds to grow tax-free for the entire period before withdrawing the full balance by the deadline.

Reporting Roth Distributions

When you take money from a Roth IRA, the financial institution reports it to you and the IRS on Form 1099-R. This form details the distribution amount and includes a code in Box 7 indicating the withdrawal’s nature. A ‘Q’ in Box 7 signifies the custodian believes the withdrawal is a qualified distribution.

Codes like ‘J’ or ‘T’ indicate a potentially taxable, non-qualified distribution. If you receive a distribution that is not fully qualified, you will need to file Form 8606 with your tax return to calculate the taxable portion of the withdrawal.

Part III of Form 8606 helps you apply the IRS ordering rules to determine the taxable amount. You must report your total basis in Roth IRA contributions on this form to correctly calculate any tax liability. You do not need to file Form 8606 for a fully qualified distribution.