Are Distributions Taxable?(p69)

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering Rules for Distributions, later.

The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution.

If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
2. The payment or distribution is:
   1. Made on or after the date you reach age 591/2,
   2. Made because you are disabled (defined earlier),
   3. Made to a beneficiary or to your estate after your death, or
   4. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.

If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions, later, to determine the recapture amount, if any.

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions, earlier.

For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2012, and makes a regular contribution for 2011 on the same date, the 5-year period for the conversion begins January 1, 2012, while the 5-year period for the regular contribution begins on January 1, 2011.

Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.

You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions.

Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

You may not have to pay the 10% additional tax in the following situations.

• You have reached age 591/2.
• You are totally and permanently disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the distribution to buy, build, or rebuild a first home.
• The distributions are part of a series of substantially equal payments.
• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
• You are paying medical insurance premiums during a period of unemployment.
• The distributions are not more than your qualified higher education expenses.
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution.

Most of these exceptions are discussed earlier in chapter 1 under Early Distributions.

If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed earlier under What if You Contribute Too Much). Order the distributions as follows.

1. Regular contributions.
2. Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion and rollover contributions into account as follows:
   1. Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the
   2. Nontaxable portion.
3. Earnings on contributions.

Disregard rollover contributions from other Roth IRAs for this purpose.

Determine the taxable amounts distributed (withdrawn), distributions, and contributions by grouping and adding them together as follows.

• Add all distributions from all your Roth IRAs during the year together.
• Add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. Add this total to the total undistributed regular contributions made in prior years.
• Add all conversion and rollover contributions made during the year together. For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2012 and the conversion or rollover contribution is made in 2013, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2013.

Add any recharacterized contributions that end up in a Roth IRA to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA.

Disregard any recharacterized contribution that ends up in an IRA other than a Roth IRA for the purpose of grouping (aggregating) both contributions and distributions. Also disregard any amount withdrawn to correct an excess contribution (including the earnings withdrawn) for this purpose.

On October 15, 2008, Justin converted all $80,000 in his traditional IRA to his Roth IRA. His Forms 8606 from prior years show that $20,000 of the amount converted is his basis.

Justin included $60,000 ($80,000 − $20,000) in his gross income.

On February 23, 2012, Justin made a regular contribution of $5,000 to a Roth IRA. On November 8, 2012, at age 60, Justin took a $7,000 distribution from his Roth IRA.

The first $5,000 of the distribution is a return of Justin's regular contribution and is not includible in his income.

The next $2,000 of the distribution is not includible in income because it was included previously.

If you had an early distribution from your Roth IRAs in 2012, you must allocate the early distribution in two steps.

Step 1. You first allocate the amount on your 2012 Form 8606, line 19, to the amounts on the following two lines.

• Your 2012 Form 8606, line 20.
• Your 2012 Form 8606, line 22.

If the amounts on these two lines cover the entire amount of your early distribution, then you do not have a recapture amount.

Step 2. If your allocation in Step 1 does not cover the entire amount of your early distribution and you have not taken a distribution from your Roth IRAs before 2012, then continue allocating the remaining amount of the early distribution to the amounts you reported on the lines listed below, in the order shown, until you have covered the entire remaining amount of your early distribution.

If you have taken a distribution from your Roth IRAs prior to 2012, then continue allocating the remaining amount of your early distribution to the amounts you reported on the lines listed below, in the order shown; however, do not start at the beginning. Start instead with the first line that has not been used fully for a previous distribution.

• Your 1998 Form 8606, line 16.
• Your 1998 Form 8606, line 15.
• Your 1999 Form 8606, line 16.
• Your 1999 Form 8606, line 15.
• Your 2000 Form 8606, line 16.
• Your 2000 Form 8606, line 15.
• Your 2001 Form 8606, line 18.
• Your 2001 Form 8606, line 17.
• Your 2002 Form 8606, line 18.
• Your 2002 Form 8606, line 17.
• Your 2003 Form 8606, line 18.
• Your 2003 Form 8606, line 17.
• Your 2004 Form 8606, line 18.
• Your 2004 Form 8606, line 17.
• Your 2005 Form 8606, line 18.
• Your 2005 Form 8606, line 17.
• Your 2006 Form 8606, line 18.
• Your 2006 Form 8606, line 17.
• Your 2007 Form 8606, line 18.
• Your 2007 Form 8606, line 17.
• Your 2008 Form 8606, line 18.
• Your 2008 Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.*
• Your 2008 Form 8606, line 17.
• Your 2008 Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a.**
• Your 2009 Form 8606, line 18.
• Your 2009 Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.*
• Your 2009 Form 8606, line 17.
• Your 2009 Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a.**
• Your 2010 Form 8606, line 18.
• Your 2010 Form 8606, line 23.
• Your 2010 Form 8606, line 17.
• Your 2010 Form 8606, line 22.
• Your 2011 Form 8606, line 18.
• Your 2011 Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.*
• Your 2011 Form 8606, line 17.
• Your 2011 Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a.**
• Your 2012 Form 8606, line 18.
• Your 2012 Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.*
• Your 2012 Form 8606, line 17.
• Your 2012 Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a.**

*Only include those amounts rolled over to a Roth IRA.
**Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA.

Your recapture amount is the sum of the amounts you allocated to the following lines in this Step 2.

• Your 2008 through 2012 Forms 8606, line 18.
• Your 2008, 2009, 2011, and 2012 Forms 1040, line 16b; Forms 1040A, line 12b; and Forms 1040NR, line 17b.
• Your 2010 Form 8606, line 23.

If your allocation in Step 1 and Step 2 does not cover the entire amount of your early distribution, then you have allocated all of your basis in your Roth IRAs. The amount left to be allocated will be the amount you reported on line 25 of your 2012 Form 8606.

Include on line 1 of your 2012 Form 5329 the following three amounts.

• The amount you allocated to line 20 of your 2012 Form 8606 in Step 1.
• Your recapture amount in Step 2.
• The amount from your 2012 Form 8606, line 25.

Also, include any amount you allocated to line 20 of your 2012 Form 8606 in Step 1, earlier, on your 2012 Form 5329, line 2, and enter exception number 09.

To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III.