More Questions on Roth IRAs


Recent columns have generated follow up questions from readers:
Readers Question: In last Sunday’s column, you stated that Roth IRA withdrawals are taxable if withdrawn within 5 years of the date of the first contribution. I believe it is only the earnings that are taxable if withdrawn in this timeframe – the contributions can be withdrawn at any point without being subject to taxes since those contributions were made with after-tax dollars. Am I mistaken in my understanding of this? S.M.
Answer: You are correct and it reminds me of the movie, “It’s Complicated”. It’s important to know that the rules differ depending on whether we’re talking about a contributory Roth IRA or a conversion Roth IRA. For a contributory Roth, non-qualified distributions potentially subject you to ordinary income taxes and a 10% federal penalty on the earnings. Non-qualified distributions include:
  1. Any distribution made within 5 years of the first day of the calendar year in which the original Roth IRA account was opened.
  2. Distributions made before the Roth owner turns age 59½.
There are a number of exceptions of which the most notable include:
  1. The distribution is being used to buy your first home ($10,000 maximum withdrawal).
  2. The distribution is due to you being disabled.
  3. You are the beneficiary of the deceased owner or the Roth IRA.
If that’s not complicated enough, there are ‘ordering rules’ that relate to partial distributions which state that, for tax purposes, the first money taken out is considered to be your non-deductible contributions. For example, we had a case where the client needed funds from her contributory Roth IRA for home repairs. She was not yet age 59½. Her partial withdrawal did not exceed her non-deductible contributions so it was not subject either income taxes or the 10% penalty. These ordering rules mean that distributions up to the amount of your contributions can be taken out without penalty or taxes at any time. 
With a conversion Roth IRA the penalty rules are a bit different. If you take a distribution within 5 years of the conversion, the 10% federal penalty applies to the portion of the distribution that you had to include in income (called the recapture amount). Also, a new 5-year period begins with each conversion.
When considering Roth IRAs, conversions to Roth IRAs or distributions from Roth IRAs, I urge you to meet with your tax or financial advisor.
Reader Question: Great article on improving your credit score. I pulled mine for the first time. Wow! I have 17 open accounts (all credit cards). Isn’t that too many? All are paid off. For example, I could get 6-months interest free at the tire store if I opened and used the store card. I was offered similar deals from stores where I bought my computer, washer and dryer and other retail purchases. My credit report was good with no negatives. Still, should I close some of these old accounts? A.S.
Answer: At, they recommended not closing multiple accounts because that reduced your overall credit limit and would, in effect, reduce the ratio of credit to usage while a report from the Federal Reserve said having too many credit cards could hurt your score. Perhaps the best suggestion is to create some activity in your dormant charge accounts from time to time, being sure to pay the balance off each month and close the ones where you rarely shop, not all at once, but over the next few years. Getting your free credit report was a great idea (; something everyone should do. If you’ll also order your credit score, the report will offer additional insights for improving your score. I ordered mine through where I received a 30-day free trial then pay $17 per month if I want them to continue to monitor my credit activity.