Roth IRA LLC Distribution Rule in Year the Owner Turns age 59 1/2

QUESTION:  

I turn 59 1/2 on on October 17 of this year. I’ve had my Roth IRA LLC for over 5 years now. I now want to distribute the earning is my Roth IRA LLC without being subject to taxes and the 10% early distribution penalty.  Do I have to wait until I turn 59 1/2 this October before I can escape taxes and penalties on the Roth IRA earnings?

ANSWER: 

First, keep in mind that distributions of cash from Roth IRA LLCs have to be processed directly from the Roth IRA not the LLC. Therefore, make sure to return funds to the Roth IRA from the Roth IRA owned LLC prior to making the cash distribution so that the Roth IRA custodian performs the necessary distribution reporting using Form 1099-R.

While the distribution of Roth IRA basis (i.e., the contributions) are always tax and penalty free regardless of of the IRA owners age (i.e., even if you are under age 59 1/2),  the distribution must satisfy the “qualified” distribution rules in order for the gains / earnings  not to be subject to both taxes and the 10% early distribution penalty.

 What is a Qualified Roth IRA Distribution?

A distribution is qualified if the Roth IRA owner satisfies two conditions. First, the Roth IRA owner must meet a five‑year waiting period for distributions. This period begins on the first day of the taxable year
(January 1 for most taxpayers) for which the Roth IRA owner makes his first Roth IRA contribution

The second condition is that the IRA owner meet one of the following
penalty tax exceptions .
• Age 59½ or older
• Disability
• Death
• First-time homebuyer

To finish answering your question, while you have already satisfied the 5 year requirement (i.e., yo have had the Roth IRA for 5 years), you wont satisfy the second requirement (i.e., age 59 1/2) until October 17 of this year.  As such, any distribution or earnings that you distribute from the Roth IRA prior to October 17 of this year will be subject to both ordinary income taxes and the 10% early distribution penalty.

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About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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