Amy Walls of Thimbleberry Financial likes to talk about “rainy” and “sunny” times when it comes to personal finance.  Taking distributions from a Roth account can be one of the sunny times, if you follow the rules.

First we recap the ways we can contribute to a Roth IRA. They are:

• Contributions – annual contribution put directly into a Roth IRA. Directly is the key word here. 
• Conversions – This is money put into a traditional IRA, or 401(k) or 403(b) and then converted into a Roth. There are two types:
• Pre-tax: an employer plan that is rolled over into a Traditional IRA or Rollover IRA that is later CONVERTED to a Roth IRA.
• Non-Taxable Conversion: This is the strategy we’ve talked about before that is often referred to as a Back-Door Roth. Contributions are made after-tax to an IRA, and then CONVERTED to a Roth IRA.
• Rollover of a designated Roth account – This is when your employer allows you to
• Contribute after-tax money to your 401k or 403b as a Roth designated contribution. Not all employers do this.
• Earnings: This is growth on the money inside the account.

Now we can look at the ways in which money is distributed out of a Roth account, keeping in mind the acronym  “Real Tacos Can Not Contain Eggplant.”

Assets are distributed in the following order:

1. Regular Roth IRA participant contributions, includes rollovers of directly contributed Roth 401(k) and 403b dollars.

2.Taxable Conversion and rollover amounts- Pre-tax IRA contributions or an old employer plan that is converted.

3.Non-taxable Conversion and rollover amounts – After-tax IRA contributions and internal 401k conversions (Mega backdoor Roth)

4.Earning on Roth assets- Growth.

For illustrative purposes, Amy gives an example of these. Here it is, laid out.

Sara opened a Roth IRA in March 2019 and makes contributions for 2018 and 2019. The 2018 contribution treats the account as if it were opened on January 1, 2018. In 2019 she converted a $35,000 Traditional IRA to a Roth IRA. Sara is 57 years old at the end of 2020. The account contains:

• $15,000 in contributions for 2018, 2019, and 2020.
• $30,000 taxable traditional IRA coversions from 2019.
• $5000 of non-taxable Roth IRA conversions from 2019.
• $5000 in earnings.
• $55,000 TOTAL

Let’s say Sara wants to take a $52,000 distribution.

• Sara can take up to $15,000 without taxes and penalties.
• The next $30,000 that is from taxable traditional IRA conversions will not be subject to income tax, but will be subject to the 10% penalty. This is because she paid tax on the conversion.
• The next $5000 of non-taxable Roth conversions are not subject to taxes or penalties as the conversion was a non-taxable event.
• The last $2000 is from earnings will be subject to income tax and early distribution penalty of 10%. The penalties and taxes are because she is tot 59.5 and the account has not been open 5 years.

The rules around Roth accounts are not always easy to understand.  Hiring a professional like Amy can go a long way.  You can find her online at (

or give her a call at 503-610-6510….(read more)

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Real Tacos Can Not Contain Eggplant – A Guide to Roth Distributions

When it comes to Roth distributions, it’s important to know what you’re getting into. The rules can be complex, but with the right guidance, you can navigate the process confidently. In this article, we’ll break down the essentials of Roth distributions and provide a detailed guide to help you make informed decisions.

First off, what exactly is a Roth distribution? A Roth distribution refers to taking money out of a Roth IRA or Roth 401(k) account. Unlike traditional retirement accounts, Roth accounts are funded with after-tax dollars, which means that qualified distributions are tax-free. This is a major benefit for individuals looking to minimize their tax burden in retirement.

To qualify for tax-free distributions, the account holder must meet certain conditions. The account must have been open for at least five years, and the individual must be at least 59 ½ years old. Additionally, any withdrawals must be for qualified reasons, such as a first-time home purchase or disability. If these conditions are not met, the distributions may be subject to taxes and penalties.

One important thing to note is that Roth distributions are composed of both contributions and earnings. Contributions are the after-tax funds that have been deposited into the account, while earnings are the investment gains that have accumulated over time. When taking a distribution, contributions are always tax-free, but the tax treatment of earnings depends on the account holder’s situation.

If you’ve had your Roth account for at least five years and are 59 ½ or older, then both contributions and earnings can be withdrawn tax-free. However, if the account is younger than five years, or you’re under 59 ½, then only contributions can be taken out without incurring taxes or penalties. It’s essential to keep this in mind when planning your distributions to avoid unexpected tax consequences.

Another consideration to keep in mind is the ordering rules for Roth distributions. When withdrawing funds from a Roth account, the IRS requires that contributions be withdrawn first, followed by conversion amounts, and finally, earnings. This order is important because it can impact the tax treatment of the distributions. If earnings are withdrawn before contributions and conversion amounts, they may be subject to taxes and penalties.

In summary, a Roth distribution allows individuals to take tax-free withdrawals from their Roth IRA or Roth 401(k) accounts under certain conditions. It’s important to understand the rules and requirements for distributions to avoid unnecessary taxes and penalties. By following the guidelines outlined in this article, you can make informed decisions about your Roth distributions and maximize the benefits of your retirement accounts. Remember, real tacos cannot contain eggplant, and Roth distributions should not contain unexpected taxes or penalties.