3713.02 / How can a taxpayer’s Roth IRA savings be impacted by divorce?

Typically, all withdrawals from a Roth IRA are taken on a tax-free basis. That includes both contributions and earnings on those contributions because the account owner pays taxes on the contributions before they are contributed.

However, the distribution must be a “qualified distribution” for the earnings on after-tax contributions to receive tax-free treatment. A distribution is only “qualified” if it is taken after the five-year period beginning with the first tax year that the owner opened the Roth IRA and made a contribution to the account. This is known as the “five-year rule.”

Distributions that are taken within five years of the date the account is opened will be subject to ordinary income tax to the extent that those distributions represent earnings on after-tax contributions. In other words, the contributions themselves will not be subject to tax a second time. The distribution could, of course, be subject to the 10 percent early withdrawal penalty if the client is not yet 59 ½ (unless another exception to the penalty applies).