How is the taxability of distributions from a Roth IRA determined?

The taxability of distributions from a Roth IRA is primarily determined by the type of distribution—whether it is qualified or nonqualified. A qualified distribution from a Roth IRA is defined as one that is made after a five-year holding period and when the account holder is at least 59½ years old, disabled, or deceased. Qualified distributions are not subject to federal income tax, making them completely tax-free for the account holder.

In contrast, nonqualified distributions can be subject to taxes and potentially penalties. These include withdrawals of earnings before the five-year period or below the age threshold, which can result in income tax on earnings and an additional 10% early withdrawal penalty unless certain exceptions apply.

While age, contribution types, and the duration the account has been open can influence other aspects of Roth IRA handling, the immediate factor affecting the tax treatment of a distribution is whether it meets the criteria for being qualified or nonqualified. This is why understanding the nature of the distribution is crucial for taxability considerations.