Penalties of Roth IRA

This section of Roth IRAs information website discusses penalties associated with Roth IRAs. Roth IRA penalties are different from traditional IRA penalties and other IRA penalties. Roth IRA penalties are discussed below.

Do I pay a penalty if the Roth IRA is liquidated for a loss when I am younger than 59 ½ or has not held the account for five years or longer?

No.

Under Roth IRA rules, the Roth IRA distribution is generally treated as a return of non deductible Roth IRA contributions which are not subject to taxation when distributed.

However special Roth IRA penalties rules apply (and a tax may be due) if a  Roth IRA balance includes a conversion.

Do I pay a penalty if the Roth IRA contains conversion assets and it is liquidated for a Roth IRA loss within the five years from the Roth IRA conversion?

If Roth IRA conversion amounts from a traditional IRA are included in any Roth IRA distribution made within the five year period from the date of roth IRA conversion, the Roth IRA conversion amount will be subject to a 10% premature Roth IRA distribution tax penalty if you are under age 59 ½ and no other exception from the penalty tax applies.

Example:

Mr. Smith's Roth IRA contains $10,000 from the conversion of a traditional IRA. Mr. Smith, who is under 59½, liquidates the Roth IRA within the five year period from the date of Roth IRA conversion to take a loss. He will be subject to a penalty of $1,000 ($10,000 x .10 = $1,000).

The Roth IRA penalty is not reduced by the loss in the Roth IRA nor is the penalty reduced by any deduction to which he is entitled as a result of the loss in the Roth IRA After five calendar years, or if any penalty exceptions apply such as disability, death or if the client is 59 ½ or older, no 10% penalty tax will be imposed.