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Avoid the tax bite on early Roth payouts

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Q. My accountant says the five-year holding period for Roth IRAs doesn’t apply to my withdrawals. I am turning 65 this year. Is he correct about this? M.C.B., Naples, Fla.

A. Technically, no. But practically speaking, you may not owe any tax on a distribution. Here’s why: A qualified distribution, including those made to a taxpayer over age 59 1/2, is completely exempt from federal income tax if the Roth has existed for five years. Otherwise, non-qualified distributions are subject to tax under special ordering rules. Initially, you’re treated as receiving tax-free contributions before you receive any taxable earnings from the Roth. Therefore, you can avoid tax on early withdrawals by taking distributions only up to the amount of your contributions.

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