Will Roth IRA Withdrawals Be Taxed in the Future?

Backdoor Roth IRAs dodged a bullet in 2022

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Roth individual retirement accounts (IRAs) have long been a popular retirement investment strategy due to their many tax advantages. Investments held within a Roth can grow tax free, and taxpayers aren’t forced to begin taking required minimum distributions (RMDs) before they want or need the money. But these accounts do come with some limitations.

Key Takeaways

  • Federal Build Back Better legislation threatened to eliminate the ability to convert traditional IRA retirement savings into a Roth IRA for high income earners, but this provision didn't pass.
  • The Build Back Better Act was revised and ultimately passed as the Inflation Reduction Act in August 2022 and the revised legislation did not include a prohibition of these "backdoor" IRA conversions.
  • Roth IRA contributions aren’t tax deductible, but you can withdraw the money tax free in retirement.
  • Earnings on Roth IRA contributions can be tax free, too, if the distributions are considered “qualified.”
  • Penalty taxes can apply if you contribute too much or take early distributions from a Roth IRA.

The Tax Benefits of Roth IRAs

Roth IRAs might not seem so great at first glance because you can claim a tax deduction for retirement savings contributions that you make as you can with a traditional IRA. You must pay taxes on the money you contribute in the year you save it to your Roth. But this earns you some nice tax perks further down the line. 

You can take that money back tax free in retirement because you already paid income tax on it when you made the contributions. Better yet, all the growth and income resulting from that money can be tax free as well, if you meet certain rules that aren’t that prohibitive. You don’t have to begin taking out the money and paying taxes on it when you reach a certain age, as is the case with traditional IRAs.


The (Internal Revenue Service (IRS) already has the money it would collect on your Roth contributions because you paid taxes on the money at the time you saved it to your Roth IRA. You won't be taxed twice on this money when you take withdrawals.

When Do You Pay Taxes on Roth IRA Withdrawals? 

The Internal Revenue Code (IRC) does include a good many rules and limits that can affect the tax-free treatment of Roth IRA earnings. First, your withdrawals must be “qualified” in order to escape taxation. 

The Tax on Nonqualified Withdrawals  

A withdrawal is considered qualified if at least five years have passed since you first contributed to your Roth IRA, and at least one more circumstance must exist:

  • You take the money after you’ve reached age 59½,
  • You withdraw up to $10,000 for a first-time home purchase,
  • You become disabled, or
  • The money passes to a beneficiary in the event of your death.


Roth IRA earnings become taxable if they’re nonqualified because these rules aren’t met, although the money that represents your original contributions is not taxed upon withdrawal.

You’ll also be charged a 10% tax penalty on the amount of the withdrawal if you’re younger than age 59½ unless you meet at least one of several other circumstances. Many of these can also apply to ordinary taxation of the Roth IRA’s earnings:

  • The distribution is taken in equal payments spread out over the course of your life expectancy,
  • You’ve been receiving unemployment compensation for at least 12 consecutive weeks and you use the money to pay for health insurance premiums,
  • You use the money for qualified higher education expenses,
  • The distribution is taken due to your disability or death, or
  • You take up to $10,000 for a qualified first-time home purchase. This amount is a lifetime limit. 

Withdrawals that qualify as reservist distributions can dodge the tax penalty bullet as well. 


Always speak with a tax professional before taking a withdrawal before age 59½. These rules can be complicated, and they don’t cover every possible scenario. 

The Excise Penalty Tax on Excess Contributions  

A 6% tax penalty will apply if you contribute more money to your IRAs than you’re entitled to save during any given tax year. Contribution limits are $6,000 per year as of 2022, or $7,000 if you’re over age 50, increasing to $6,500 or $7,500 in 2023. These limits apply to all your IRA contributions added together if you contribute to more than one account in the same year.

You have a short window of time to correct the situation if this happens to you. You can withdraw the money and any earnings on the contribution by the due date for your tax return for that year. This deadline includes any extensions of time that you might ask for to file your return.

Modified Adjusted Gross Income (MAGI) Limits

Your modified adjusted gross income (MAGI) must be below certain thresholds to contribute the full $6,000 or $7,000 to your accounts annually. These thresholds are set by filing status. 

You’re limited to a MAGI of less than $129,000 in 2022 if you’re single, head of household, or a married taxpayer filing a separate return, provided that you didn’t live with your spouse at any time during the tax year. You can contribute a lesser portion if your income falls between $129,000 and $143,999. You can’t contribute at all if your MAGI is $144,000 or more. 


The MAGI income limits increase to $138,000 in 2023 because they're indexed to accommodate inflation. You can contribute a lesser portion if your income falls between $139,000 and $152,999, and you can't contribute at all if your MAGI is $153,000 or more.

These limits increase if you’re married and filing a joint return, or if you’re a qualifying widow(er). They decrease to $10,000 if you’re married and filing a separate return and you lived with your spouse at any time during the tax year.

The "Backdoor" Roth IRA

“Backdoor” Roth IRAs can work around the problem of MAGI limits. You can make a nondeductible contribution to a traditional IRA that isn’t subject to any income limits, then transfer or convert that money into a Roth account, even if you earn more than the Roth IRA MAGI limit for your filing status.

This earns you those Roth IRA tax perks on your money and its growth when you take distributions, although you would have to pay income tax on any earnings realized between the time you make the initial contribution to a traditional IRA and the date of the conversion.

Congress lifted the income restrictions for Roth IRA conversions in 2010, although they still apply to contributions. The Tax Cuts and Jobs Act (TCJA) continued to allow this workaround when that law went into effect in 2018. The Build Back Better Act, introduced in 2021, proposed to eliminate this strategy from the tax code, at least for wealthy taxpayers. But this provision was eliminated when the Act was scaled back and passed as the Inflation Reduction Act in August 2022.

Frequently Asked Questions (FAQs) 

How do you pay tax penalties on a Roth IRA?

The additional 10% tax penalty for early Roth IRA withdrawals is reported on IRS Form 5329 and on Schedule 2, both of which must accompany your tax return when you file it. The 6% penalty on excess contributions is also reportable on Form 5329. Roth IRA contributions and qualified distributions aren’t otherwise tax deductible or taxable, so you would not have to report those transactions to the IRS on your returns. 

Are Roth contributions eligible for the Saver's Tax Credit?

Contributions made to a Roth IRA are eligible for the Saver’s Tax Credit, even though they’re not tax deductible at the time you make them. The credit is equal to 10%, 20%, or 50% of the amount of your contributions, depending on your adjusted gross income. But the income limits for the Saver’s Credit are relatively low, ranging from $20,500 to $34,000 in tax year 2022 if you’re single or you're married and filing a separate return, and $30,750 to $51,000 for heads of household. Married taxpayers filing jointly can make $41,000 to $68,000. These thresholds are also indexed for inflation and increase in 2023 by about $2,000 respectively.

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  2. U.S. Treasury Department. “Summary of Key Roth IRA Features.

  3. IRS. “Retirement Topics - IRA Contribution Limits.”

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