Distribution rules and taxation

Required minimum distributions and their start age, the 10% early distribution penalty and its exceptions, 72(t) substantially equal periodic payments, rollovers and direct transfers, net unrealized appreciation, Roth ordering rules and five-year clocks, and inherited account rules for spouses and non-spouses.

Internal Revenue Code Section 401(a)(9)Internal Revenue Code Section 72(t)SECURE Act

Practice question for this objective

Free sampleRetirement Savings and Income Planninghard

Dominic is aged 61. He opened his first and still his only Roth IRA in 2023 with a single regular contribution of $7,000 and has made no regular contributions since. In 2024 he converted $100,000 from a traditional IRA to that same Roth IRA and paid the resulting income tax from taxable savings. The account is now worth $135,000. In 2026 he withdraws $60,000 to fund a home renovation. What is the federal income tax and penalty treatment of the $60,000 withdrawal?

AThe whole $60,000 is a qualified distribution, so it is free of income tax and free of the 10 percent additional tax
BThe whole $60,000 is free of income tax and free of the 10 percent additional tax under the ordering rules, although it is a non-qualified distribution Correct
C$53,000 of the withdrawal is subject to the 10 percent additional tax because the 2024 conversion has not satisfied its own five-year holding period
D$53,000 of the withdrawal is ordinary income because the account has not satisfied the five-year contribution holding period

Separate the Roth contribution five-year clock from the conversion five-year clock and apply the distribution ordering rules to a non-qualified withdrawal. There are two independent five-year periods. The contribution clock starts with the first contribution to any Roth IRA, here 2023, and only decides whether a distribution is qualified, which controls the taxation of earnings. The conversion clock runs separately from each conversion and only decides whether the 10 percent additional tax applies to converted principal taken out early, which is moot once the owner is past 59 and a half. Applying the ordering rules, the $60,000 is drawn first from the $7,000 regular contribution and then $53,000 from the $100,000 conversion, leaving $47,000 of conversion principal and all earnings untouched, so nothing taxable is reached. Checking the arithmetic: $7,000 plus $53,000 equals $60,000, and $100,000 minus $53,000 leaves $47,000 of converted principal still in the account.

Why A is wrong: The outcome is right but the reasoning is wrong, and the label matters because it changes how earnings would be treated: the distribution is not qualified, since Dominic's five-year contribution clock began in 2023 and does not finish before 2028, so the correct description is a non-qualified distribution that happens to reach only untaxed layers.

Why B is correct: Roth IRA distributions come out in the order of regular contributions, then converted amounts oldest first, then earnings, so the $60,000 is made up of the $7,000 regular contribution and $53,000 of already-taxed converted principal, neither of which is taxable, and Dominic is past age 59 and a half so the conversion five-year clock cannot impose the 10 percent additional tax.

Why C is wrong: This applies the conversion five-year clock correctly in form but ignores the condition that makes it operate, since that clock exists purely to stop a converted amount being withdrawn before age 59 and a half without the penalty that would have applied to a direct traditional IRA distribution, and it becomes irrelevant once the owner reaches 59 and a half.

Why D is wrong: This confuses the two clocks, because the five-year contribution period governs whether earnings come out tax free, and converted principal has already been taxed in the year of conversion, so recovering it can never produce a second income inclusion regardless of either clock.

See more CFP practice questions, answers explained.

Exam traps in Retirement Savings and Income Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

Take the $30,000 a year directly from the former employer's 401(k) under the exception for separation from service, and leave the rollover IRA untouched
Why it is wrong: The separation from service exception requires that the separation occur during or after the calendar year in which the participant reaches age 55, and Rosa separated at 53, so the exception was never available to her and this route would attract the 10 percent additional tax.
$45,620.44
Why it is wrong: This divides the $1,250,000 IRA balance by the age 72 factor of 27.4, which was the right divisor when 72 was the required beginning age, but for someone who reached 72 after 2022 the first distribution year is the year age 73 is attained and the factor for that attained age applies.
$380,000 is long-term capital gain and no part of the gain is short-term
Why it is wrong: This is tempting because the automatic long-term character of net unrealised appreciation is the memorable part of the rule, but that character attaches to the $320,000 measured at the distribution date, and appreciation arising after the distribution is governed by the ordinary holding period rules.

Examworthy is not affiliated with or endorsed by CFP Board. Original, blueprint-aligned practice material only.